Did you know that the same credit bureau could report three wildly different numbers for your credit score on the same day? More importantly, what steps can you take to improve your personal score and to help your clients navigate their way to a final loan approval?
Have you checked out your credit scores on CreditKarma.com? Or perhaps you’re paying Equifax, Experian, or Transunion for credit reporting and you actually believe your credit score is the number they will report if you’re obtaining a loan. Think again.
A Case Study
During the real estate downturn we ran our business on our personal credit lines, as do many startups, entrepreneurs and small businesses. For us, that meant we used a substantial percentage of our available credit. We have an impeccable payment record, long credit history, no derogatory remarks and only one credit inquiry.
We sold our house and will need 20 percent down, closing costs, plus six months of payments in the bank or cash equivalent, plus at least a score of 680 to qualify for our new purchase. You can imagine my shock when I went to CreditKarma.com and found that my credit scores were in the 620 range.
I decided to check some other sources. Here’s what I found (all numbers were reported by Equifax):
American Express reported Equifax score: 680
CreditKarma: 618
Fair Issac (lender-pulled FICO score): 668
Equifax member: 720
That’s over a 100-point range from the same credit-reporting bureau! By the way, when the lender pulled the FICO score – Bingo! An instant 20-point drop, although it didn’t prevent us from being pre-qualified.
Even after we paid down a number of balances, the numbers still were very different ranging from 689 (fair rating) to 748 (very good). That’s equivalent to the difference between a “C” and a “B+.”
According to the research firm CEB Tower Group, FICO scores are used in 90 percent of all credit decisions. This is despite the fact that 8.3 percent of adult consumers (19 million people) are “unscorable.”
Moreover, a recent Wall Street Journal article noted that Social Finance Inc., a company that offers student loan refinancing, mortgages for high-priced homes and personal loans, has decided to do away with FICO scores. The company doesn’t believe the FICO score itself is a real driver to credit performance.
Steps To Take To Improve Your Credit Scores
If you or your clients are struggling with increasing your credit score, it may be useful to speak to someone specializes in credit repair. Here are some additional suggestions that may also help.
Full credit reports vs. what you see online: When we received a copy of our credit report from the lender, it was much more comprehensive than anything we found online. The history included all of our opened and closed accounts for housing, autos and revolving credit. It also included a comprehensive payment history, including any late pays. This provides the lender with a much more complete picture and may also account for some of the differences in reporting.
The percentage of available credit and your on-time payment history are the two biggest determinants of your credit score. Revolving credit is indeed the 800-pound gorilla in this equation. Here is how they will rank you based upon the percentage of revolving credit that you are using: excellent, 0-9 percent; good, 10-29 percent; fair, 30-49 percent; poor, 50-74 percent; very poor, 75 percent or more.
Here’s the bottom line: Make sure that every one of your clients is pre-approved for a loan before taking them out to look at property. For those who have serious credit issues, have them work with a credit repair service. Also, remember to advise each of your buyers to hold back on any major purchases or other expenditures until after their new home closes.
