Score Big: Credit Score Optimization

When you inquire about a mortgage, one of the first things your lender will do is (of course) ask for permission to check your credit. The report we pull up includes (in addition to seven years’ history of activity and accounts) credit scores from the three major credit bureaus – Equifax, Experian and Transunion.*

Credit scores loom large

Your credit score is really important. It impacts so much more than whether you get approved. It also impacts your loan options, the cost of your loan, the cost of your mortgage insurance… possibly even the cost of your homeowner’s insurance.

The score we use, anyplace a score matters, is what we call the “low-middle” score. What does that mean? For every individual, we ignore the highest and lowest score and run with the middle of the three. And when more than one person applies for a loan jointly, we use the lowest middle score for all applicants.

Your score is constantly changing

There seems to be a common misconception that a credit score is something that exists out there somewhere, floating around over your head like one of those flippy signs in a train station. We lenders probably add to this when we talk about credit scores. When I say something like, “Your credit score is 756,” it sounds pretty cut-and-dried.

In fact, your credit score is anything but a fixed. In fact, a credit score only exists when it’s requested – figured in the moment. A snapshot of whatever data the credit bureaus have on file, right that second, is run through a formula and to generate a score.

(Another source of confusion when it comes to credit scores is that there are actually a bunch of different formulas used to calculate credit scores, but that’s a topic for another post.)

Plan… and save

There’s good news and bad news in the fleeting nature of a credit score. The good news is that we can usually offer clients simple action items can improve their credit score—sometimes dramatically. The bad news is that these changes take time.

When given the opportunity, I like to get started with every client as early in their home buying journey as possible. Gathering financial information and checking your credit 6 or 12 months before beginning a formal house hunt probably sounds like overkill. But there is valuable groundwork we can lay, even that far in advance – especially when it comes to credit.

What-if… and win

Once you authorize a credit check we can dig in and look for ways to increase your score. Up until a few years ago, I relied solely on my experience and intuition. After seeing thousands of credit reports over a couple of decades, I developed some pretty good instincts.

Then, a few years ago, the credit reporting service we use helped us get much more scientific. Although the credit score formulas are proprietary, our credit vendor has developed simulators that aide our search for ways to improve your credit score. We can even run “what-if” scenarios. And the simulator does an impressively accurate job of estimating the resulting score.

Together, we can experiment with nearly any variable on a credit report and, by trial and error, map out a game plan. We can peer up to a couple of years in the future.

More time is more better

Which brings me back to timelines. Because your score is generated based on a snapshot of data at a moment in time, a new piece of information reported to the credit bureaus, means an immediate change to your credit score.  But, new data must be reported to the bureaus by a third party. To take advantage of a shiny, new credit score we lovingly craft, we have to wait around for your credit card company or bank or credit union to report to the credit bureaus.

This waiting around, means changes to credit scores happen rather slowly. Most creditors report to the credit bureaus once per month. And what they report is generally the prior month’s information. Let’s say you pay down a credit card today – it can easily be 30, 45 or even 60 days before the new balance filters to the credit bureaus and impacts your credit score.

The other thing to note is one quick way to boost your score is to make strategic adjustments to what you owe on credit cards and other debts. This takes, well, money. Unless you already have cash on hand, you may need to chip away at paying things over a period of time.

A potential shortcut

So what happens if you don’t plan ahead? If you show up on our doorstep looking for a loan to buy your dream home and must close in three weeks, we will be hustling to make that happen and simply won’t have time to monkey around with credit scores.

With just a little more time, we may be able to affect some change, but we may not have time for nature to take its course. If we spot a simple fix and you act on it quickly, we may be able to document the change manually via a service offered by our credit reporting vendor, called a “Rapid Rescore”.

To initiate a Rapid Rescore, you’ll need to secure a letter (on letterhead) from the creditor that clearly identifies you, the account and the change to be made. The credit agency will verify the information and then push it to the credit bureaus. The bureaus update your credit file in a few days, at which point we can pull up an updated report — with updated scores in tow.

When it comes to rescoring, there are drawbacks and limitations to keep in mind. For one, the service is not inexpensive. As of today the cost is $119 to $164 per tradeline per person. Also, a significant number of loan programs and investors will not accept a rescored report. Jumbo loans are particularly unwelcoming of rescoring.

Don’t Fear Inquires

When a lender checks your credit, it is called an “inquiry”. An inquiry by a lender is a “hard” pull on your credit which negatively impacts your credit score. This is becoming common knowledge and is a big reason I hear many prospective homeowners balk at reaching out to a lender until they are ready to begin their house-hunt in earnest.

Inquiries are, however, generally lightly weighted. The factors that impact your credit score are grouped into five categories. Inquiries fall under a heading called “New Credit”. The New Credit category is weighted at 10% of your overall score and inquiries are one of five topics considered under this heading. (MyFico.com has a great article here, if you and want to learn more about the factors and how they are weighted.)

My observation is that an inquiry will generally have a single-digit impact on a score. It’s unusual for us to not find action items that have the potential to make a double-digit improvement in score.

The cases where we can’t figure out a way to more than compensate for the impact of the inquiry tend to be one of two extremes – either your score is so high that you have points to burn before there would be any adverse impact on loan options or costs (congratulations and nice work!) or your score is negatively impacted by enough other derogatory items that we need the the report to map out a longer-term plan to build or improve your credit.

On balance, I believe the benefits to be gained from an early credit check and strategy session far outweigh the small negative impact to your score. Knowledge is power… and in this case, can be money too!

Let’s talk!

My team and I are here to serve you, wherever you are on your path to homeownership. Whether you are ready to start your house-hunt this weekend or just starting to think about buying a home in the vague future, please reach out!

You can call 503-799-3711 or email juleef@rate.com.

*If Applicant self-reports credit score as “needs improvement,” Guaranteed Rate will not run credit or provide free credit scores via the Digital Mortgage. Applicant may request credit scores by contacting Guaranteed Rate. GUARANTEED RATE IS NOT A CREDIT REPAIR COMPANY, CREDIT REPORTING AGENCY, BROKER OR ADVISOR. You acknowledge that Guaranteed Rate is not a credit repair company or similarly regulated organization under applicable laws, and does not provide credit repair services. Where available, recommendations, tips and education materials are provided to you at no additional charge, and for educational purposes only. The services are intended to provide you with general information and assist you with identifying your options. The information is provided only to enable you to make your own choices about your personal finance, and is not intended to provide, legal, tax or financial advice. We do not provide any services to repair or improve your credit profile or score, nor do we provide any representation that the information we provide will actually repair or improve your profile. Consult the services of a competent professional when you need any type of assistance.  You acknowledge that Guaranteed Rate is not a “consumer reporting agency” as that term is defined in the Fair Credit Reporting Act as amended.  Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.

Leave a Reply

Your email address will not be published. Required fields are marked *