Turning Up the Lights

Fortunately, even though the credit scorers have not shined much light into their black boxes, mortgage loan reps and underwriters who see everyday results are beginning to develop some keen insights. In addition, while still cloaking their systems in secrecy, credit scorers have reluctantly released some clues over which borrowers can puzzle.

Indeed, myfico.com will give you pointers on how to improve your FICO scores. To learn how much your scores actually do improve (if any) over the next 12 months, you will need to pay another $40 or so. For that price, you get four FICO reports. Turns out that turning up the lights a little will prove to be a real moneymaker for Fair, Isaac. Millions of Americans must now go to myfico.com and pay to glimpse their credit destiny.

I say "glimpse" because the info provided doesn't go far enough. It's more like "try this and pay us to see what happens." You really can't tell ahead of time the specific score boost that their suggested changes might bring about. Nevertheless, piecing together clues from myfico.com and experienced loan reps, here are the best tips currently available. (However, FICO and other credit scoring companies periodically revise their scoring systems. So, pointers that applied yesterday may not apply in the same way tomorrow.)

  • Number of open credit accounts. You can have too few or too many. The optimum number probably ranges between four and 10. One highly paid, credit-perfect (no lates) executive I know scored 640. After closing 6 of her 12 credit card accounts, her score went to 780, but it took six months before her score climbed up to that level. Some observers now say that closing accounts has been overrated as a credit boosting technique. So, do not close old accounts in favor of newer ones. Longevity counts. Nevertheless, over the long run, fewer accounts should help you maintain better credit discipline— thus, a higher credit score.
  • Balances. Open accounts that carry balances reduce your score more than open accounts per se.
  • Balances/limits. Numerous accounts with balances close to the limit will lower your score.
  • Credit inquiries. Whenever a potential creditor checks your credit file, it counts against your score; however, multiple checks within two weeks or so may not hurt much if it appears that you're merely shopping different lenders for one loan. Your personal inquiries don't affect your score. Nor do insurer or employer inquiries.
  • Payment record. Obviously, late payments hurt your score, but supposedly FICO doesn't distinguish between late mortgage payments and late payments on your Visa or student loan. (Mortgage lenders, though, most certainly do care. Always pay your mortgage or rent first.)
  • Recency counts. Late payments recorded two years ago don't hurt as much as those that occurred two months ago.
  • Black marks. Multiple lates on multiple accounts, collections, unpaid judgments, and tax liens devastate your score.
  • Kiss of death (but not always fatal). Go straight to credit scoring purgatory if you're within two years of a past bankruptcy discharge or a foreclosure sale. Chapter 13 bankruptcy plans and credit counseling debt management plans also count negatively. Nevertheless, some lenders (e.g., FHA loan programs) will originate a mortgage for people who are successfully carrying out a debt repayment plan including a Chapter 13 bankruptcy.

Myfico.com also shows that some categories weigh more heavily than others. These are:

  • Age of credit (15%)
  • Mix of credit (10%)
  • Amount of balances (30%)
  • Payment history (35%)
  • Recent credit inquiries (10%)

These clues shed some light on the credit scoring process. Most importantly, they display why perfect payments do not necessarily generate a high FICO score. To improve your score, you must not only pay your bills on time, every time, you must also manage your credit according to the likes and dislikes of the FICO (or other) credit-scoring program.

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