Cheri Landin: Hello and welcome to the podcast on credit scores. Can we get to that perfect 850? Is it possible? There’s so much consumer confusion just wrapped around the whole credit score issue and really kind of what plays into it, what do consumers need to do, how can they maximize their score. Those are just some of the things that we want to talk about today. Number one, some of the things that people always inquire about is why are there three different scores and if there are three different scores, why do they wind up being different? Why is the credit score important? We can talk a whole lot about that. What factors go into determining what your credit score is and is there any rhyme or reason at all to the models themselves? So if any of these questions are things that have crossed your mind and probably, most certainly they are, this is going to answer a lot of those for you. So my name is Cheri Landin and I am the Community Development Director with The Mortgage Company. One of my roles is to bring some education to our community members surrounding topics like this, that we get asked questions about all the time. The Mortgage Company has been locally owned and operated here for over 20 years and we’ve been serving all the Coloradans in the area for that time so we just want to bring some good education to them. I am joined today by Alexandra Erlich from Riverstone Law. She is an expert on credit reports and kind of how to interpret them. So we are going to go over a lot of these things today so Alexandra, would you introduce yourself, please.
Alexandra Erlich: Absolutely. Thank you so much, Cheri, for having me. I can’t begin to tell you how much it really means to me to be part of your community, part of the Colorado community and making sure that we are bringing all of this education and clarification to light for everybody out there.
Cheri Landin: Great thanks. So I think let’s just start out, number one what I can say is a credit score, just being in the mortgage industry, a credit score is probably one of the most crucial pieces of a person’s evaluation when they’re applying for credit. So this is, essentially to keep it real simple, a credit score is an indication of what the person’s ability is going to be to repay that loan, whether it be in our case mortgages or auto, whatever the case may be, what the ability is for them to pay back on the terms that are set forth and in a timely manner. And that really is going to be the number one determination in deciding whether someone should be lent funds to. That being said, why do we have three scores and why are they different.
Alexandra Erlich: So the reason that we have three scores in the mortgage world, and in a lot of other industries we actually don’t utilize three scores. However, in the mortgage realm the reason that we have three scores is because of the different models and algorithms that exist, which are computerized mechanisms that apply a mathematical formula, utilizing a lowest integer, a highest integer, and different data points to ascertain an actual numeric value. Just to kind of break that down the short way is to take everything that’s going on in your credit profile and give it a number. And the reason we’re taking that middle score and we have three is because different creditors choose to report either to one, or two, or all three of the different bureaus and the weighting on those bureaus is gonna factor just a little bit differently based on what information is provided to them.
Cheri Landin: So not all places report to all the bureaus.
Alexandra Erlich: Correct because there is a cost to them as a creditor to actually provide that information, to continue to provide that information on, whether that be a monthly or a quarterly or annual basis to those bureaus.
Cheri Landin: Okay that makes sense. I guess that’s one thing that I and people probably have not realized is that would maybe determine why the scores are different depending on who is reporting.
Alexandra Erlich: Absolutely and not just that. It even goes so much further in-depth on to the creditors that we pay on a day to day basis that choose not to report at all whether that be your landlord from a rental standpoint, or your utility bills, cable, things like that, cell phone providers, auto insurance, all of them actually choose not to report on a regular basis to pass along the savings to the consumer.
Cheri Landin: OK well we’ll get into a little bit more of that in detail as we go along. So I guess in determining that credit score, I know there’s a lot of different factors that play into that. So how many actual factors are that going to the credit score and what are they.
Alexandra Erlich: So there’s a total of six actual factors that are really relevant and prevalent in any scoring model and each one of them has a slightly different weighting and what we can do is really delve into each one of those one at a time if you’d like.
Cheri Landin: Yeah that would be great. So what I do know is payment history. Payment history, from my understanding, is the one that has the largest impact and the largest percentage of effects.
