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:
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Optimize the way your applicants use their available credit
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Optimize the accuracy of your client’s credit profiles
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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.
