The Gallant Group

A FICO score is based off of various but a limited amount of information. Some of the information cannot be manipulated and some can be. If you’re thinking about raising your credit score or hiring a “credit repair” agency/expert to fix your credit, read this post very carefully. The barrier to entry to become a credit repair expert is almost non-existent and in a tight money market, this industry will explode with individuals who will promise the world, won’t deliver, and worst of all will cost you a fortune.

Credit Components

Credit reports and scores are made up of 5 components.

1) Your open or “current” accounts
2) Your closed accounts
3) Derogatory Accounts
4) Inquiries
5) Public Records

Open “Current” Accounts

All accounts that show prompt payment history are in this section. What’s important here is a combination of:

1) How many accounts you have open
2) Average credit balances on all your credit lines such as credit cards, credit lines, etc
3) Length of time that these accounts have been open

Though you have control over all 3 of these factors, on any given day you have really have control of only one factor. And that happens to be the balances on your revolving debt. This may be confusing so I’ll dive one level deeper.

Types of Debt

All debt under this category can be put into 3 major buckets: 1) Revolving debt, 2) Installment Debt, or 3) Mortgage Debt.

Revolving debt is any credit line that doesn’t have an end unless it’s terminated by the borrower or the credit grantor. Credit lines, credit cards, personal lines of credit fit into this category. Once you open them and make your payments on time, the credit terms are a revolving 30 days. In other words, the credit company grants you credit, bills you monthly on your purchases for last month, invoices you and then you have 30 days to make a payment before they start charging late payments, dinging your credit etc. At no point in time does this cycle end without specific termination from either party.

Installment debt is a bit different. It’s debt that you have agreed to pay periodically for a period of months and the goal is to pay off the debt. The term, the payment due, and loan amount all show up on the credit report.

Mortgage debt is any real estate loans that are oblilgated to pay on. Mortgage debt works just like installment debt except that it has a different impact on your scores. To what degree, no one really knows but it’s quite possible to have a borrower who is maxed out on mortgage debt (EX: $500K high balance and the loan is also $500K) and not have it impact as significantly as maxed out revolving debt. For example, I was recently working with a borrower who has 5 homes all secured by an interest only mortgage. Her credit report shows that all loans are at or near the high balances, but her score is still 695. If she had 3 credit cards of $500 that were maxed out, her score would be near 620.

One more thing before moving on. Equity Lines of Credit are NOT mortgage debt. They are credit lines and are treated as Equity Credit Lines against real property. They are a different form of revolving debt and are treated as such on credit reports.

As I said earlier, on any given day you have control over only thing, which is the amount of revolving debt. If you want to quickly bump up your score, the other two factors above that go into forming your score won’t help. But reducing revolving debt drastically does.

Typically any credit cards or personal loans that have balances of more than 40% of the high credit limit (EX: $1000 credit limit with more than $400 balance) negatively affects your credit. This is not a hard and fast rule but generally in about half of the cases where I ask the borrowers to raise credit scores to qualify for a specific program, lowering balances to 40% of the maximum balance has a significant impact. For example, just recently I was working with a prospect who had a 580 credit score. They had two $1000 credit cards that were maxed out. By moving money around a bit, they made a payment of $600 on each of the credit cards and brought their balance to $400 for both. Their credit score shot up by 60 points in under 5 business days.

The more *unused* credit someone has, typically the higher their score is.

Closed Accounts

These are accounts that were once reporting on your credit reports and are now no longer active. All these accounts were at one point in time under your name. If there is a category of accounts that adversely affects your score here its any account that was “Closed by Grantor”. Although by itself that label is pretty harmless, but in credit decisions if the “closed by grantor” accounts were closed during a time of delinquency on your other accounts, that can make or break a borderline approval from underwriters.

Derogatory Accounts

Items in this section have the most impact on your credit report. Clearing up derogatory accounts requires cooperation from many different parties and thus they take time to correct or change. What’s worse, once changed there is no guarantee that they’ll stay changed. Read more about this in my credit repair section.

