The Loan Lowdown – Understanding Your Credit
There are different types of credit. There is “consumer credit model,” and then there is a “real credit model,” that is what we take a look at. When we (Jane/Jim) started working and writing up loans, back in the day, there was no way for someone to look up their credit at all. There was no “free” credit report available at that time. Banks and lenders, whether it be for buying a car, renting an apartment, buying a house, etc., didn’t have to share the credit report with the consumer. There was a lot of fear put into the buyers back in the day.
There is now a way to check your credit, which is better for you. All credit cards offer a way to monitor your credit. Unfortunately “consumer credit models” that are available are just marketing tools to just market to you. Unfortunately that marketing is from that lower 600 credit score all the way to as low as scores go; that is their target audience.
Experian, Equifax, and TransUnion, the three bureaus that we pull, also have their own “consumer model” for monitoring. And they don’t tell you the difference. Jim did a test with Experian, just to see what his customers go through, and there wasn’t a day that went by that he didn’t get something from them, selling a service from them. Because they are monitoring what you are spending. They are trying to sell “bankruptcy” to turn it into a lead for them.
Don’t be fooled; even if it is from Experian, Equifax, and TransUnion, they are still a consumer model. Each one has a different model, and they are good for content. This is particularly relevant if your credit is at risk of being hacked or if you have recently paid down a credit card.
There are other things on a credit report that can be scary. A little while back they stopped putting public records on credit reports. You might have seen a commercial on TV stating that they were removing public records from credit reports with the goal of increasing people’s credit scores. But the problem is that there are judgements** that we are not being aware of. We pull your credit, and we don’t see a judgment. But when a title company pulls a credit report, there is a judgment there. Judgments are no longer part of a credit report, so we don’t know about them until they come up on a different platform.
We do a lot of closings in Illinois, Indiana and Florida, and they have been on closing dates; right before closing, the title companies pull a “judgment report,” and then there is nothing that you can do. Everything that we do is investigated, so it is best to be honest right from the beginning, and everything has to be proofed up with documentation.
What are lenders looking for in your credit? It’s not just the scores. We think a lot of loans get denied because the loan officers get caught up on the scores, and they don’t look further. Here’s an example: An 800 credit score and a disputed item** on a credit report. When I am looking at a credit score, I don’t care that you have an 800 credit score, but when I look 50% down, if everything on the credit score is disputed, you’re not going to get that loan. You are going to have to make sure you have an explanation for why there are disputed items. In most cases you are having to remove the “disputed items,” unfortunately bringing the score down to 540, which is the real score. And if someone has told you to “dispute everything,” that is wrong information.
There are a lot of credit repair agencies out there, and their main goal is to just “dispute, dispute, dispute.” And when you dispute items, this is again another situation when you have to dial the clock back. Years ago when you disputed an item on your credit report, that was basically you having your day in court, saying, “I was not late on that car payment.” And what they would do back then was remove that item from the credit report pending investigation. And once it was figured out, it would be put back onto your report, bringing your score down.
It is different when you dispute an item on a credit report, and now it leaves it on the credit report, to where we can see it, but it takes it out of your scoring equation. So if you have an 800 credit score and you have a late car payment, then your score goes down to 600. If you dispute the late payment, your score goes right back up to 800. In most cases, if you agree to remove the dispute, your score will immediately decline. There are rules on what you can dispute and what you can’t. Just disputing all negative things on your credit score will not work.
It’s actually really bad advice, and unfortunately when people go to credit correction places, they dispute everything, they see their score go up, they tell their friends, all their friends start go there, and it is just a “dispute” nightmare.
What lenders are looking at are your payment history, your credit utilization**, the length of credit history, and any recent inquiries. Payment history is 35%, credit utilization is 30%. If you have 3 credit cards, and they are all maxed out, it’s the same amount no matter the amount that is owed.
Mix of credit. We love talking about “revolving credit” vs. “installment credit.” When we look at a lot of credit reports, or even speak with a customer, we always hear that “their car payment has always been paid on time.” Most car payments are paid on time because it is called “secure debt,” and if you don’t pay for your car, they repossess your car. A car, boat, motorcycle, RV, camper, jet skis, or wave runner. But a mortgage, they typically get paid on time, and they can take that item.
“Unsecured debt” is “credit cards or bank loans.” Which is an example of “revolving credit,” and that is where you are going to get a boost from your score. You can pay off many cars and houses, but if you don’t have that mix of revolving credit, that might hurt you. A lot of people say that they don’t have credit cards because of the interest. If you don’t pay off your credit card in full, you don’t pay interest. But what ends up happening is when someone puts $300 on a credit card, they pay the minimum payment, which is $25, and then they are still confused on why they still owe $310. You owe more because your minimum payment didn’t even cover the interest. If you can’t pay them off in full, you need to send them “chunks of payments.” Keep the credit card balances low, but don’t close them. Don’t close the account.
