Know Your Score – Part III

Have you recently been denied credit or been offered credit terms on the application only to have those terms worsen days later? You wonder, “I pay my bills on time, why would they turn me down or offer me this much higher rate than what I was quoted?”

There’s really only one way to determine what rate and terms you’ll be approved for when applying for any loan or credit card. A completed application and credit report. Anything earlier than that is just conjecture and usually ends up as a false promise. “Bait and Switch” comes to mind. The conversation goes more or less like this; “Hi, I’m calling to see what your rates are for a loan. My credit is good, I pay my bills on time, and I’m trying to get the best rate.”

Answer: Well, we are offering 6 ½% for 72 months and we can close that loan in 24 hours.

You are setting yourself up for disappointment at best. Until you’ve fully completed a credit application and the lender has obtained a credit report, they won’t be able to quote you accurately. Most lenders are “tiered,” in other words, depending on your credit score and debt ratio, you may qualify for a Tier I, Tier II, Tier III, etc. loan. Tier I may be the loan that has an interest rate of 6 ½%, but based on your credit score, you qualify for a Tier III loan that has an interest rate of 9 ¾%. Not only is the rate higher, but your debt ratio (the amount you owe on all your debts versus your income) also changes; Sometimes this relationship can even disqualify you for the loan altogether, regardless of the rate.

But what if you knew ahead of time that to get the Tier I loan you would need a credit score of 720 or better? Even better, you knew how to make your score as high or even higher. To manage your credit score, you need to understand what the credit bureaus use to determine that score.

35% is your payment history (pay your bills on time)

30% are your balances in your revolving accounts, credit cards. (keep balance below 30% of best yet paid)

15% is your credit history (how long you have had a particular account open)

10% is the type of credit (installation loans, credit cards, and mortgages) and

10% are credit inquiries (how many times have you applied for credit in the last 6 months)

If you want the best rates and terms, you need to have the best credit score. Notice I didn’t say you had to have the best job or income or house or live in the city or rent the best apartment. These have nothing to do with your score. You can earn $15 per hour or $75 per hour and it doesn’t affect your score at all. Only those five factors mentioned above do. Get your own credit reports at least once a year. Make sure the trading lines are yours and that you have maintained those accounts to reflect the high scores. More information in the next article.

don davis