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'What-if' tool lets you explore the credit score consequences
The computer programs don't repair a damaged score; they allow you to tinker
with tactics and devise a plan.
By Lew Sichelman, United Feature Syndicate
July 30, 2006
WASHINGTON - A young couple fell into the trap that ensnares many home
buyers: While waiting for their home purchase to be completed, they rushed
out and, on credit, bought enough furniture to fill a house.
They thought they had been approved for a mortgage at the lowest possible
interest rate. But what they didn't know was that a few days before
settlement their lender would run another credit check just to make sure
they were still a safe risk.
Just when they were about to close on their loan, their credit scores were
below the threshold needed to obtain the low rate they had been promised.
They were faced with the prospect of paying not only a higher rate, which
would mean a larger-than-expected house payment, but also coming up with a
larger down payment.
A credit score is based solely on the information in your credit report and
is a number that helps lenders predict how likely you are to make your
payments on time. Overall, the higher your score, the lower your mortgage
rate. And for many people, one interest point on a loan can mean the
difference between an affordable mortgage and one that pinches their wallet
so tightly they would have to switch from sirloin steaks to hamburger to buy
a house.
Enter "if," as in, what would happen to my score if I closed out this
account or paid off this car loan? If I paid off this judgment? If I moved
all my outstanding card balances to a single card with a lower rate?
Valid questions all, but too often they are put to a loan officer or
mortgage broker who hasn't a clue what effect these or other steps might
have on the buyer's score. Worse, acting on an incorrect response can send a
score tumbling, a disastrous step from which it could take months to
recover.
Help is available in the form of computerized modeling programs known as
"what-if" simulators, which allow people to explore the effect certain
actions - adding or removing accounts, for example, or correcting errors -
could have on your score before actually taking them.
This is not rapid rescoring, which is a quick way of correcting and updating
information in your credit files. And it's not so-called credit repair or
credit restoration, which is a questionable method of removing negative
items from your profile, even if they are true, by filing a protest with a
credit repository.
(You have a right to question inaccurate, unverifiable or erroneous
information. But it is impossible to permanently remove accurate items. They
may be lifted for 30 days while the credit bureau investigates your
complaint. But once the creditor responds, it will go back on your record.)
This is an interactive way to see how applying for a loan, opening new
accounts, missing payments, consolidating debt or transferring balances can
affect your credit score. Think of it as a game in which you can change a
balance, pay off a collection or delete an account to find out how to
improve your score before you actually take those steps.
Using a simulator, borrowers can "play" with any number of possibilities and
combinations until they find a solution that works best for them. The
programs can also help borrowers avoid misguided actions.
The aforementioned young couple used a program called ScoreWizard to scan
their credit reports and see recommendations on how to get back to where
they started. By implementing the suggestions, they were able to elevate
their scores by 99 points for one person and 52 points for the other, which
was more than enough to qualify for the loan they needed.
ScoreWizard, which also automatically scans credit files for opportunities
to raise credit scores, is one of a number of powerful simulators that
would-be borrowers can use to test various scenarios. Another is ScoreRight,
which uses common assumptions to suggest ways to increase your score. A
third system, CreditXpert, lets you use its predictive capabilities to test
any combination of options.
Unfortunately, you can't access these or other what-if calculators directly.
Rather, you must go through a mortgage broker or loan officer to use the
programs, which are marketed to industry professionals as tools to help them
attract and keep clients.
There's nothing wrong with that. After all, a broker or loan rep offering to
help borrowers reach their target credit score quickly and effectively is a
sign he or she has their best interests at heart.
At the same time, there's nothing to keep you from taking your business
elsewhere if you so desire, whenever you so desire. You may lose the $35 to
$50 credit-report fee, but otherwise you are free to walk.
Either way, though, these credit advisory programs can prove valuable to
anyone who is searching for the best interest rate possible.
The difference between a 720 score and 580 could be as much as three full
percentage points, according to the booklet "Your Credit Score," which was
prepared by the Consumer Federation of America and Fair Isaac, the company
that developed the scoring programs used by each of the three major credit
repositories - Equifax, TransUnion and Experian.
On a $200,000, 30-year loan, the difference between 6.5% and 9.5% is an
expensive $418 per month, $5,016 a year and $150,480 over the loan's 30-year
life. Nothing to sneeze at.
Lew Sichelman can be reached at lsichelman@aol.com.