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When community groups come knocking: How to manage HMDA data to prove you are in compliance.

National Mortgage Professional
Aug 25, 2008

The World of Credit: Raise the credit scoreJohn J. Hudockcredit score, FICO, tips, strategy Using the correct strategy, it generally much better for your client if you show him how to increase his credit score a few points than for you to locate a sub-prime lender. When you have the client increase his own credit score, you do him a great servicea service he will not forget. Lenders base their initial observations on the middle credit score. The credit score is generated currently by a model developed by FICO. They use the information that is being reported on the credit report by creditors. This is where the problem starts. The information on any credit report is, to some degree, inaccurate. I have never seen a tri-merged credit report without an error. The current scoring system, in my opinion, is designed to elevate the risk and lower the credit score for almost every consumer. It is not a coincidence that the errors are to the benefit of the lender. How do you address this? The only accurate method for beginning to correct inaccuracies is to interface with the consumer and the credit report. You must determine what tradelines are correct and which have issues. Show the consumer what is being reported and how it reflects on his credit score. You have to tell him where there are problems and what he can do to correct them. By suggesting basic methods to increase his credit score, you increase his loan-to-value options and lower his interest rate and monthly payments. My goal is not to give anyone a perfect credit score; it is to qualify them for a mortgage. You need to have your clients reach a target score. The target score would be the level of credit necessary to satisfy the lender. Sometimes it's only a few points that could be realized utilizing proper credit techniques. With appropriate recommendations from you, your client can increase his credit score a few points before you submit it to a lender. You can give him a few points to qualify for the loan, a few points to get a lower debt ratio or a few points to get a preferred loan-to-value, in order to get a better interest rate and a lower monthly premium. The fastest way to increase a credit score is to pay down the balances on the revolving accounts. The reason that this is the most effective way of increasing the credit score is that credit cards are reported in real time. The credit report reflects the most current reporting balances from the credit card bank. This works both waysif your client uses his credit card and the balance is high when a credit report is pulled, this will reflect a lower credit score as compared to having a balance below the 25 percent level. Select the accounts with the lowest high limits and have your client pay those accounts first. If there is a credit card with a $400 high limit and it has $400 balance, then 100 percent of the credit limit is being used. This could cause a reduction of up to 90 points on this credit card, depending on how many revolving tradelines there are. Paying $300 on this particular card could increase the score almost 70 points. Compound this by paying other revolving accounts with high balances, and an individuals score could be increased by 100 to 150 points. Another option for increasing a credit score quickly involves a credit score that is above 620 on any tradelines more than a year old. You can then have your client request an increase in the high credit limit (be careful about how many tradelines you recommend, as this will add an inquiry to the credit report and may offset the advantage of improving the credit ratio on that tradeline). On the front of every credit report, each repository lists the impact reasons associated with their credit score. In the past, they have listed about 33 separate reasons. Many are similar. Codes 014, 016 and 024 involve the use of revolving credit: "Code 014: Length of time accounts have been established is too short "Code 016: Lack of recent revolving account information "Code 024: No recent revolving balances There are three types of revolving credit: bank credit cards, store credit cards and lines of credit. They have to be used at least once every six months to avoid a negative impact. If a consumer has a revolving account that was not being used, he can realize 10 to 12 points in some situations by simply using the account and paying down the balance to 25 percent or less of the high limit. "Code 001: Amount owed on accounts too high/Code 010Proportion of balances to credit limit too high. Pay any account balance down to 25 percent of the high limit. "Code 003: Too few bank revolving accounts This code has a very high impact on credit scores. You need three to five revolving accounts to get a score above 650. Scores in the 400s generally mean "no credit." What they really mean is "no revolving tradelines." "Code 004: Too many revolving accounts I suggest that you limit the number of open accounts to eight revolving accounts. The most favorable scenario would be to close the accounts not used and have the creditor include a statement on your account that you requested it be closed. Be certain that you have a record of the request. "Code 005: Too many accounts with balances Pay off any accounts with low balances. Remember, the positive actions that are taken do not count until the creditors report the changes to the repositories. Look at the closing date on the statement and realize that this is the date the changes must be at the repository. Every credit report is unique in the method to increase the score rapidly. What I call emergency credit is a situation when it is necessary to increase a credit score by a few points in a short amount of time. This exact method will vary from credit report to credit report, depending on the profile of the specific tradeline mix and combinations. However, the basic methods are listed above and I consider this credit education. You have a responsibility to understand and educate your clients on good credit habits. You should emphasize to your friends, relatives, neighbors and acquaintances that sooner or later, they are going to need your services. They should not wait until they've found a house or are in the need of refinancing. You should pre-qualify them to find out exactly what type of mortgage a lender will be able to offer them. The more time you have to work on any problems guarantees better solutions. You should constantly be looking for clients and not waiting for them to come to you. They will come back when they realize you are knowledgeable in your field and took the time to pay attention to their needs. John J. Hudock is president of The International Credit Club and The World of Credit, two companies specializing in credit report problems and scores. He also has online continuing education courses on credit approved by the Pa. Department of Banking and the Pa. Department of Continuing Legal Education. John can be reached at (877) 829-5432 or e-mail woc@epix.net. He invites e-mails on any credit topic, will answer each one and publish any that will benefit his readers. Please be specific with your questions.
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