Fast Credit Repair
by SCOTT MEDINTZ
Mortgage professionals can deliver better service, build loyalty, and provide valuable advice by helping clients improve their credit scores.
The reality is poor credit scores can be repaired.
Many borrowers see a low credit rating as an insurmountable barrier. But the reality is that poor credit scores can be repaired - which presents brokers with a significant opportunity. All it takes is an investment of time, a little forethought, and some reimagining of your role as a broker to deliver the kind of tangible benefit that helps generate repeat business and referrals. For instance, last winter Money magazine found it was possible to lower a consumer's interest rate about 150 basis points by boosting his credit scores just 50 points; he would have saved more than $80,000 over the life of a $200,000, 30-year mortgage at the time. Actual savings will vary with interest rates, but a higher rating should still be a money-saving asset.
Keep in mind, however, that in some cases it's more cost-effective to refer a client with a particularly complicated financial history to a company that specializes in repairing credit and boosting scores (see the sidebar "Cleanup Companies").
Consumers consider us counselors, and we have a responsibility to them.
COUNSEL CLIENTS. Repairing credit requires commitment and discipline on the part of clients, which is easier to encourage when they understand the broad impact their credit rating has on their purchasing power. "Customers consider us counselors, and we have a responsibility to them," says George Hanzimanolis, president of Bankers First Mortgage in Tannersville, Pa. It helps to remind them that beyond mortgages, credit ratings help determine how much they will pay for auto leases, insurance, and other purchases. Ideally, clients will address their credit issues before seeking a loan, but Hanzimanolis says that if they need a mortgage immediately - if they arrive at his office after having successfully bid on a home, for instance - he'll secure the best loan they qualify for in the short term and then work with them to improve their credit record so they may qualify for a lower rate in the future.
If, on the other hand, a customer walks in the door looking for guidance on how much she can reasonably spend and credit repair is necessary, get started on it immediately. Angela Martin, a broker with Capital Mortgage, Inc., in St. Louis, Mo., spends the first 15 to 20 minutes with new clients talking about the credit process before getting to their particular needs. I tell people, "Pay attention to credit the way you pay attention to family. It's your baby - you need to take care of it."
FIX ERRORS IN THE CREDIT REPORT. Lenders generally look at credit reports generated by each of the three major credit-scoring companies - TransUnion, Equifax, and Experian. You have to access reports from all three in order to start with an accurate assessment, as there are often inconsistencies. A credit score is determined by several factors (see "What's in a Credit Score?" below), including the number of recent inquiries, so don't rush to pull the scores yourself, because it may knock a few points off your client's total.
Martin sends clients to www.myfico.com, a commercial Web site where people can purchase credit reports and find out their scores before they come to see her. Alternatively, the recent Fair and Accurate Credit Transactions Act (FACTA) mandated that the industry set up a free centralized source - www.annualcreditreport.com - where consumers can get one free report per year from each of the major credit bureaus. The free reports do not, however, include the numerical FICO score, which lenders regard as crucial.
FICO scores help determine how much a customer can borrow and at what rate, though of course income and assets are factored in as well. FICO scores are tallied by the three major credit bureaus.
Challenging errors in a payment history is usually the most effective strategy for improving a credit score. Overdue medical bills, often the result of an insurance snafu, are common. Unfortunately, clearing things up can be a hassle. The client must contact each of the creditors and try to establish, say, that a payment marked as 60 days past due was merely 30 days late, and get the creditor to acknowledge the error in writing. Then he has to forward the information to each of the credit bureaus. He can also contact creditors and ask for a lower interest rate, arrange a new payment schedule, or even negotiate to pay the creditor back at a rate of, perhaps, 60 cents on the dollar. Many companies are willing to make a deal just to get the debt off their books.
Challenging errors in a payment history is usually the most effective strategy for improving a credit score.
