How often have you needed just 20 points (or fewer) to get a borrower into a better interest rate on a mortgage, or maybe into any mortgage at all? By understanding a few simple points on credit scoring, mortgage brokers and lenders can advise borrowers on how to increase credit scores quickly, in a matter of days, without spending money on credit repair.
Pay tax liens and settle outstanding judgments
In contrast to paying off delinquent debt, payment of these liabilities does not constitute an “activity” and thus will not lower a score. However, as these items are reported by the court system, it is necessary to obtain and file with the court, the proper documents to show that the tax lien has been released, or the judgment satisfied. Then, take a copy of the filed document to your credit reporting service to use in their quick re-scoring service (usually a three-day process).
Longer Range Prevention strategies
Brokers and lenders can increase the range of loan opportunities to those borrowers who are in the early stages of obtaining a loan and who can wait three to six months before applying for loan approval. Borrowers often do exactly the wrong thing at the wrong time, such as opening a new department store account, just before applying for a loan. Or even worse, financing a car. Any activity that involves an extension of credit will have a downward effect on a credit score. This includes purchasing an item with no payments for 90 days, or getting a 10 percent discount with the opening of a store account. By advising these borrowers to delay opening the department store account, or applying for other financing until after loan funding, you can keep up their scores and thereby offer them more and better loan rates.
Pay down revolving balances
Some people with so-called “perfect” credit have surprisingly low credit scores because they have several revolving accounts with high balance-to-credit ratios. Fair, Isaac and Company, designers of the credit scoring system, “ding” credit ratings for balances of 50 percent or more of the high credit limit. For example, take a borrower with a $4,000 visa balance with a $7,000 limit, a $400 balance of a $600 limit Target account, and a $1,000 balance on a Macy’s account with a $3,000 limit. Despite an otherwise perfect payment history, this borrower will loose valuable points off his credit score. Bu strategically paying down the Visa and Target accounts to about 40 perfect (to assure that fluctuating balances do not go over 50 percent), these borrowers can raise credit scores at least 20 points, and sometimes more. In these examples, the borrower can apply the least amount of money for the maximum credit score gain by paying $1,200 to Visa and $160 to Target, leaving each account balance at 40 perfect, and leaving the Macy’s balance as it, with a $3,000 limit.
Strategic pay off of collection or charge-off debt
The credit scoring system is heavily weighted to recent consumer behavior – the more recent the delinquent behavior, the greater the effect on the credit score. Paying off delinquent accounts has the effect of “updating” the delinquency, even if the collection, charge-off, or late payment was several years ago. And the more recent a delinquency, the more the credit score drops. Therefore, paying a debt shortly before loan approval can have a devastating effect on a marginal credit score. Try first to negotiate with the creditor to have the account deleted upon receipt of payment. If this is not possible, arrange to have the debt paid off in escrow so it does not affect the credit score, and consequently your ability to offer optimal loan rates to your borrower. You can make many more loans this way with sub-prime borrowers as well as keeping high the scores of “A paper” borrowers.
“Authorized User” Accounts
Although legally, only the primary account holder is financially responsible for an account, the behavior of either the primary or an authorized user will affect the credit score of the other. If your borrower is an authorized user, and the primary user has a delinquent history on the account, advise the borrower the borrower to demand that the creditor remove his name from the account. His credit score will rise because the delinquent history will no longer be tied to him.