Small bump in credit score could mean a cheaper loan

Bob Tedeschi, New York Times

When lenders issued mortgages to anyone who asked, borrowers could largely ignore their credit scores, the most important and most incomprehensible determinant of a loan's interest rate.

But now that banks have tightened their lending standards considerably, borrowers must sometimes search for ways to eke out a point or two more on their credit scores to qualify for loans or for more favorable rates. Mortgage professionals say that some knowledge about the scoring system helps.

"Sometimes, I'll tell borrowers their score, and they'll start yelling at me," said Debra Killian, president of the Charter Oak Lending Group, a mortgage broker and lender in Danbury, Conn., who teaches courses on the credit-reporting industry. "And I have to explain I'm not the one who's generated the score."

The reports come from Experian, Equifax and TransUnion, credit bureaus that evaluate the financial-management abilities of millions of Americans.

Credit-card companies, utilities and other creditors send reports to the bureaus, which rely on software from the Fair Isaac Corp. (creator of the FICO score), along with their own, to grade a borrower on an ascending scale of 300 to 850.

The software is a black box of sorts, whose workings are known only to the companies involved. Each credit bureau will weigh certain factors differently - the number of late payments, for example, or the number of credit-card accounts open.

To account for those differences during the mortgage application process, loan officers review the scores from all three credit bureaus and base their loan offers on the middle number. If a couple - married or not - is jointly applying for a mortgage, the loan officer will choose the middle score of the partner with the lower score.

That score essentially dictates the loan terms that a lender offers. For instance, a borrower with a credit score of 699 will often get a higher interest rate than a borrower with a score of 700. And the higher the interest rate, the bigger the broker's commission from the lender, known in the industry as a yield-spread premium.

That is why, mortgage executives said, borrowers should be proactive about this part of the mortgage process. Killian of Charter Oak said borrowers should ask the broker or lender to explain how their score changes the terms of the transaction.

Brokers buy reports from services that supply data from the three credit bureaus, and each report gives details about items that adversely affect a score.

If a consumer wishes to challenge such items, credit bureaus will do so on the consumer's behalf, or consumers can also call or write creditors directly. Credit-repair services can also help, although people should review their terms carefully because they are popular fronts for scam artists.

This article appeared on page K - 9 of the San Francisco Chronicle