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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2016

How to Fix FICO Scores

Help borrowers repair cracks in their credit rating to qualify for loans

How to Fix FICO Scores

When your borrowers have FICO scores that come up short of qualifying for their desired loans, you do not necessarily have to move them into lesser loan products or disqualify them outright. A score increase of 25 points or more is legally possible as long you understand the factors affecting specific credit reports.

The Fair Isaac Corp. (FICO) offers credit tools like the FICO Score Simulator, which sometimes may offer guidance, but these tools do not offer comprehensive strategies. Following are tactics you can use to help borrowers repair cracks in their credit ratings.

The most overlooked credit-report resource originators should be using also happens to be the most important one: score factors. These factors are listed by all three credit agencies on the mortgage tri-merge credit report in descending order in terms of the negative effect they have on a borrower’s credit score.

Score factors include items such as of the ratio of balance to credit limits, level of delinquency, time since delinquency and lack of recent revolving-account information. These factors tell you exactly what is lowering a borrower’s FICO score. Let’s look at how to recognize the factors affecting your borrowers’ FICO scores and some tactics you can suggest to help them improve their credit rating quickly enough to qualify for a loan.

Payment history

Derogatory information, such as collections, liens and bankruptcies all factor in here. A borrower with just one negative item in this section can experience a score increase as high as 80 points if that information is rectified or removed.

Simply paying off a collection account does not increase the FICO
score, but getting it removed entirely from the credit report will.

  • Tactic: removing collection accounts. Simply paying off a collection account does not increase the FICO score, but getting it removed entirely from the credit report will. One way to get the collection removed is to call the collection company and offer to pay the collection under the condition that it is removed from the credit report. Sometimes collection companies may agree to such a settlement, after which they can provide a “letter of deletion.” The letter can be used for a rapid rescore, which is a tool available to most mortgage lenders through their credit-bureau vendors. Rapid rescores allow for an update to the credit report within five business days instead of the 30 days it normally takes. Make sure to pay the collection via a mailed check, and write the following above the endorsement line: “Cash only if you will delete account from credit report.”
  • Tactic: goodwill late-payment removal. Creditors may sometimes agree to remove a late payment from a credit report, especially if the account has otherwise had a perfect payment history or if an individual fell behind on the account for a reason other than financial inability to pay, such as not receiving the account statement because of an address change. Department-store cards often are generous when it comes to goodwill late-payment removals. You can obtain a “payment history update letter” from the creditor for a rapid rescore, otherwise the payment history will automatically update within 30 days.
  • Tactic: removing federal liens. Even after a lien is paid off it still plagues the report as a released lien, affecting the score negatively. The Internal Revenue Service (IRS) has a new program that allows for lien withdrawal and its subsequent removal from the credit report. The IRS will even remove liens with existing balances under $25,000 if the taxpayer is making monthly payments. Borrowers can call the IRS for the documentation to apply for the lien withdrawal request. The IRS normally takes in excess of 60 days to process lien withdrawals. Once the IRS issues a lien-withdrawal letter, forward it to the credit bureaus or use it for a rapid rescore.
  • Tactic: removing authorized-user accounts. If a borrower shares a credit card account as an authorized user on an account with a negative payment history, that borrower can be removed from the credit report. Credit card companies will remove an authorized-user account from a credit report if the user calls and requests to be taken off the card and requests to have the account deleted from the credit report.

Revolving-account balances

Balance utilization on revolving lines of credit is not about how much money is owed on a credit card, but the proportion of the available credit limit being used. A score is more adversely affected if the combined credit card limits are $1,000, and $500 is being used (50 percent utilization) than if $5,000 is being used of an available $100,000 balance (5 percent utilization).

  • Tactic: balance paydown. Borrowers should not carry balances on more than a couple of credit cards and should not exceed 10 percent utilization of the credit limits. Someone close to maxing out all of their credit cards may gain up to 50 points by bringing down utilization to 10 percent and reducing the total number of accounts with balances. Paying down from 50 percent utilization to 10 percent may yield a 20-point score increase. Do not close the credit cards after the balances are paid down, however. Your borrower also should get taken off any high-balance cards that are authorized-user accounts.
  • Tactic: balance transfers. If a borrower is short on funds to pay down card balances, the individual can transfer the card balances to a spouse’s credit card. Home equity lines of credit are often reported to credit bureaus as mortgage accounts instead of revolving accounts, so transferring a card balance to a home equity line of credit also can help.

It also is important to know when cards and balances are reported to the credit bureaus. A credit card company will send the credit bureaus a balance update on the date the statement billing cycle ends, which is different for each credit card. So, on a card with a billing cycle that ends on the fifth of the month, borrowers must pay the balance off before the fifth for the account to show a paid-off balance to the credit bureaus.

Length of credit

When it comes to credit scores, the older the credit history the better. Someone with open accounts ranging back 20 years with a perfect credit history may have a 760 FICO score, whereas the same person’s score 15 years ago would have been 30 to 40 points lower because of the shorter credit history.

Therefore, the average length of time an account has been open on a credit report will affect the score. Opening too many new accounts also contributes negatively if there are already a few seasoned tradelines on the report. Similarly, closing old accounts will lower the credit score.

  • Tactic: adding long-history authorized- or joint-user cards. A person may get added to his or her spouse’s credit cards as an authorized or joint user. These cards then will show up on the added user’s credit report within 30 days with the entire credit history the primary card holder has already established. When adding someone to a credit card, provide the card company with the new user’s social security number. Otherwise the card may not appear on the added user’s credit report. In addition, check with the bank to see if it has a policy to report authorized-user cards on credit reports.

It also is important to note that although both authorized- and joint-user cards factor equally into the mortgage version of FICO scores, lenders may not count authorized-user cards to satisfy loan-program guidelines requirements of having a specific number of open tradelines.

  • Tactic: closing new accounts. In instances where a client has a number of old accounts and then a few new accounts are opened, this may lead to a drop in the borrower’s credit score. In this case, closing a recent account may help. Only do this if the FICO score factors mention a new account, however.

Types of credit

This factor pertains to the assortment of the credit accounts found on a credit profile. In order to satisfy this category, borrowers are expected to have at least one of each of the different credit accounts in an active status. These include the following: a revolving/credit card account, a mortgage account and an installment-loan account.

When it comes to credit scores, the older the credit history the better.

  • Tactic: adding accounts to the credit report. Of the three different types of accounts mentioned, not having an open credit card account will affect the credit the most. So for those borrowers who do not have an open credit card, simply acquiring one will result in a FICO-score boost of up to 30 points. An authorized- or joint-user account with an established history may help the most, but if that is not an option, then opening up a credit card, department-store card or even a secured credit card account would help as well.

•  •  •

If these strategies do not bring about the desired boost in your borrower’s FICO scores, professional credit-repair services may be helpful. Be sure to check that the company meets your state’s licensing requirements, is bonded or registered with the attorney general’s office and that fees for deletions are charged only after the work is done.


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