Optimizing Credit Scores & Interest Rates

A Skilled Originator Can Help

It's a very simple equation. The higher your credit score, the better interest rate you will receive as a borrower. The reasoning behind the equation is equally simple - your interest rate not only reflects current market conditions, but also your estimated ability to pay back the loan. To a lender, your ability to pay back your loan is worth its weight in gold.

Components of a Credit Score

Generally speaking, your credit score is based upon the following criteria in order of importance:

• Payment History (This is where delinquencies will hurt you.)
• Responsibility regarding credit usage (How maxed-out are your accounts?)
• Credit Age (How long have you had your credit accounts?)
• Number of credit inquiry requests
• Credit Diversity

These quantifiable aspects, once accumulated, typically result in a number between 350 and 850. The higher the number, the more likely you are to pay back the loan.

A Closer Look at the Players Involved

There are three separate credit bureaus that keep track of your score. Experian®, TransUnion® and Equifax. If you've heard your score referred to as a "FICO" score, it's because all three bureaus use software developed by Fair Isaac Corporation. FICO is an acronym taken from that name. Most lenders look at all three scores when making a decision on your loan since scores can and often do vary.

While FICO is the industry standard, the three major credit bureaus released their own scoring model called "VantageScore." The new system is being actively marketed to lenders, and the bureaus claim that it will produce more uniform results across agencies. In addition, the scoring system is arranged similarly to the grades given in school, which is supposed to make it easier for everyone to understand. Time will tell whether this system will impact the traditional use of the FICO system.

What a Credit Score Means

A borrower with an outstanding credit score will get what is called an A-paper loan. This borrower is rewarded with a lower interest rate because of their proven track record. Consumers with less-than-perfect credit receive loans labeled A-minus, B-paper, C-paper or D-paper. These loans are known as "sub-prime" and come with higher interest rates. This translates into more money out of a borrower's pocket on a monthly basis.

Improving Your Credit Score

The best thing you can do to improve your credit score is to consult with a qualified mortgage professional. An originator can provide examples of reasonable credit usage, discuss options for paying off existing debt and advise you as to whether limiting or expanding your credit is most beneficial to you. A mortgage consultant can also help you identify items on your credit report that have negative impact or that may be in error. It's important to deal with such issues as soon as possible. In addition, if you need further credit counseling, a mortgage professional can help you obtain it.

At www.myfico.com you can see a current graph showing how your credit score can impact your interest rate on a 30 year fixed rate loan. On one such graph recently, borrowers with credit scores over 720 were receiving rates under 6.5% while borrowers with scores in the 500s were receiving rates over 9%.

Here are some additional tips to help improve your credit score:

1. Pay your bills in a timely manner. Paying bills on time for one month can raise your credit score as much as 20 points.
2. Control the balances on your credit cards. Maxing out credit cards can lower your score as much as 70 points.
3. Don't open new lines of credit you don't need. New accounts lower your average account age, which in turn may lower your score as much as 10 points.
4. No credit is bad credit. Having a few credit cards that you manage responsibly is a good thing. Having no credit cards will reflect negatively on your credit report.
5. Don't start closing accounts. Closed accounts still show up on credit reports. Be sure to consult with a mortgage professional prior to closing any accounts to make sure this will not negatively impact your overall score.

Next Steps

Once you have improved your credit score, a mortgage originator can re-examine your financial status and help you determine how to proceed. For example, they can help you determine whether obtaining a new loan or refinancing an existing one would be most beneficial.

If you are looking at refinancing, a mortgage professional will first determine if your existing loan has a prepayment penalty. If it does, you can work with the originator to continue to improve your credit score until the penalty expires. Once this occurs you can obtain a new loan that has less than a two year prepayment penalty so you can continue to refinance as your credit score improves. It is advisable to keep refinancing until you reach A-paper status, which gives you the best interest rates available.

Loans and credit scores can work against each other. It's a balancing act. A good mortgage professional will provide you with proper guidance that ensures a balanced relationship between your loans and your credit.

My Favorite Mortgage Professionals

I work with lenders and mortgage brokers every day. They can make or break a transaction. It is important to choose yours with care.

Below is the link to the website of my favorite mortgage lender, David Vernon of Security First Financial Services located in Burlington. David is known for going the extra mile for his customers. In additional he is extremely competent and great fun to work with.

You can learn a lot just by browsing his website. In particular you can learn how to easily determine your credit score as well as more tips on how to improve your credit score. And you can easily calculate your monthly mortgage payment for various loans at various interest rates.

But sooner or later you will reach a point where you need to talk personally with a competent professional. I highly recommend you give David a call sooner rather than later. There is no obligation. In a few minutes over the phone, he can give you an idea of where you stand financially with regard to what you want to accomplish, and what you need to do to make it happen.

Click here to find out more about David Vernon and Security First Financial Services