Alexandra Erlich: That is correct, it’s 35 percent of your entire score. Thirty-five percent of your entire score is your payment history. Everything you’ve ever done right, everything you’ve ever done wrong. The way that you’ve actually been able to show your creditworthiness is by your traditional history of repayment.
Cheri Landin: So you were mentioning that some things are reported in our report and some things are not. What are some examples of some things that would not be reported and how does that, I guess what things are not reported and what should we be concerned with. We want to be concerned about paying all of our expenses. But as far as showing up on our credit.
Alexandra Erlich: Absolutely. So traditionally speaking the things that you’re not going to see on a regular basis are going to be your insurance, your utilities, your cable rental agreements any type of repayment of a personal debt to friends, family members, things along those lines. What will be reported would be a mortgage, a bank loan, an auto loan, credit card of any type and lines of credit as well as negative and resulting accounts such as collections or charge-offs. So when we think about our budget on a monthly basis and every family has that one difficult month. For my family personally, it’s June every year, between kiddos birthdays, end of school, beginning of summer. There’s that short month that every family has and in that month, if you have to make a choice of which bill to pay or not pay, I always recommend paying the bills that are reporting on the credit report first and then worrying about those other obligations. And if you need to be a little bit behind on those, don’t be as stressed out.
Cheri Landin: All right well good that’s good to know. Thanks for that. I know that the other and probably the second largest piece is the balance versus the limits on any particular like let’s take a credit card, for example, a lot of people will say if I have $5000 limit on my credit card what is the smartest type of balance to keep?
Alexandra Erlich: Absolutely. When we’re talking about balances versus limits the first thing that we have to keep in mind is how the computer is interpreting this data. There’s always that underlying piece of the fact that this is a computerized scoring mechanism. So when the computer is interpreting this data it’s not looking for rhyme and reason. What it’s looking at in this particular category is anything that is coded as revolving. What that is, is going to be your equity lines of credit, personal lines of credit and any type of credit card. You may have heard in the past that having a Visa, Mastercard, Discover, something with that primary logo holds more weight than having say a department store card. That’s absolutely not true. Having any type of a revolving account is crucial to making sure that you’re optimizing your credit score for that ideal 850 that we’re shooting for. We want to see at least one revolving account. I always personally recommend having five and they all carry equal weight. When we talk about that balance versus that limit ratio, ideally we want to be under the 30 percent mark. So if I have $1000 credit limit I want to keep that balance under the $300 mark at any point in time. And that’s also most relevant when I’m about to go into any type of a financial transaction, be it a mortgage or an auto loan purchase. That’s when it’s most important that I keep those balances as low as possible.
Cheri Landin: OK so if I’m understanding that, it doesn’t necessarily make a difference what the balances are if we have three different cards or four different cards, what the limits are necessarily. It’s the ratios of how much you have charged. And just because one might have a higher credit limit that’s not going to have more of an impact. You said they were all equally weighted
Alexandra Erlich: Correct. It doesn’t matter if one is your home equity line of credit at $100000, if that’s maxed out, you’ve already reduced your credit score by whatever the value of that account is. For example, if you only have one revolving account whatever your balance versus your limit is on that particular account any given month counts for 30 percent of your entire score. If it’s fully maxed out, you’ve minimized your score by 30 percent. The very next month you go ahead and hit Powerball, you pay that thing off and you’ve actually gained that same 30 percent right back. You’re seeing that fluctuation very very quickly and that’s the easiest way to impact our score is to pay off or pay down our bills.
Cheri Landin: Absolutely. OK. And on that. So how often should someone be using those cards to keep them let’s say in an active status?
Alexandra Erlich: I really recommend at least once a quarter every single card for a pair of socks. Pair of socks is just a nice easy number that we can all wrap our heads around and not necessarily go too far overboard.
Cheri Landin: OK. All right well that’s good to know too. So let’s say for instance I’m new in the world of establishing credit and I’ve kind of you know messed some things up in my history and I’m trying to establish some credit and I can’t get a card. Are there some other things that I can do.
