It’s no secret the lending guidelines continue to tighten and minimum credit scores have increased for many lenders. Here are some very valuable key points to know and understand if you are looking to purchase a home any time soon, or if you are a Real Estate Professional advising your clients.
1) Paying off collection accounts and past due accounts without negotiating removal or modification of the reporting to the credit bureau-is something that we see constantly. A borrower has a delinquent account, settles with the creditor or collection agency and pays the balance, without extracting a promise that the item will either be removed or updated to “paid as agreed.” The negative account statement then becomes extremely difficult to remove.
2) Closing accounts-Never voluntarily close any credit accounts. No one should ever close an account voluntarily. Even if there are several late payments, which will fall off over time, one of the main criteria for determining FICO is age of the accounts or trade lines. If someone closes out an account they have maintained for many years, this will have a highly negative impact on their FICO.
3) Missing payments-A missed payment can cost as much as 30 points of the FICO. It is always better to make the minimum payment than to miss a payment. Unfortunately, borrowers are often unaware of the harm they are doing to their scores, with missed payments.
4) Going Over-Limit on an Account-Exceeding one’s credit limit by just a few dollars can have a similar impact on one’s FICO score to making a late payment. Always to be avoided. One must keep track of their balances to avoid this mistake.
5) Failure to annually review credit report accuracy-most mortgage professionals are acutely aware of credit reports and resulting scores. However, the public at large is often uneducated of these matters. Even though the sites offering consumers access to their credit reports is increasing greatly, most people ignore the matter, to their disadvantage. Studies have shown that at least 79% of all credit reports contain inaccuracies. Take advantage of the free credit reports at www.annualcreditreport.com, run by the FTC.
6) Too many accounts open-Too much of anything is not a good thing and this applies especially to credit. When too many accounts appear and there are high balances on each, credit scores will suffer. Even if a person has a perfect payment records, too much credit utilization will often but them under a 700 FICO.
7) Not enough credit accounts-This is the flip side of too much credit. If an individual has less than three trade lines, they may not even receive a FICO score from one or more of the bureaus. This situation can be easily remedies by opening a secured card account or department store cards, which require less credit scrutiny.
7) Starting and stopping the mortgage shopping process-shopping for a mortgage will obviously increase the number of inquires on a consumer’s credit report. However, all mortgage inquiries made within 30 days (and auto too) will only count as one inquiry for FICO purposes. When the applicant starts and stops this process over a period of several months, scores can and will go down.
8) Maxing out balances and paying them off each month-the practice of maxing out card limits, even if you are paying them off monthly can negatively impact scores. FICO’s model may treat this practice as an indicator of out of control spending. Have your limits raised, spread your spending out over several cards or use non-credit methods of payment to avoid this result.
9) Improper Dispute Methods-there are approved methods of properly disputing incorrect credit report information. Failure to use those methods can result in temporary freezing of negative information and can send out a red flag to prospective credit grantors. Be certain to be aware of all the dispute rules before undertaking the process.
10) Too many credit apps too soon-Never apply for more than 1-2 credit accounts every few months. When the bureaus pick up multiple requests for new credit, scores will suffer, sometimes greatly. In addition, they may suspect fraud or identity theft, which can cause other problems. Keep new applications to a minimum and be sure that the consumer only applies for needed credit.
11) Applying for cut rate offers and maxing them out-We all see enticing offers from electronics retailers and others, claiming “zero percent financing-same as cash.” The consumer should always be aware of these offers. When approved at the store, they get just enough credit to allow their purchase. Effectively they have maxed out their account upon its opening. This too can cost another 30 points of their score. If they succumb to such an offer, be certain only to charge up to 70 percent of the allowed credit limit. This will assure that no FICO points are lost. If the consumer has already opened such an account, have them pay it down to 70 percent and the next month their FICO will increase.
Kerry Lutz, Attorney at Law, contributed this information.
For more information or any questions, contact:
Dan Ranck
(717) 431-8848
dranck@ghmc.com
