All credit information agents need to know
Even if you are familiar with the basics of credit, it can still be overwhelming to learn the intricacies of credit. The numbers that are constantly changing along with the alphabet soup of acronyms also need to be considered.
As we often discuss, it is up to you as an agent as to be the expert for customers. Here are some things you should know to help your customers with credit-related questions during the home-buying process.
Question 1: What’s a FICO Score?
FICO stands for Fair Isaac Corporation. It was the first company to offer credit-risk models with scores. It was established in 1956. It makes you think of Fair Isaac, a wise old economist or university professor. But it was actually named after Bill Fair and Earl Isaac…an engineer, and a mathematician.
FICO uses information from one of three major reporting agencies to create scores — Equifax, Experian, or TransUnion. FICO is not a credit reporting agent.
FICO Score is a number that can be calculated from credit reports and is between 300-850. It is used by lenders to determine your likelihood of repaying a loan. This affects the amount you can borrow, the length of the loan, and the cost of the loan (the interest rate, points, and the term).
A FICO Score can be thought of as a summary of credit reports. Side note: FICO scores do not apply to all credit scores. However, 90% of lenders use FICO scores so it is important.
Question 2: What makes me feel like I can’t make a difference in my score?
It doesn’t just matter how many times you’ve been late, or how much you owe for loans and credit cards. There is an algorithm involved. This is why it can be so frustrating for people trying to improve credit scores.
Question 3: What is a score?
FICO scores are based on five main factors. Each factor has a different impact on your score and each one is not equal. Here’s how it works:
FICO Scores are calculated by analyzing credit data from your credit report. This data can be grouped into five categories: payment record (35%), amounts due (30%), length credit history (15%) and new credit (10%).
Let’s dive deeper into these factors:
Payment history (35%)
A lender will first want to know if you have paid your past credit accounts on schedule. This allows a lender to determine the risk it is willing to take when extending credit. This is the most important aspect of a FICO Score.
Sums owed (30%)
Although you may have credit accounts and owe money on them, this does not necessarily mean that you are a higher-risk borrower. If you are using a lot or all of your credit, it could indicate that you are more at risk of default. Banks can interpret this as a sign that you are overextended.
Credit history length (15%)
A longer credit history will generally increase your FICO Scores. Depending on the credit report, even those who haven’t used credit for a while may have high FICO scores.
Your FICO Scores are taken into consideration:
How long ago your credit accounts have been open, including the age and age of your oldest and newest accounts, as well as the average age of all accounts
How long have credit accounts been open?
How long has it been since you last used certain accounts?
Credit mix (10%)
FICO Scores will take into account your credit cards, retail accounts and installment loans. They also consider mortgage loans and finance company accounts. Although you don’t need to have each credit card, having too many can be detrimental.
New credit (10%)
Research shows that opening multiple credit accounts in a short time frame is more risky, especially for those with a poor credit history. Avoid opening too many accounts at once if you can.
This is a common issue buyers create when they are under contract or pending. They then go to furniture stores and get new credit. They also buy a new car, boat, Home Depot card, etc. When they close, the underwriter checks their credit score and finds that it has changed. Your clients should not touch their credit until they close.
FICO Scores take into account a wide range information about your credit report. They do not take into account:
If you are in a credit repair program
Area you live
Child support obligations
Existing credit is subject to interest rates
Your scores are not considered “consumer initiated” inquiries. However, you can make requests for your report using: FreeCreditReport.com and experian.com.
They don’t count “promotional inquires.” These are requests made by lenders to make you a pre-approved credit offer or administrative inquiries.
Question 4: How do I “fix my credit score?”
There is no magic formula to increase your score. It is important to manage your score over time and be deliberate about improving it. Here are some ways to do this:
Here are some steps to improve your FICO score
Check your report for errors. You should look at all three credit agencies as they may have different errors. These reports will not impact your credit score. Each agency has an online way to dispute incorrect information. Sometimes it’s incorrect, sometimes it’s not, or it’s missing like a tax lien that has been paid.
Learn more about disputing errors in your credit report.
Next, make sure you pay your bills on-time. This is 35% of your FICO Score calculation. It is difficult to make late payments or miss payments. This is why it is important to automate your bank’s payments.
Make arrangements with creditors to make current payments if you have missed payments in the past. You can get past credit sins forgiven with time, but only if you have a better track record.
Your credit utilization (the amount of debt you have) has an impact on your score. Your score will improve if you reduce the amount of debt you owe. You don’t have pay everything off. Keep your balances low.
It is better to pay off your debt than to move it around. Your credit score can be affected by having less accounts open but owing the same amount. Make minimum payments on all your cards and pay off the higher-interest rate cards first.
Experian Boost enables you to receive credit for on-time utility payments. This can increase your score by as much as 10 points in a matter of minutes.
A collection account that isn’t paid off will not be removed from your report. It will remain on your report for seven years.
While it won’t immediately rebuild your credit score, seeking help from a legitimate credit counseling agency can help you manage your debt, consolidate and lower your payments, and get you back on track. This company will not lower your score.
Closing your cards is not a proven strategy for improving your score.
In order to improve your credit score, opening up new credit lines can actually make it worse. This strategy is not effective.
Credit: The bottom line
It’s a good idea to tell your buyers clients to do these things BEFORE they apply to for a mortgage.
To know their credit scores, they should get their own credit report.
Correct any errors and update any information that could increase their score.
Register for Experian Boost.
Knowing credit is a benefit to you personally. Being able to explain it clearly to your buyers will give you credibility. Knowledge equals confidence, but ignorance equals fear.
Real Estate Coaching Radio is a podcast that Tim and Julie Harris host for Realtors. They have been helping agents succeed in all market conditions for over 20 years.