Alexandra Erlich: Absolutely. First and foremost is that there are a number of credit card companies out there that will provide credit as long as you have not had a derogatory account history with them in particular. One of those ones is Fingerhut. I know a lot of us still remember Fingerhut as that catalog that our great-great grandmother had sitting on the coffee table and they happen to still be in business and will give almost anyone a line of credit. Definitely one of my first choice options for somebody looking to build. Another option is what’s called a secured card. We want to be really cautious with a secured card and not confuse it with a prepaid card, a prepaid card being something you can pick up at Walgreens or Target or at the grocery store and then you can just load your cash onto to have a little bit more security than carrying around all that green. On the flip side, a secured card still requires an application, is written by a bank, takes the money that you deposit into an account and uses that to collateralize the actual credit card that you are then able to utilize.
Cheri Landin: OK great. So there are some things that we can do out there. All right. So the next piece is the age of accounts. So how does the age of the account factor into your overall credit score and how important is that?
Alexandra Erlich: So that is weighted at 15 percent of your entire score. And the reason that it’s so important to make sure that we’re letting our accounts age out and have that long length of history is to show the track record, show our ability to consistently use, repay, use, and repay again. What the computer again is looking for to really maximize the entire 15 percent is a 25-year length of history. Now that twenty-five-year length of history isn’t just the length, it’s the average of all your open accounts. That’s whereas you were asking before about making sure things don’t go inactive, we really want to make sure that we’re using those cards consistently and looking at what the big picture is if we’re ever considering closing an account out.
Cheri Landin: OK and that’s actually what I was going to ask you next. So a lot of people who often ask should I close this account, I guess the answer isn’t really that simple is it.
Alexandra Erlich: No it never is because it really depends on where that card or account is being weighted within the overall picture of their scoring model, whether that be their oldest account with their best payment history and their lowest balance. I always recommend that a client look at the big picture and get advice either from a mortgage lender or a credit professional before closing out that account. Also in looking at that account, figure out why they want to close it in the first place. Is it simply because they just don’t use it and it’s collecting dust? OK maybe it’s not so atrocious to use that every now and again just to keep that activity. Or is that that it has an annual fee? Monthly fees, things that are actually prohibiting the rest of someone’s budget overall.
Cheri Landin: So I guess it’s not necessarily a good idea just because you get mad at the customer service rep to just go ahead and close that card because you could be hurting yourself really more than you would realize.
Alexandra Erlich: Exactly, it’s kind of like marriage. We can’t necessarily get divorced every single time we get upset.
Cheri Landin: Exactly, don’t leave your cards. Another question that comes up often and I guess in relation to age of accounts, can you just briefly talk about student loans in that, again, going back to a lot of these people who are just new trying to establish some credit and really don’t understand maybe what some of the advantages of those student loans could be in this respect.
Alexandra Erlich: Yeah. The really cool thing about student loans is it’s a great way to inherit or grandfather in a long-standing credit history the minute that student loan comes out of deferment. Keep in mind we’re looking at how the computer is interpreting the data that it’s being presented. It’s not necessarily rhyme and reason and logic, it’s that the computer is programmed a specific way. When we look at that, the computer sees that a student loan has been in deferment for on average right now I believe nationally it’s at nine years. Can you believe that? Though the minute that kiddo makes the very first payment on that nine-year-old deferred student loan, the computer thinks that that same loan has had nine years of perfect payments. So it’s now impacting that 35 percent of payment history. It doesn’t count in the balance versus limit. A lot of people get caught up that, oh my gosh my student loan balance is now actually higher than what I originally borrowed. I’m completely getting dinged on that. That’s not true because it’s not considered a revolving account. So it doesn’t impact that 30 percent whatsoever. And then on the length of history, it’s counting for that 9,10,11,12-year-old account and there are usually multiple student loans. There’s usually a different student loan number for both a subsidized and unsubsidized portion each and every semester. Kids graduating college could have as many as 12 or more student loans, all with anywhere from 4 to 7 to 9-year history, that when you take those all individually add them together and weight them out for an average, drastically lengthen that history.
