Skip to content
Higher credit score now norm in prime lending
With the resurgence of tighter underwriting standards, some mortgage-market observers have been predicting that lenders would again rely more on a would-be borrower's overall worthiness and less on his credit score. But if anything, credit scores have become more critical.
Lenders are giving more credence to each of the so-called "Five C's" -- character, capacity, collateral, capital and credit. But your credit score, a numerical snapshot of your credit history at a single point in time, is still paramount, says David Chung, managing director of CreditXpert, a Towson, Md., firm that sells credit-management tools to lenders.
Just a few months ago, a credit score of 620 would garner the best mortgage rates and terms. But many lenders now require a minimum of 680 for a prime loan. And some won't lend to anyone whose score is below that.
"The gold-rush era is over; 680 is the new 620," Chung says.
Since the significance of a good credit score cannot be overstated, it is important for borrowers to understand how to raise their bar. Start by making sure the information in your credit reports is accurate.
Check your histories with all three repositories -- Experian, TransUnion and Equifax -- because each receives information from different creditors. In addition, information often is reported at a different time, say, at the end of the month or once every three months.
If you are one of the estimated 50 million Americans who have little or no credit records on file, you can still have a credit score if you pay for rent, cable television and phone service, child care, insurance, utilities, appliance and furniture rentals, health-club memberships, transportation and security systems.
These recurring bills are not typically included in the data used to compile a credit score. But people who tend to pay with cash or money orders can use them to create a "non-traditional" credit history.
Credit Plus, a Salisbury, Md., credit-information service, allows consumers to post their payments online with PRBC, a consumer reporting agency that collects, stores, scores and reports non-traditional payment data.
"Non-traditional credit reports have been gaining greater acceptance in the mortgage sector," says Allen Johnson, vice president of sales and marketing.
Obviously, paying your bills on time shows you take your responsibilities seriously. On the flip side, late payments are always a negative. And consistent tardiness can kill a deal.
But credit scoring is based on complex mathematical formulas containing as many as 300 characteristics that might predict how a person will meet his obligations.
Of these, though, about two dozen are considered the most predictive -- and the easiest way to raise your score.
And though the many permutations and complexity of scoring systems make generalizations risky, there are some basic credit truths.
For example, the longer a consumer's credit history, the better. Files that go back 30 years are considered ideal. But a three-year record will do the trick, and Johnson of Credit Plus says a record of 12 or more consecutive on-time monthly payments will help even thin-file borrowers obtain financing.
Managing debt load is also recognized. So keeping your credit below half of your limit will improve your score. But keeping it below 30 percent -- $300 on accounts with a ceiling of $1,000, for example -- is ideal. To raise your score, pay accounts down, which is better than paying them off.
Delinquencies, of course, are negatives. But when a late payment occurred is important. Recent late payments will reduce your score significantly, while a late payment more than two years ago will cause hardly a ripple.
Paying credit cards in full each month will not necessarily raise your score. If the balance is high the day the credit-card company reports to the bureau, that's the amount the score sees. So it doesn't matter that you paid the amount in full by the due date, because the balance may have changed because of incoming charges.
Scoring models also look for well-balanced credit, including the number of credit cards in use. There is no optimal number, but typically people with too many or too few are considered higher risks.
Write to Lew Sichelman c/o Chicago Tribune, Real Estate, 435 N. Michigan Ave., 4th floor, Chicago IL 60611. Or e-mail him at realestate@ tribune.com. Sorry, he cannot make personal replies. Answers will be supplied only through the newspaper.