Tweak your credit report, finally get that mortgage?
A credit score is either a blessing or a curse cast down upon you from the digital cloud.
A score of 740 qualifies you for the best interest rate on a conventional mortgage. A score under 640 means ugly interest, and a number under 620 makes it very hard to get a mortgage at all.
This measure of your worthiness — generated by a soulless computer — also affects the deals available for car loans, credit cards and auto insurance.
But there are ways to tweak that score higher.
Such tweaking is part of George DeMare's business. He is managing partner of Midwest Mortgage Capital, a mortgage lender in west St. Louis County. “I deal with people with 640 scores all day long,” he said, and he looks for ways to push them up.
Lately, he's taken to lecturing on the mysteries of scoring. His main advice: Pay your bills on time, and borrow sparingly. That's the best way to fix credit over time. But if time is short, there are other maneuvers you can make.
First, a word about scoring: Most of the blessing and cursing comes from king of credit scoring Fair Isaac Corp. The company, better known as FICO, provides the software used by many major lenders and credit reporting companies. FICO uses five variables for scoring credit; its main rival, called Vantage, uses six.
With a FICO score, on-time payment history is the biggest factor, accounting for 35 percent. The amount owed influences 30 percent of your score; the length of your credit history is responsible for 15 percent; the type of credit used and recently added credit each affects 10 percent. (On-time payment history also is the biggest factor with Vantage, accounting for 32 percent.)
Scoring formulas are tailored for different lenders. If you buy your score from a credit company, know that it may not be the score your lender sees.
The scores are derived from information on your credit report. The report tells how much you owe, how close you are to maxing out your credit lines and whether you pay bills on time. The report also scans public records for bankruptcies and court judgments against you.
So the first step in boosting a score is to make sure the credit report is accurate. It's often not. In a recent Federal Trade Commission study, a quarter of consumers found errors on their reports that could affect their scores.
A clerk's finger slips on a key, and somebody else's debt is reported as yours. The system confuses similar names. It has trouble telling John Doe from John Doe Jr. and John Doe III. “We see a lot of Junior's accounts reported on the Third's credit,” DeMare said.
Court judgments often stay on reports after they've been paid off, DeMare said. Collection agencies are not diligent about reporting satisfied debts.
You're entitled to a free report once a year from each of the three major credit bureaus — Experian, TransUnion and Equifax. You can get it at http://www.annualcreditreport.com or by calling 877-322-8228. If you're denied credit because of your report, you're entitled to another free one.
If you find a mistake, contact the reporting agency. The Federal Trade Commission found that 4 out of 5 consumers who complained won a change in their report.
The agency is supposed to check with the creditor to see if the information you challenged is correct. If the creditor doesn't respond within 30 to 45 days, it comes off your report. And therein lies potential for mischief. Some consumers challenge legitimate credit blotches, hoping that creditors will be slowpokes or goof. DeMare considers that “immoral.”
The credit reporting agencies don't know how much money you make or how big your savings are. They don't know the rent you're paying. So the scoring companies can't judge your ability to carry your current debt.
They look at the amount you owe and at how much of your available credit you are using. The smaller the debt, the better. For instance, if you have a $10,000 maximum limit on your credit cards, and you owe $1,000, that's OK. A $9,900 debt would be awful. FICO likes for debt to be at 30 percent or less of available credit, said spokesman Anthony Sprauve.
If you can't pay down the debt, call the credit card company and ask for a higher credit limit, DeMare said. A bigger limit makes your debt percentage smaller.
Shuffling debt around can also help. Suppose you have two credit cards with $10,000 limits, with $9,000 owed on one and nothing on the other. Moving half the debt to the unused card will help, he said, and the FICO spokesman agrees. The formula judges you on how close you are to maxing out a card.
Not all credit cards report your maximum credit limit to the credit agencies, and that's a problem. It makes your debt percentage look bigger than it is.
That happened to someone in DeMare's office. “Sure enough, Citibank wasn't reporting his credit limit,” DeMare said. “He got it fixed, and his score jumped 40 points.”
Debts sent to debt collectors are poison for a credit score. If they're new debts, try to pay them off. But the older a “collection item” gets, the less it counts, and they disappear after seven years. So, if the debt is very old, you're better off not paying it. A payment turns it fresh again in the scoring system, DeMare said.