By Kenneth Harney Syndicated
Columnist - Seattle Times
WASHINGTON, D.C. - As mortgage lenders nationwide
increasingly use "credit scoring" to decide what interest rates
and fees consumers qualify for, a troubling new trend is
emerging With little or no reliable information, loan applicants are
trying to raise their credit scores, often with calamitous results.
Take this case involving a California couple, both highly
paid professionals, who sought to quality for the lowest
interest-rate refinancing available. The key test, according to
their mortgage broker, was that they had to have a "FICO" score
of 720 or higher. "FICO" is the most commonly used type of scoring in
the mortgage market. Devised by San Rafael, Calif- based Fair,
Isaac and Co., the score -- ranging from a low in the 300s to a
high above 800 - represents a statistical evaluation of a
borrower's risk of future default. The higher the score, the
lower the probability of default. The score is produced by
running a consumers raw credit-bureau data through proprietary
statistical-modeling software marketed by Fair, Isaac. The score
isn't generated by the lender; instead the lender requests it as part
of the credit report it obtains from one of the three national
credit-information "repositories" - Equifax, Trans Union and
Experian (formerly TRW).
In the case of the California couple, the husband and
wife assumed they'd both get exceptional scores. After all, said
the husband, "we've never missed a mortgage payment, we've
never been late on anything. We've got a perfect record." But
when their mortgage company pulled their FICO scores
electronically from the credit bureaus, neither the husband nor
the wife made the grade. Both had good scores - above 700 -but
neither hit 720. The mortgage broker was not legally bound to
divulge their scores, but did so as a courtesy, and provided
copies of their credit reports as well.
That's where the trouble began. The couple decided to
"fix" their credit profiles to raise their scores. For starters, they
immediately paid off the small balances on several of their
high-limit credit cards. Then they canceled those cards and two
others, shifting thousands of dollars of balances onto just three
cards. Their mortgage broker assured them that this
"consolidation" strategy should boost their FICO scores
significantly.
Two months later, the couple reapplied for the same
rock-bottom rate. The broker pulled their scores again, but to everybody's shock, they were 20 to 30 points lower. They didn't
get the loan.
What happened here? Cases like this are beginning to
pop up across the country, say credit-bureau experts, because
mortgage lenders are shifting to "risk-based pricing" - rewarding
higher scores with lower rates
The potential for misunderstanding is great enough that
Fair, Isaac and home--real-estate, mortgage-and credit-industry
leader's have begun quietly meeting to develop ways to better
educate the borrowing public about scores and how they work.
One of Fair, Isaac's top officials for credit-score design, vice
president and statistician Michael Rapaport, recently agreed to
discuss some of the basic do's and don'ts for mortgage applicants
eager to boost their scores.
Probable the key mistake the California couple made in
their quick-fix effort, according to Rapaport, was to suddenly
cancel six cards with relatively small, unpaid balances on each,
and shift the combined debt onto just three cards. That had the
effect of raising the ratio of their unpaid balances to the
maximum credit lines available on the three cards. Before the card
cancellations, by comparison, they had more cards - and a higher
overall dollar limit of credit available to them - but they had lower
balances spread among half a dozen cards.
The net result was to make them look more "extended"
on their credit use than they looked before the fix.
With this in mind, here's Rule No.1 on maintaining or
getting a higher score: Don't even come close to "maxing out" on
your cards. It's statistically better to have smaller balances against
more cards than high balances relative to your credit limits
lumped on just a few.
Rule No. 2 is perhaps more obvious. Pay everything on
time, in the amounts agreed upon. That's probably the single most
important factor in your score, according to Rapaport, but it's not
something you can fix overnight.
Rule No. 3 Order copies of your credit report
periodically, or before you apply for the new credit. Dispute any
incorrect information you find. All "derogatory" information
drags down your score. If it's wrong, get it deleted by
contacting the creditor responsible. Rapaport says the most
dramatic, rapid improvements in a credit score can come when
erroneous data sitting in your file is eliminated.
Finally, if somebody tells you that you can do a quick
fix on your score to get a lower mortgage rate, don't believe it.
The only sure-fire strategies are correcting errors, keeping credit
balances modest, and paying on time.
| 