IMPROVE CREDIT RATIOS. Clients should lower their credit ratio (the percent of a credit line being used) by devoting available cash to reducing credit card debts to 50 percent of the limit - and to 25 percent if at all possible. It's best to pay down larger debts first, since larger missed payments count for more points. They also should avoid what Martin calls "credit card roulette" - transferring balances between cards or opening new accounts in order to consolidate or lower their ratios. Maxing out a high-limit card can devastate a score. Plus, the average age of a person's credit lines has an impact on the score. "Credit needs to age," Martin says. Canceling credit cards altogether is also a no-no, as even dormant, untapped lines enhance a score.
RAPID RESCORING. To speed up the repair process, brokers are increasingly using "rapid rescoring," which allows them to ask credit report resellers to enter the new information as soon as a change in credit status has been documented. Instead of waiting months for the information to work its way through the system, rapid rescoring gets the score recalculated in about 72 hours. The cost varies, but $30 per disputed item per credit bureau is typical, and can be money well spent.
TEACH BY EXAMPLE. Hanzimanolis aims to equip his customers with the skills they need to fix their own credit. He invites them to his office and has them watch as he talks to creditors about outstanding bills "to sort of teach them how to do it." Once they get the strategy, he hands them a list of contacts and phone numbers and sends them off to finish the job.
Advise them not to open new credit lines or make large purchases while seeking a mortgage.
PREVENTIVE ACTION. Hanzimanolis also helps clients develop the skills to maintain sound financial behavior. "A lot of times the problem is just their way of life - they don't know how to budget," he says. "So I sit them down and talk about budgeting. And then I'll ask them, "Do you mind if I call you once every month or two and check up on how the budgeting is going?"
While looking over a customer's credit report recently, Martin saw that he was getting zinged for being late on ridiculously small payments. "He kept saying how busy he was. And I understand that; we're all busy," she says, "so I told him to put himself on automatic payments."
It's also important to make sure clients don't mess up their credit score during the underwriting process. Advise them not to open new credit lines or make large purchases while seeking a mortgage. Martin says that one woman she was working with charged $800 worth of clothing in the middle of the application process. It lowered her credit score by 15 points, she says.
CLEANUP COMPANIES. Helping to fix credit reports for customers with spotty credit histories could eat up all of a broker's time. So brokers frequently have to make a cost-benefit analysis: Is the benefit in terms of goodwill generated worth the substantial amount of time required by the process? Melissa Cohn, president of Manhattan Mortgage Co., in New York, N.Y., and one of the countrys top brokers for close to a decade, passes clients on to credit cleanup companies, which specialize in negotiating with creditors. When doing so, it's important to find a reputable firm to refer your clients to, Cohn says. "We're very careful about who we use." To find credit counseling resources in your area, go to www.debtadvice.org.
What's in a Credit Score?
The formulas the three credit bureaus use to generate scores are closely guarded proprietary information, but the factors considered and their relative weightings are shared with the public.
Payment history counts for 35 percent. Scores suffer for late bill payments in the past seven years, with bigger reductions for more recent delinquencies, and for longer stretches and greater amounts. Bankruptcies, legal judgments, and liens can also harm scores.
CREDIT UTILIZATION, or the amount of credit a borrower uses, counts for 30 percent. The biggest factor is the "credit utilization ratio," the portion of total revolving credit extended that is used. For installment loans, the key ratio is the outstanding balance to the original loan amount, so advise clients to avoid maxing out credit lines.
LENGTH OF CREDIT history counts for 15 percent. Lenders prefer that clients have a long history of managing payments and credit lines, so if clients cancel any credit cards, make sure they don't cancel the ones they've had the longest.
RECENT ACTIVITY, including credit inquiries, suggests to creditors that borrowers are looking to open new credit lines. It counts for 10 percent. Lenders are wary of people taking out lots of credit in a short period, and rapid inquiries suggest they may have been turned down.
MIX OF DEBT, or the combination of credit cards, retail accounts, mortgages, and education loans, counts for 10 percent of the score. In this case, the more variety the better, as lenders prefer a mix of secured and unsecured debt.
SCOTT MEDINTZ is a senior editor at Money magazine.
Reprinted with permission from Argent Mortgage.