Proper Credit Use = Higher Credit Scores

February 12, 2008

This morning I led a seminar for mortgage brokers and loan officers that introduced the concept of Credit Proofreading. Afterward I was even more convinced that Credit Proofreading is a big opportunity. Not only can it be used as means of positioning brokers as credible financial consultants, but credit proofreading may be one of the best (and lowest cost) referral building strategies I’ve ever encountered.

Credit Proofreading simply means using computer software to optimize a credit profile for borrowing strength. It means reading the data in the profile and optimizing it in these three ways:

  1. Optimize the way your applicants use their available credit
  2. Optimize the accuracy of your client’s credit profiles
  3. Optimize the file for underwriting engines

For today let’s look at how and why you would optimize your borrower’s credit usage.

The ways your applicants use available credit are a significant factor in credit scoring. The FICO score weighs the number of open accounts and may ding the score if they have too many or even too few. Another factor FICO considers is whether your client has too much usage on one credit card and not enough on another. It even scores based on whether there is not enough use on specific cards – or too much.

The difficulty here is that no borrower really understands how to use credit correctly. How could they learn? Consequently, people make seemingly good short term financial decisions, only to drain their credit score in the long term. Here are a couple of real world examples.

Let’s assume that Tom and Tracy are a young, financially savvy couple. They understand stocks and invest regularly, and when possible enjoy saving money. One day Tom and Tracy go shopping and upon checkout are offered an immediate 15% savings if they will simply open up a credit account with the store. They agree and leave the store having pocketed $52. What they don’t know is that their new credit card account, with a limit of $400 and a balance of $350, has just lowered their credit score by more than 20 points.

When Tom and Tracy get home, they see a letter in the mail offering 0% financing for any transferred balances. Realizing they could save hundreds in interest payments, they get the card and roll over their balances. Once again, they have made a good short term move that inadvertently harmed their credit score.

Perhaps we should consider their neighbors, Max and Marti. This couple realizes the importance of good credit and would one day like to purchase a new home. In an effort to protect their credit score the primary credit card used is an American Express card since it must be paid off each month. They’ve also worked diligently to pay off all their other credit cards, which now maintain zero balances. They’ve made seemingly sound financial decisions that have unknowingly wreaked havoc on their credit scores. 

Can you see the opportunity here? If potential borrowers have not learned to used credit properly, (and I’d argue that they have not), they can not know if their scores are being negatively affected. As a mortgage professional, wouldn’t it be helpful to suggest changes to your borrower’s credit use – and then see a healthier, higher credit score in just three days.

This is the first step in effective credit proofreading. And it’s as simple as looking at a credit report using credit proofreading tools. Immediately upon pulling credit you can see how many points are being lost due to poor credit use. In seconds your software generates a step by step plan for your borrowers that details strategic payments to specific accounts, whether money should be transferred from one account to the other or even if new credit accounts need be opened.

After your borrower completes the plan, the higher score resulting from optimized credit use can be obtained in just three days. 

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Posted by Caped Crusader

Get Your Head Out of your LOS

February 1, 2008

As I prepared a blog to continue the theme of credit proofreading I thought it might help to lay a little groundwork. Without it, I might lose some mortgage originators from the conversation before it even began.

Credit proofreading simply means computer analysis of a credit profile to ensure its optimized for borrowing strength.

Not to sound simplistic, but remember that  a credit profile is not a credit report. The traditional, paper credit report is actually a grossly simplistic representation of the data within your borrower’s credit profile. The fact that you are looking at a merged credit report should clue you in to the fact that the tradelines you see can’t show you the whole picture. Three lines of data have been “merged” into one.

It wasn’t that many years ago (I’m talking the early nineties) when mortgage professionals received credit reports via fax several hours after the request. The credit data from three sources was merged and organized on paper in ways underwriters could understand. That’s right, actual people reviewed these paper reports tradeline by tradeline to determine a borrower’s eligibility. Laying out the data on paper was the best solution technology offered at the time.

But remember, we are talking about data here. Lots and lots of data, which when  combined create our borrower’s credit history. Today’s mortgage brokers have become so accustomed to the old paper format they’ve lost sight of the data behind it. And they’ve forgone the business opportunities inherent in those data.

Need some examples? For starters, a majority of credit reports get reissued to Fannie Mae, Freddie Mac or some other automated underwriting system. These systems read data – not paper. How can you tell by looking at a paper report what the underwriting conditions will be? Here’s another one… how can you tell if there are reporting errors that may be wrongfully lowering the credit score? There are more, but my point is that looking at paper will only tell you so much. And not very much at that.

I realized brokers don’t understand this when I discovered that most of our mortgage clients spend their entire loan processing lives in their LOS (loan origination systems) like Calyx Point, or Encompass. And they do so because these systems accept a paper based credit report directly into their loan file. They are so accustomed to manually studying paper credit reports – the idea of using computers to assist them in their analysis never even occurs to them.

I’ll get on my soapbox and say (annoyingly loudly) that you’ve simply got to get out of your LOS system and start analyzing credit profiles. Failure to do may end up costing you loans and referrals. Instead, let specialized credit management software help you analyze the deep data elements in a credit profile. You’ll then discover things about your borrower that a paper credit report could never reveal– things that can help you close loans you’d otherwise not. Software can tell you if credit scores are held down by outdated or blatantly wrong information in the profile. You can even see what Fannie Mae or Freddie Mac will think of the file – before you pay to run it through their systems. You can even discuss a credit profile with your clients in ways that will teach them how to use debt in ways that can maximize their scores.

This is serious business, and mortgage originators that get it (and I know they exist because I’ve talked with them) are closing more loans and increasing client loyalty. The average consumer understands the financial importance of their credit profiles. The new breed of mortgage originator understands that credit analysis tools can help protect their clients credit health and optimize scores. They’ve positioned themselves as  credit profile experts with the technical competence to put their clients in the best loans.

These credit proofreading tools exist – and every one I’ve discussed is free. You just won’t find them in your LOS.

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Posted by Caped Crusader