To raise credit rating not as easy you think A couple consolidated credit card debt only to earn a worse rating

Nation's Housing

November 08, 1998|By Kenneth R. Harney

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 qualify for the lowest interest-rate refinancing available. The key test, according to their mortgage broker, was that they have a "FICO" score of 720 or higher.

"FICO" is the most commonly used type of scoring in the mortgage market. Devised by Isaac and Co. of San Rafael, Calif., 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 consumer's 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 t he 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.

Rating was lower

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 leaders 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, Michael Rapaport, a vice president and statistician, recently agreed to discuss some of the basic do's and don'ts for mortgage applicants eager to boost their scores.

Probably the key mistake the California couple made in their credit score 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.

Prior to 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 a half-dozen cards.

They looked more 'extended'

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 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 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 3: Order copies of your credit report periodically, or before you apply for new credit. Dispute any information you find that is incorrect. 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.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

Pub Date: 11/08/98

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