Cheri Landin: OK so I think that’s that’s some really good information there’s a lot of people out there not even necessarily you know people that go back to school later in time they’ve had loans for some time and the big question is always should I consolidate those. You know I think before people make those decisions they really ought to know how it could impact their credit score both in a positive or negative way. So I know another big area is the types of accounts. So how many different types of accounts are out there that are accounted for in a credit score.
Alexandra Erlich: There are four types of accounts one being mortgage which, obviously a huge percentage of people don’t necessarily have a type of account on their credit these days. They’re trying to go into the homeownership process and have not actually had a mortgage in the past. The second type is an installment loan which could be your student loan debt, an auto loan, things like that that you’re paying on a monthly basis and that have a full amortization are going to fall into that installment loan category. Revolving is going to be that credit card debt and the final category is other. This is another one of those counterintuitive pieces to the credit scoring model because other, a lot of the times is going to be a medical collection or a utility collection and we don’t want those things on our credit. Yet they can potentially help us in a small way depending on the big picture by giving us something in that other category.
Cheri Landin: So on the different types of accounts, so there are four different types. Are they, for that portion of the credit score, are they treated equally or?
Alexandra Erlich: They are. Each one counts for 2.5 percent of your entire score potential. And what we want to really think about when we’re looking at credit as a big picture is that credit is not like school. We don’t all start with an A and work our way down. Oh geez. Something happened in life. Now I’m at an A-, but that’s OK I’m still better than average. A slightly different shift on that perspective is looking at our credit as we would a sporting activity of the score being a multiplier of the actual execution and the degree of difficulty being applied to it. So that 35 percent we talked about in regards to payment history and how well did I make those payments in a timely fashion. And have I always been consistent? That’s going to be your execution. The other 65 percent is actually going to be the degree of difficulty What is my potential? That being said, your potential to truly gain that 850 maximum score from that computerized model is going to require something in all four of those categories. It’s not to say that you really need to go open a new account for either to have something in each of those categories from a lending perspective or day to day credit usage.
Cheri Landin: Right. OK. Alright, so I think that this next is the most asked about and that is inquiries. People are always saying what does it mean and why would something make an inquiry on my credit and I know there are two different types that I’d like you to kind of just tell us what the differences are. So there’s a soft inquiry and a hard inquiry. What’s the difference?
Alexandra Erlich: And another way of phrasing that just in case anybody has heard the different terminology is a hard pull versus a soft pull. Some people do know the terminology inquiry. It’s also referred to in the industry as a pull on your credit. And a hard inquiry would be a request for money and a soft inquiry is a request for only information. So some applied principles of that when you get that pre-approved offer in the mail from the credit card company they’ve done a soft pull to see where you stand and see your creditworthiness overall. And then when you call and accept the offer, now you’re requesting money. It transitions into a hard pull. Every single hard pull is going to count in the 10 percent category of inquiries and is going to count for anywhere from one to five points. That’s going to count for about an 18 month period in time. In addition to that though those soft pulls, when you’re doing it as a consumer online, when you’re going in and looking at your credit card statement, things along those lines those do not count against your credit score because they are not factored.
Cheri Landin: OK. And so on those soft pools because you mentioned I think everyone has gotten the, “You’ve been approved, just give us a call!” And so they’ve done a soft pull. Does someone in that instance need permission to do so?
Alexandra Erlich: No they do not. And on the soft pull, because it’s simply a request for information, it can be requested frequently. Another place that we see those soft pulls happening on a very consistent basis is actually your auto insurance and homeowners insurance. Those insurance companies, every time that they’re looking at renewing your policy, will go ahead and do a soft pull to see if anything’s drastically changed.
