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TBWS Daily Monday March 15, 2010

• Past payment history:  Approximately 35% weight of score
  • Includes revolving and installment credit
  • Includes public records i.e. bankruptcies, foreclosures, tax liens, judgments, etc.
• Outstanding debt:  Approx. 30% weight factor
  • Average balance on revolving trade lines
  • Percentage owed on revolving trade lines (I call this “saturation”)
  • Percentage owed on open installment loans
  • Saturation threshold should not exceed 30-35% of available credit
• History of credit establishment:  Approx. 15% weight factor
  • Number of months since oldest active revolving trade line was opened
  • Number of months since oldest installment trade line was opened
  • “Credit Surfing” is watched carefully and may be a problem
• Type of credit being used…  Approx. 10% weight factor
  • Number of bank cards being used
  • Number of retail/department store cards being used
  • Number of finance company accounts
• Pursuit of new credit… Inquiries:  Approx. 10% weight factor
  • How many inquiries over 30, 60 or 90 days and 12 months
  • Type of inquiries
  • “Like inquiries” are monitored
  • Mortgage and auto inquiries are more tolerated

Without detailing each and every bullet above, what can we focus on that will have the highest positive effect on score improvement?

The top two items (payment history, credit use/saturation) represent between 60 and 75% of your score, so let’s look at those.

Payment history… this one is obvious… pay your payments (at LEAST the minimum payment) ON TIME! Minimum payments are a completely different issue, but you MUST make your payments on time with each and every lender.  Your credit report monitors how many times each account was late 30, 60 and 90+ days.  One payment that doesn’t get made, and is never made up, may show up as MULTIPLE late pays! This is what we call a “rolling delinquency”.  One 30 day late, that is never made up can show up as not only a 30, but also a 60 and a 90, as it progresses while not being made up!  It now LOOKS like 3 different late pays, not just one!

Most banks offer online banking and online bill pay at no cost.  The simplest way to get your bills paid on time is to program all of your monthly payments to be “recurring payments”, and the bank will pay each creditor the same amount on a monthly basis AUTOMATICALLY!  Now, you only have to make sure your paycheck makes it into the bank.  I would highly advise automatic payroll deposit as well.  The amount of personal time that automatic recurring payments saves you is amazing… not to mention postage!

Credit Use/Saturation…  This one is not quite so obvious and might require the help of someone (mortgage broker/banker) to obtain a full credit report and sit down and analyze this with you, but here’s an example…

• Mr./Mrs. Smith have 4 credit card accounts.  Each account has an available line of credit of $10,000 ($40,000 total available).  2 accounts have $0 balances and 2 accounts have $7,500 balances on them.  This would mean that 2 accounts have a 0% threshold and 2 accounts have a 75% credit saturation threshold.  (average saturation threshold is 37.5% over all 4 accounts)
• There are credit “advisors” out there that would recommend that a consumer close any unused accounts, so as not to incur annual fees, or be tempted to use them.  I DO NOT recommend this!! I would recommend that the two accounts that have no balance be put into a safe deposit box at the bank.  Why do I say this?  Given the above example of the “Smiths” credit… if they were to close the two accounts that have a $0 balance, that would leave the two accounts that have a 75% saturation threshold on them and the new saturation average is now 75%, not the 37.5% that existed prior to closing the accounts.  Closing these two accounts ALONE, not even factoring in all of the other items that could affect their score, could result in a drop of 30, or more, points in score!!

To sum up… Pay your accounts on time and stop using, BUT DON’T CLOSE, unused accounts with $0 balances!  By concentrating on these two items, you have focused on a potential 75% score impact! Realize that in pursuit of a home mortgage, the fees (and ultimately, the rate) you will pay for mortgage financing can change by anywhere from 1/4 point to 1.50 points for each 19 points in score!

If you are an Illinois resident and would like to focus on your individual situation, feel free to contact me through this site.

In 2007, and earlier, there were as few as 4-5 credit score tiers, by which mortgage pricing was derived.  Currently, there are at least 8-10 tiers dividing mortgage pricing determination and they are separated by as little as 19 score points to each tier! These are considered in conjunction with the type of financing (purchase/rate term refi vs. cash out… owner occupied vs. investor) AND loan to value (LTV) and combined LTV (CLTV) of your loan.  There are instances when a borrower could have the virtual “Dagwood Sandwich” of add ons, given the current state of the market.

What does this mean?  It means that, in some cases, depending on the score tier that you “reside” in and your LTV, it might cost a borrower as much as an extra 1/2 point to 1 1/4 points (a point being 1% of the loan amount) to get the same rate as another individual with a score that might be 19 points higher!  Additionally, in the past, depending on the lender, the score used to determine your mortgage rate might have been the middle score of the main breadwinner of the household.  Now, almost inevitably, the lower of the middle scores of both (all) borrowers is used.  So two borrowers can no longer slide into a mortgage using the high credit score of only the main borrower.

There are a number of legitimate things that consumers can do to improve their score.  I will go into those things in a little more detail in future posts.  For the time being, suffice to say that consumers should be ultra conscious of what their credit score is and consciously take even small steps to be improving their score on an ongoing basis.  Sometimes something as little as not closing credit card accounts after paying them off, or strategically analyzing which accounts to pay off, rather than just paying off the highest interest rate or lowest balance, will go a long way toward score improvement in seeking a home mortgage loan.

Bottom line… consult one or more qualified professionals and determine the course that makes the most sense for your given situation.

More later…