Moneysidestories
Here's a way around
the problem: First, find out what your credit score
is. You can pay Fair Isaac or one of the major credit
bureaus to find out, or, if you have Internet access,
you can go to http://www.eloan.com. This free service
does not use the Fair Isaac model, but it's similar
enough to approximate your FICO credit
score.
(Fair Isaac and
Equifax, a credit bureau, also offer credit scores on
the Web. Their service, which can be found at either
http://www.equifax.com or http://www.myfico.com, costs
$12.95.)
Knowing your credit
score can tell you whether you're likely to qualify
for the lowest-rate loans. You can then shop for a
loan more casually, simply asking lenders for their
mortgage rates for good borrowers or by checking
newspaper and Internet-based advertisements and rate
comparisons.
Use those good-risk
rates as a guide to determine how much you can afford
to pay for a house. Then you can limit your serious
rate shopping--the kind that requires lenders to pull
your credit report--until you've found a house you
want to buy.
Here
are tips for boosting your credit score:
* Check your credit
report for errors. If there are eroneous items, write
to the credit reporting company and have those items
removed.
* Close unused
credit card accounts, but only if they were opened
recently.
* Leave old credit
accounts open, even if you're not using them, because
part of your score is based on how long you've had
credit.
* Apply for credit
only when necessary. New credit applications can lower
your score.
* Pay your bills on
time, every time.
Kathy Kristof
exemplefied --
Wini
Jackson, 58 as her subject matter. Ms Jackson wanted
to buy her first home. But the Los Angeles resident
discovered a troubling fact while she was looking for
the best deal on a mortgage loan: Rate shopping can
sometimes be hazardous to your wealth.
The reason: credit
scores. Lenders consider them, among other factors, to
determine whether to lend you money and what interest
rate to charge. These complex numerical
fingerprints--often called FICO scores--can be
influenced by all sorts of consumer behavior,
including rate shopping.
Credit scorers
generally will ignore the sort of intensive rate
comparison a pro Wini Jackson, 58, wants to buy her
first home. But the Los Angeles resident discovered a
troubling fact while she was looking for the best deal
on a mortgage loan: Rate shopping can sometimes be
hazardous to your wealth.
The reason: credit
scores. Lenders consider them, among other factors, to
determine whether to lend you money and what interest
rate to charge. These complex numerical
fingerprints--often called FICO scores--can be
influenced by all sorts of consumer behavior,
including rate shopping.
Credit scorers
generally will ignore the sort of intensive rate
comparison a prospective borrower is likely to do when
shopping for a home or auto loan. But shopping
leisurely for rates over an extended period can be
interpreted as a sign that you're applying for vast
amounts of credit. And that's a red flag that can cut
your credit score by as much as 10%, said Craig Watts,
a spokesman for Fair, Isaac & Co., the San Rafael,
Calif., firm that created the most commonly used
credit-scoring program.
In Jackson's case,
the damage was great enough to make her ineligible for
many mortgage programs aimed at borrowers with
excellent credit records. Her ineligibility for
lower-interest loans landed her in a category intended
for higher-risk borrowers, who often pay thousands of
dollars in additional interest charges for a
loan.
"A little while
ago, I didn't even know that credit scores existed,"
fumed Jackson. "Now they tell me that my score dropped
50 points because someone made an inquiry about me.
What is this? They are changing my whole life, saying
what I can have and what I can't have."
Where do credit
scores come from? They're created by a computer
program, most commonly designed by Fair Isaac. The
program assigns numbers to information on your credit
report, such as the number of credit cards you have
outstanding, the length of time you've been managing
credit, the amount of credit you have available and
the number of times you've paid late or defaulted on a
loan. The scores range from a low of about 300 to a
high of 900. Generally speaking, a score of 700 or
more gets you the best credit and fast loan approvals.
A score between 600 and 700 generally qualifies you
for a loan, but not always at the best interest rate.
A score below 600 classifies you as a relatively high
default risk, making it likely that you'll either be
turned down for a loan or offered credit only at very
high interest rates.
Mortgage lenders
like to see scores of at least 620, and 660 or higher
is considered very good. Scoring above those
thresholds typically qualifies borrowers for the
lowest-rate loans. Those who fall below get lumped
into a "B" credit category, which means they still can
get loans but are likely to pay interest rates one to
two percentage points higher.
On a 30-year
mortgage loan of $100,000, each percentage point rise
in the rate costs about $850 a year. Over the course
of the loan, that will add up to roughly $25,000 in
additional interest charges.
Unfortunately,
sometimes an innocent act--such as rate shopping--can
push you out of the top tier, as Jackson's story
illustrates.
She started with a
credit score between 689 and 702. But the last time
Jackson inquired about a loan, the lender told her
that her score was 650--about a 50-point drop. (Your
score can vary somewhat depending on which credit
bureau's report is pulled. There are three credit
bureaus. Though the bureaus use the same
credit-scoring software, the data in your file at each
one may vary slightly, creating minor deviations in
the scores, Watts said.)
Jackson's crime?
She shopped too slowly and too seriously.
To clarify why this
matters, it's important to understand a little about
the credit approval process. Naturally, anyone can
shop for mortgage rates by looking for comparisons in
the newspaper or on a Web site. This type of shopping
has no impact on your credit score.
But if you go to a
mortgage lender and ask for a firm rate, the loan
officer probably will insist on pulling a copy of your
credit report. That's to ensure that you qualify for
the lender's best rates. Some lenders also encourage
you to "pre-qualify" for a loan of a set amount. But
each time your credit report is pulled in connection
with an offer of credit, an "inquiry" is registered on
your report.
Inquiries are a
factor in determining your credit score because they
can indicate that you're getting a loan that's in the
loan approval process. And if it appears that you're
applying for lots of loans, it can be interpreted as a
sign that you're in financial trouble.
Because rate
shopping is a good idea--it can save you thousands on
the cost of a big loan--Fair Isaac attempts to
segregate rate shopping from real credit applications
by counting all mortgage loan inquiries that are made
within 30 days as a single inquiry. The same holds
true for inquiries on auto loans, Watts
said.
But a problem
remains: If you shop slowly--taking more than a month
to check rates as Jackson did--the inquiries are no
longer consolidated and show up as multiple inquiries.
And your credit score could take a hit.
Even lenders that
don't use traditional credit scores--such as Fannie
Mae--use loan-approval systems that include many of
the same standards as the Fair Isaac models, and also
would penalize borrowers for leisurely rate
shopping.
Times staff writer
Kathy M. Kristof, author of "Investing 101" (Bloomberg
Press, 2000), welcomes your comments and suggestions
but regrets that she cannot respond individually to
letters or phone calls. Write to Personal Finance,
Business Section, Los Angeles Times, 202 W. 1st St.,
Los Angeles, CA 90012, or e-mail
kathy.kristof@latimes.com.
Racking Up
Points
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