Cheri Landin: Interesting. All right. And so another thing I often hear, so in other words, there are times you have to have a hard pull. Like you said if you are applying and looking for actual dollars such as in a mortgage transaction or purchasing an automobile they need to do the hard pull. So if someone goes in, is shopping for a car let’s say and the car dealership is going to say to you, “Oh it doesn’t matter how many dealerships you go to and how many times you get your credit pulled, none of this matters.” Is there any truth to that?
Alexandra Erlich: There is and we have to factor that that’s only true in the auto world because there’s these different scoring models, these different scoring algorithms, and the ones that are utilized in the auto world are not one in the same for the mortgage world. The one in the auto world says that all inquiries within a 30-day window all count as one as long as they’re used for the purpose of shopping for an auto loan. On the flip side, in the mortgage world, each and every one of those inquiries is going to account for one to five points. And what I always like to look at is, what is the end goal? Are we shopping for a mortgage because we really are that concerned over 100 or 200 dollars in fees and so, therefore, we need to go shop around? Or are we shopping because we’re looking for that best fit as a lender and from a personality and product standpoint? If we’re perfectly happy with the product. the service everything that we’re being offered, there really isn’t the need to go shop around and worry about those inquiries.
Cheri Landin: Right. OK. So you know there’s so much that goes into this and I think that I guess if I could ask you one thing from a consumer standpoint. They have so many services out there that you can monitor your credit cards or get your free credit reports. Is there any that you would recommend? And for consumers just, you know from an awareness standpoint?
Alexandra Erlich: I like to look at it as this. No data is ever bad data. No learning or question is ever a bad question and it’s what we do with that information that counts. When you’re monitoring your credit on a daily basis, taking time and energy out of living the life that you want to worry about a point or two without necessarily an end objective in mind I don’t find that that meets any objective. Just to kind of simplify that is looking at your report once a year, getting your free credit report not online but getting the annual report that you can request by phone or mail from each of the three bureaus, just to ensure that everything on their looks correct. Doing once a year, a report from a mortgage lender or your local bank so that you can again see that everything is looking on point and nothing has been opened in your name. Absolutely I recommend that, monitoring it from a scoring perspective. On a frequent basis, I don’t find the need for because it really is a moving number. You know even depending on you know where you are in your statement cycles for instance. And not just even where you’re at in your cycles in the statements but it’s also what’s going on in your world that piece of the year. Whether that be that big month that I was mentioning before and my family, coming down to birthdays and family vacations or whether that be the holidays. A lot of people have those constraints different times of the year. And when we talk about people that are self-employed and they have different cycles within their business and need to utilize different pieces of credit, there’s always a time and a place for living life. And that’s where I kind of say back to you from a mortgage perspective, what on the mortgage end do we really need to have that 850 for? Is there really any product difference going all the way up to that 850.
Cheri Landin: No, no there’s not. You know there’s more differentiators on the low end as far as what types of products you can qualify for. But I will say from a mortgage transaction, let’s just talk about purchasing a home, when you’re purchasing a home. There’s a lot that goes into that transaction from the inspection, to the appraisal, to contracts, and the lending piece being the biggest. So then in the lending piece of it the number one thing that needs to be evaluated is the credit report. So I think that if anyone is looking to venture and purchase a home the first thing that they need to do is go through the process. And one of the first things when someone makes an application for a mortgage, the first thing that we do is pull credit because we have to evaluate that credit. And unfortunately often times there are errors on a credit report, things you know that need to be dealt with and or planned for. And actually I’m going to have you speak to that a little bit but you know in the event that creditors have not removed items from your credit report when they were supposed to do so. What do you do in those instances? You know sometimes you’re not, for credit reasons going to be approved necessarily upfront because there are things that need to be dealt with. So if someone does need to deal with that I’m guessing you offer some of those services as well.