There are things out there, like Amazon, that want you to pay for your item in installments. And they are hoping that you can’t pay off that item. Just beware that those things, like Amazon installment payments, are showing up on credit reports, and you need to have records of those payments on your bank statements. Lenders want to see evidence of those Amazon payments.
Pre-qualification pitfalls when it comes to credit reports. If a loan gets denied elsewhere, and we get it, we can guess sometimes what was missed. “Student loans” are a big one. “Disputed “accounts”—that is another one, where someone looked at a credit report but didn’t look down further on the credit report. Judgments are another pitfall. They think it is a judgement/collection.
Let’s get rid of all the bad on the credit. Some people think that a credit report is only the negative on their credit. When they say, “I have things on my credit,” but there are a lot of good things on my credit, that helps drive up your score. If you have nothing on your credit, you will see “NA,” which is not a good position to be in. It is funny advice if you have collections for $500 a piece and you have $1,000 that are usually “charged off.” And most times they were written off their books as a loss. So we would tell someone to tell them to open up 2 new credit cards. Getting those secured credit cards will start a new boost. An old credit issue did its damage, but now it is time to create good credit.
There are ways to jumpstart some credit, and “authorized users” still works. Which means adding someone onto your own credit card, boosting your score, and allowing him to get his own card. Not all credit cards work like this. Chase and Wells Fargo no longer report “Authorized Users.” Call your credit card to ask if they report to “authorized users.” But the one thing to be aware of is that if all of your credit cards are “Authorized Users,” then you will have problems getting credit. You still need to have your own credit. With secured credit cards, you still need to be careful, because we have seen people have late payments that could ruin their credit.
If you get a “secured credit card” and you use it the way that you should—to use it, pay it off, and use it—that credit card company will typically then reach out to you to turn it into a regular credit card. Refund you back your deposit, and then you are on your way to better credit cards. Don’t worry about what the interest rate is on a “secured credit card.” You are going to see rates with fees, and you don’t want the fees. If you use it and pay it off, you don’t worry about the fees. Take the 21.9% interest rates with no fees.
Scores required for a loan. We did the myths of lending a little while back; a lot of people think that for FHA loans, you need a 620 credit score. But in all reality it goes down to a 500 credit score with the automated system. Some reserves and low debt ratios help the loans go through. If a bank is requiring 580 or 620, then that is an overlay, which we talked about before. VA loans don’t have a minimum credit score. But VA doesn’t like recent late car payments; it doesn’t like that. USDA loans are 620/640, and for conventional loans, there are no minimum score requirements at the moment for them. Right now it is all up to the automated system.
A lot of people call and ask, “What kind of score do we need?” and we can’t tell until we get everything together. Maybe you are putting down a decent down payment, but they have money in a 401(k) that can help. There are no checklists, unfortunately. There are also these “down payment assistance” programs, and the towns are telling them that they don’t need a score requirement. But make sure to ask that question when you call and ask about those. If you don’t qualify for down payment assistance, most times it is because of your “score” and debt-to-income ratio.
Should you pay off debt before applying for a loan? That is a hard one to answer. I would want to know how many cars they have, the current car balance, and what their limits are.
Should you check your own credit score? Checking your own doesn’t affect your credit score, so keep doing that. But if we pull your credit, and another lender checks your credit score, that also won’t affect your credit score.
Closing old accounts will boost your credit. That is not true. If you had a credit card for over 30 years with no balance, that will not matter for you. People are saying that their “credit utilization is great,” and that comes from Credit Karma.
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** A “credit score judgment” refers to a formal court decision that can occur when a creditor sues an individual for non-payment of a debt and wins. While these judgments no longer appear directly on most credit reports, they are public records and can severely damage your creditworthiness by negatively impacting your ability to get loans and potentially leading to actions like bank account levies or wage garnishment. The term can also refer to “judgmental lending,” a subjective credit evaluation method, but this is less common and distinct from a court judgment.
** A disputed item on a credit score is an entry on a credit report that you have notified the credit bureau is incorrect. This means the information is under investigation by the credit bureau and is often marked as “in dispute”. While an investigation is underway, the item may not be used to calculate your credit score, though this can vary depending on the specific credit scoring model and whether the dispute is resolved.
** Credit utilization is the ratio of your total revolving credit balances to your total available credit, expressed as a percentage. It’s a key factor in calculating your credit score because it shows how responsibly you manage debt. To calculate it, divide your total credit card balances by your total credit limits and multiply by 100.
** An “authorized user” is someone who is given permission to use a credit card account by the primary cardholder but is not legally responsible for the debt. The primary cardholder is fully responsible for all charges made, including those by the authorized user. Authorized users receive their own card, which is connected to the primary cardholder’s line of credit, and their activity can affect the primary cardholder’s credit score.
** A secured credit card is a type of credit card that requires a cash deposit as collateral, which also typically becomes your credit limit. These cards are designed for individuals with no or poor credit history to help them build or rebuild their credit by making on-time payments. The deposit is refundable and secured cards offer an easy approval process, making them a good way to gain financial discipline and access to credit.
