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October 2007
Index of all
past
Affiliate Corner columns
Understanding credit scoring and remediation
By Ron Gregory, Mortgage Advisor
Colorado Tierra Mortgage
Credit remediation is a subject consumers often face with fear and trepidation, and for good reason. With the exception of recognizing that the best score wins, the average home shopper knows very little about the whole credit scoring process.
Sub-prime borrowers who are eager to move into A-Paper territory often find themselves at a loss when trying to find ways to upgrade their credit history. The good news is there are ways homebuyers can improve less-than-perfect credit scores and obtain a loan for the home they really want.
Check credit scores
The first step in the process is obtaining a current credit report. Congress recently amended the Fair Credit Reporting Act so that consumers may now receive one free credit report annually. There are three major credit bureaus: Equifax, Experian, and Transunion. Since entries can vary across bureaus, potential homebuyers should request a free report from each of the three companies (go to www.annualcreditreport.com).
It’s also important to know just what a good credit score is. Most A-Paper scores generally begin around 680, although this number may differ slightly among lenders. Those who fall short need not despair – there is always room for improvement. Increasing ones’ score just five points can save a significant amount of money. For example, someone who improves their score from 698 to just 703 could save thousands of dollars over time as a result of a slight improvement to a loan’s interest rate.
Enhance what’s there
While credit repair is necessary for some, it’s not the only way to increase a credit score. Even those who have stellar credit can enhance their score through these steps:
• Evenly distribute credit card debt to change the ratio of debt to available credit. Let's say someone has a credit score of 665. If that debt is on only one card, and four additional credit cards have zero balances, evenly distributing the debt of the first card over all five could help the potential buyer closer, and possibly into, that ideal bracket.
• Keep existing accounts open and active. The average consumer is usually anxious to close credit card accounts that have zero balances, but doing this can cause them to lose the benefits of a long-term credit history and increase their ratio of debt-to-available credit. The bottom line is...don't close those old accounts!
• Keep credit inquiries to a minimum. Each inquiry into your credit history can impact your score anywhere from 2-50 points. When it comes to mortgage and auto loans, although someone may be looking for only one loan, multiple lenders may request the credit report. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry, so try and stay within that time frame.
Remember, credit scores don't change overnight. Improving them requires time and diligent effort, so it's a good idea to get the ball rolling at least three to six months prior to submitting an application for home financing.
Repair the damage
Some consumers’ credit scores need more than enhancing. Sometimes, repair is necessary. It’s possible to begin the process alone; sometimes it’s good to seek out a repair service.
Those who decide to make their own improvements should visit as many websites as possible to get information regarding credit laws and consumer rights. It’s crucial to search through them and become educated to avoid sustaining any self-inflicted wounds. A good place to start is the Federal Trade Commission’s (FTC) website, which contains a wealth of helpful literature.
Those who are facing severe or complicated credit issues should enlist the assistance of a professional credit repair company. With over 1100 credit repair companies to choose from, it’s important to choose a reputable firm; consumers should examine the FTC’s information on fraudulent practices to avoid falling prey to credit repair scams.
Addressing credit issues can be uncomfortable to say the least. But taking these steps now can help potential homebuyers get much closer to obtaining the home of their dreams.
Additional Resources:
To order a free credit report:
www.annualcreditreport.com
To read the Fair Credit Reporting Act:
www.ftc.gov/os/statutes/frca.htm
For the Federal Trade Commission’s information on consumer credit:
www.ftc.gov/bcp/conline/edcams/credit/index.html
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