Alexandra Erlich: Absolutely. And I know that one of the other big pieces that from a lending perspective you always advise people is not to open new credit. That’s actually that final category that when you were asking what goes into that credit scoring model is new credit. So one of the factors that have been programmed into the computerized model is that until you’ve made six payments, not six numeric calendar months have gone by, but six payments have actually posted to any new account, it’s going to go ahead and suppress the score by sometimes as much as 10 percent. And the reason for that is not just because of that inquiry, not just because of that shortening of the age of accounts, but also because the computer has been programmed to understand that this new account could throw everything else out of balance or could make everything else perform better after you’ve made those six calendar payments. Six actual payments through and those have been posted, then the computer has been factored to say, OK, now we have a track record, what is considered a viable track record to decide whether this account is going to turn anything else around.
Cheri Landin: So that goes back to the payment history which is so critical. Payment history in general, and I don’t care what kind of debt it is, that’s absolutely the most critical. You know when I say to people, when they’re talking about credit scores and why is it so important, you know I say if it were flipped around and I say to you hey do you have $200000 I can borrow? And you look at my credit score and it’s 510, you’re most advantageously going to say, you know what I really like you Cheri but it doesn’t appear that your likelihood to pay me back is that great. So you’ve got to flip it. You know and understand that that really is an indicator of someone’s ability to repay and that’s why you need to do everything you can in your power to preserve that score and maintain that score for so many things in your life.
Alexandra Erlich: Absolutely. And just knowing what those factors are and being cognisant of them not necessarily on a day to day basis but whenever we’re about to make those financial decisions and going into a major purchasing phase in our life, being able to plan accordingly ahead of time and having now 6 month, 12 month, 18 month, 24 month game plan to be able to plan accordingly on how do we pay those balances down. How do we look at making sure we’re not opening or closing anything right now. That’s always going to be a crucial piece.
Cheri Landin: Right. Absolutely. So if you would, give your contact information as well because if someone has more questions about their actual credit report or if there’s anyone out there that knows that they need to deal with some things on their report that are not accurate, how could they get in touch with you.
Alexandra Erlich: Absolutely. Again my name is Alexandra Erlich and I’m with Riverstone Law. We are a local credit repair company here in the Colorado marketplace. I can be reached on my direct cell at 303-668-0300 or on my e-mail at firstname.lastname@example.org I can also be reached on Facebook or on LinkedIn at any time.
Cheri Landin: Great. And for those again out there having any consideration about purchasing, it really is advisable to at least just know how to start the mortgage process. Have the credit pulled and make sure we determine whether there’s anything that we need to do. And our website is themortgageco.com. And this also will be available and accessible and I can be reached as well. Cheri Landin and my cell phone is 561-301-2055.
Alexandra Erlich: Thank you so much for everything Cheri. I really appreciate the opportunity to share with the public so much information and please know that there is more and we can go in-depth on this for days and hours. Obviously, we don’t want to bore anyone. That being said, if anybody has any questions or is looking to get into that buying phase and cycle I can’t stress any more loudly that talking to a mortgage professional or a credit professional, not trying to analyze it on their own, is the key piece that’s going to get them to that finish line. Much more rapidly and with a happy positive outcome.
Cheri Landing: Absolutely. And I really thank you for coming. It is a lot of information. It’s overwhelming. There are many different pieces that go into such a vital number for all of us to be paying attention to and just making sure that we’re out there and doing the best we can so we can be making our purchases when we’re ready. So thank you so much. I appreciate your time. Have a wonderful day.
About Alexandra Erlich
Through all of my years in the banking and finance sectors I have found that there is one arena where skilled, knowledgeable and service minded professionals were few and far between: Credit Consultation and Restoration. After personally going through credit highs and lows over the years and working with countless companies I finally found the one that actually delivered on every commitment. Riverstone Law with the wealth of expertise and service impressed me to such a level that I sought employment with the company. I am so grateful to finally be in a position with a company that I believe in wholeheartedly and offering a service that I know without a shadow of a doubt everyone can benefit from. Every day excites me as I share my knowledge of the FICO and credit systems with all of the colleagues, professionals and their networks I have had the pleasure of working with for numerous years, now as I watch their pipelines, businesses, and incomes grow I am confident I have found my calling.