Wednesday, May 26, 2010

A Peek inside the Credit Scoring Engine

On May 7th. 2010, I wrote about how little credit it takes to have a great score. Today we look into this a little further, and contrast two different credit profiles. It’s all in the management!
Here is an example of damaged credit:
Total Credit Lines in history: 6. “DLA”=Date of Last Activity
1. Open Collection $481 Balance
2. Auto Loan. $16574 High Credit Limit. 62 Months old. $0 Balance, Paid off 6 months ago. No lates.
3. $146 High Credit Limit. Paid Charge off. 46 Months ago.
4. Medical Collection. $100 High Credit Limit. Paid 47 Months Ago.
5. Bank Credit Card. $600 High Credit Limit. 40 months Old. 0 Balance. DLA 39 Months ago. No lates.
6. Store Credit Card. $0 Balance. 12 Years Old. DLA 9 years ago. No lates.
The Credit score is 643. Although one collection and one charge off were paid off several years ago, the open collection is still damaging the score. Another factor is the ratio of good-to-derogatory credit items. In this case, addressing the open collection (in the right way), creating occasional activity on a new line of credit or two and on trade lines #5 &/or #6 will help to re-build this score over time.

Let’s compare this example with another.
Total Credit Lines in history: 4.
1. Secured Credit Card 72 Months old. High Credit Limit $300. Current Balance $204. DLA 1 month ago.
2. Secured Credit Card 72 Months old. Reported Stolen, $0 Balance. DLA 48 months ago. (Re-issued as account #1.)
3. Credit Card 3 months old High Credit Limit $1000. Balance $0. DLA 3 months ago
4. Charge Account. 48 Months Old. High Credit Limit $550. Balance $0. DLA 4 months ago.
The credit score is 783! This shows that if obligations are met, it is not necessary to have several different types of credit, more than a couple of trade lines, frequent activity, or even more than modest amounts of credit available to achieve an outstanding score.

Tuesday, May 25, 2010

How Top Real Estate Agents Tackle Tough Times

How Top Real Estate Agents Tackle Tough Times is the sub-title of Shift, the latest book in the Millionaire Real Estate agent series by Gary Keller, the CEO of Keller Williams Realty. Published in 2010, the focus is on the current market environment. Real Estate is cyclical. I highly recommend this easy to read book. (It's light on commas, but you’ll quickly adapt to its conversational style.) It clearly breaks out into 12 tactics exactly what is necessary to succeed in the current market environment. Here are two essential key nuggets (bolds are mine):
…after the sub-prime, free-lending ways of the early to mid 2000’s, mortgage lenders created another “ability” crisis for buyers. In response to previous loose lending practices suddenly lenders tightened their lending standards. They quit offering many popular programs, asked for stricter appraisals, required higher credit scores, and demanded more money down. In both shifts many buyers were less able to buy and some could no longer even qualify.
To counter such challenges you must find workable financing solutions and counterattack or put to rest any false ideas buyers may have about their ability to buy a home. Knowledge and a great loan officer are the keys. By teaming up with a loan officer immediately you’ll not only serve the best interest of the buyer, but also increase the number of people you can help. As soon as you meet someone help them understand whether they qualify. And if they do qualify then help them find out if they can buy what they want and need.

Shift, Gary Keller, p. 175

So how does a real estate agent add “master creative financing” to their ever growing list of important tasks to do? They don’t. You only need to have a clear understanding of the market, the players, and their options. With this knowledge you can effectively expand the choices for your buyers and sellers and leave the details to your financing specialist.
Meet separately with your top two loan officers every week. These meetings should be on your calendar for the entire year.
The goal of each of these brief meetings is to brainstorm the issues you and the market are facing. Ask them to put all the financing options on the table that might work in the market for each of your buyers and sellers. With that list in hand, you can set the expectation that these same lenders will take ownership of the forms, the timelines and the processes needed to put these ideas into action on each loan they get.

Shift, Gary Keller, p.219-220

If you take away nothing else from the book, be sure to implement these two key steps. Your bottom line will improve significantly!

Tuesday, May 18, 2010

The second last-minute credit report before closing

Up till now, realtors and homebuyers were infrequently affected by this practice. Starting June 1st, 2010, it becomes the rule rather than the exception. Your lender is likely to order a second credit screening immediately before closing. It is part of Fannie Mae's "loan quality initiative" to cut down on slipshod underwriting and fraud by borrowers. This second report is designed to find out whether you have obtained, or even shopped for, new debt between time of loan application and the closing. If you have made applications for credit of any type, the closing may be put on hold pending further investigation, and your transaction could potentially fall through.
How should a borrower prepare for the new credit check procedures? Just follow one basic rule: total abstinence. Resist new spending completely between loan application and closing. And don't apply for new credit or increase credit lines without discussing it with your lender first!

Friday, May 7, 2010

Can a young person achieve an excellent credit score?

With banks now expecting a middle score of 720, or even 740 to extend the best pricing or terms to you, it is now important to build up your credit profile to achieve these levels. Not only that, but many lenders don't want to see much variance between the scores from Equifax, TransUnion and Experian. A mix of 673, 735 and 751 would not be considered excellent because of the one score below 680, even though the mid score is well above 720.
Common knowledge is that it takes years and a mix of several different kinds of trade lines to build up a high score. We'll see by the examples below that this is not necessarily true.
It is true that to have little credit history is equal to having bad credit. But it is not as hard as one might think to build up a great score from nothing. Of course, you must always pay on time, and have no derogatory items (such as collections, judgments or charge-offs) to maintain a high score. The examples shown below have done that.

Now let's look at 2 actual real-life examples:

Example #1:
Total number of Trade Lines is three.
1st one is a credit card , opened 7 months ago. The High Credit (amount available) $500. The balance is 63, the minimum payment is $25.
2nd is an auto loan, opened 42 months ago. High Credit $3000. This account was satisfied in 18 months and has 0 balance.
3rd is a $1000 credit card opened 66 months ago. It has a 0 balance.

Pretty minimal number of trade lines and amount of borrowing power, yes? What would you guess the credit score to be? Maybe 680 at best?

Example #2:
Number of trade lines is two.
1st one is a credit card opened 5 months ago. The balance is $63, the minimum payment is $25.
2nd one is an auto loan. It was opened 33 months ago. High credit was $5836.
It has a 0 balance.The "months reviewed" is 2. This means the loan was payed off early.

Do you think that just 2 trade lines could achieve a 680 score? Maybe?

Both accounts have had 2 inquiries in the last 12 months.

Both of these accounts have Key Factors impacting the score of:
1. Length of time Accounts have been established
2. Length of time revolving accounts have been established
3. Too many inquiries in last 12 months
4. Proportion of balances is too high on bank revolving or other revolving accounts

Now what do you think?

(drum roll, please)

Score #1: 786

Score #2: 741

Interesting, isn't it?

What have we learned?
  • Credit reports all show the same Key Factors items 1-4 above,
    even if you have the highest possible score!

    To have an excellent score:

  • It is not necessarily to have five or more trade lines of different types.
  • It is not necessary to have shown an ability to handle 5 and 6 figure high balances and 4 figure payments.
  • It is not necessary to have 6 or more years of credit history.
  • Owing a small percentage of your available credit has a positive impact on your score. (FYI, under 30% for credit cards is best.)

    And by the way, our examples are 23 and 22 years old!

    Go forth, use credit accordingly, and prosper.