Steps to Raise Credit Scores Could Prove Costly

There's no question that computerized scoring models which almost instantaneously judge a would-be borrower's creditworthiness have enabled more people to obtain mortgages, possibly even at lower rates than if their applications had been underwritten the old-fashioned way.

But since the number assigned to borrowers by the software represents a snapshot of your credit record on the particular day it was calculated, your score can actually change from one 24-hour period to the next. As long as you continue to use credit wisely, though, the number usually won't shift enough to impact your ability to obtain funding.

Every once in a while, however, the number changes drastically and through no fault of your own. And if that happens, the first thing you should do is find out exactly which version of scoring model the various entities in the mortgage food chain are using.

That advice comes from Ginny Ferguson, chair of the National Association of Mortgage Broker's Credit Scoring Committee, who says some companies are using ancient software that may be as much as a dozen years out-of-date.

While the three credit repositories have all updated their scoring models, Ferguson said at the California Association of Mortgage Brokers' annual convention in San Diego last month, some funding lenders are "all over the park."

With some, she added, the models being used are different from branch to branch. And as a result, she said, brokers in the field who produce the loans could find themselves on "the front-line of predatory lending just because the lender's scoring model is out of date."

According to Ferguson, a co-owner of Heritage Valley Mortgage in Pleasanton, Calif., three versions of Equifax's Beacon scoring software are in use, but Version 96 is the most up-to-date.

TransUnion has two versions of its Emperica scoring system, with Version 98 being the most current. And Experian, which uses the Fair Isaac, or FICO, model, has two, with FICO 2 being the most recent.

"You can have the exact same credit report and still get a lower score with the old software," she said.

The credit scoring expert also warned brokers they could do more harm than good if they advise borrowers incorrectly about how to improve their grades. "We are not in the business of making credit reports pretty anymore," she said. "They are what they are."

Still, if it is necessary for a borrower to earn a better score in order to obtain a lower rate or gain access to a particular loan product, Ferguson suggested they give the most attention to new blemishes on their credit reports and pay less attention to old ones.

"One single derogatory item won't nail you to the wall unless it happened yesterday," she said.

Ferguson said it is an absolute mistake for borrowers to pay off judgements and liens that are more than two years old because "old events" automatically become brand new items on the credit report.

"Past dues will submarine you. They are right-now, in-your-face killers, so pay them off right away," she said. "But do not pay off a five-year old event. If the lender requires that a judgement be paid off, pay it off at closing, not before."

She also warned against closing out old unused credit accounts or paying active accounts down to zero before submitting the loan package.

Credit scoring models look more closely at the amount of debt used in relationship to limits than at how much money is actually owed, she explained. "If you want to see your score improve quickly, pay down your cards to 30 percent or less of their available credit."

To go any lower is a waste of time and money, she added. "You're not getting anywhere. If the borrower has excess dollars, get the balances of all credit cards down. You are far better off spreading out credit over three or four cards than have big outstanding balances on just one or two cards."

Another reason to avoid closing out old cards, or rolling over older balances into a single credit card, even if it has a lower rate: The longer someone has credit, the more opportunity the software has to review how they handle it.