When I’m taking a look at a new borrower or prospect, the “derogs” is the first section I scroll to. This is where items such as collections, accounts with late payments are, overdue balances, etc are. I will briefly list in order the most to least impact that items have on credit reports under this category:

1) Late payments on mortgages: If more than 12 months have passed since since last late payment, you are in the clear (some lenders and credit grantors require 24), but if less than 12 months, this does have a significant impact on your credit score. Often times upwards of 100 points.

2) Late payments on installment debt: Late payments on car loans and personal loans come next. Often times, these late payments may be cleared up by negotiating with your lender. Lenders on these types of loans are usually more lenient on credit reporting practices than the first group.

3) Collection Accounts: If the collection is less than 30 days old, your credit score will most likely be impacted by at least 50 points or so. After 30 days, these have progressively less and less impact in lieu of other good factors towards your credit. The challenge is clearing the collections up. Collection companies are notorious for leaving old collections on there. Often, you have to get a letter and have someone from my firm do a rescore.

4) Late payments on revolving debt: Though late payments can hurt you, non-recent late payments are usually overlooked in lieu of low credit card balances, decent credit scores and other established revolving accounts.

5) School loans: Last are derogatory school loan payments. There are so many ways to get out of paying your student loan payment if you can’t afford it (forbearance, deferrment, etc). The reason why I consider this the least important in the derogatory category is because time and time again I’ve seen borrowers get approved for financing despite derogatory school loan history. What’s more, my professional experience has been that despite a missed payment, 3 months of prompt payments restores a credit score to 80% of what it used to be.

Contrary to popular belief, paying off derogatory accounts does not hurt your credit. What hurts credit is if the derogatory accounts are forgotten and are not taken care of. Contact us to find out more about cleaning up your derogatory credit items.

Please don’t get the wrong idea. All of the above are not good items to have in your credit report and all do adversely affect credit scores. But in qualifying for a residential, commercial or business loan, there is a higher decline ratio among borrowers who have derogatories in the first two categories above.

Inquiries and Public Records

I’ll address both of these categories as one subject.

Inquiries are simply the number of times someone has pulled your credit. Every time somone does, it shows up as an “inquiry” on your credit report. Multiple inquiries within a short amount of time indicate that you were looking for financing (or doing something funky with your credit) and have a hit to your credit. Little is known about how much and though I’d like to say it’s little, the truth is I simply don’t know. I’ve never seen though a credit report that had a ton of inquiries on there get declined just because of the number of inquiries. It’s always because of another reason in conjunction with the inquiries.

In my earlier days in real estate financing, there was always a myth that multiple credit checks by the same company within 30 days when applying for a residential loan do not have a negative effect. I was surprised to find out that this myth is actually true. But there is a trick. If your loan officer is trying to raise your credit score by paying off debt, they have to let the credit company know that they intend reissue the same credit report but just want an updated score. Somehow, the credit companies themselves can “open a credit file” (as is the terminology) for repeated credit checks without impacting your credit.

As far public records are concerned, these are the toughest and often times the most impossible records to get off your credit reports. These consist of bankruptcies, judgements, tax lients, etc that have been on your credit report. A “Letter of Satisfaction” always has to be issued and since most of these judgements are recorded in the Counties where they were placed, doing credit repair on them will usually not get rid of them. This is the special instance I spoke of when I said that somethings can be manipulated and others can’t. So far, I have not seen a clean and doable way to get rid of public records FROM ALL THREE credit bureaus even though there are hundreds of credit repair individuals promising you that they can. And a public record on one, is just as good as a public record on the other ones.

I hope this information was informative. Please feel free to comment. Also, if you need to discuss your credit, I can provide this service for free depending on what it is that you’re trying to do. Send me a detailed email at info@gallantgrp.com and I’ll reply back letting you know what I can do.

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This entry was posted on Tuesday, April 3rd, 2007 at 8:28 pm and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.