The common wisdom is that would-be homebuyers on the lower end of the credit spectrum will benefit the most from improving their credit scores -- those all-important snapshots in time of how people use their credit.
But that’s not the case, according to number-crunching company CreditXpert, which claims that most people who apply for a mortgage can raise their scores by 20 points -- and do so within 30 days.
Most lenders accept credit scores as static figures. They're not, though -- they are dynamic, says Mike Darne, vice president of marketing at CreditXpert. Lenders should look at every applicant’s score "not for what it is," he says, "but for what it could be."
So should borrowers, for that matter.
CreditXpert found that 65% of a representative sample of people who bought homes in the last six months, or who intended to buy in the next six, were never given the opportunity to improve their credit scores. Out of those who were given the chance, 7 out of 10 took steps to do so, and the main reason was to save money.
How much money you can save varies, of course. But in one example, a woman raised her score by 40 points, earning her a lower rate from her lender and trimming her principal-and-interest payment by $158 a month. She also saved $131 on mortgage insurance, for a total of $289 a month.
Just for taking rudimentary steps to raise her credit score, she'll save tens of thousands of dollars over the 30-year term of her $400,000 mortgage.
Credit is just one of the three C's lenders look at when deciding whether to provide financing to someone. The other two are capacity, or your ability to repay the loan, and collateral, which is the value of the property you're buying.
But credit, Darne points out, is the only one over which you have any control. You can’t very well boost your income instantaneously, and you certainly can’t raise the value of the house you are buying. But you can raise your credit score -- sometimes enough to make a real difference.
To do so, there are numerous steps you can take. First, go over your credit report to search for errors and have them expunged. Credit reports are often riddled with mistakes, such as accounts that don’t belong to you or paid-off loans that are described as still active -- or worse, as delinquent.
Another step: Don’t utilize more than 35% of your maximum credit allocation. For example, if you could max out all your credit cards to a total of $10,000, keep your combined balances below $3,500. That will show that you know how to handle credit. And always be on time with your payments, of course.
Some actions in the world of credit scores seem counterintuitive or contradictory. For instance: In general, you shouldn't apply for any credit that you don't need. But in some cases, it may help your score to take out a new credit card. Likewise, paying off your balances and debts is a good thing -- most of the time. Paying off an old debt could actually be detrimental because the action will render it a "new" item on your report, which will be counted against you. So it may be better to just leave it alone.
These steps can be tough to navigate, and may not even be helpful in the short term. But CreditXpert is testing a credit optimization tool that anyone can use to determine what (if anything) they can do to boost their credit score and lower their mortgage costs.
After answering a few questions about the anticipated purchase price and loan amount, the system will check your credit file and use predictive analytics to identify what you might do to meaningfully bump your score. Then, it will send you to a lender who can use the tool to produce a step-by-step plan to help you reach your potential.
Optimizing your credit won’t come without a cost. But in the long run, your savings could be substantial.
In the example above, the woman who raised her score by 40 points would have to spend $2,810 -- maybe through paying off a credit card or two, or paying down other accounts -- to take her score from 640 to 680. But her monthly payment would be $289 lower, so in just 10 months, she would recoup her out-of-pocket costs.
By the way, credit optimization should not be confused with credit counseling or credit repair. Whereas optimization leverages sophisticated data science and predictive analytics to look for short-term opportunities, credit counseling is usually a longer-term process. Those interested should seek out face-to-face counseling platforms run by legitimate organizations.
"Credit repair" is another story altogether. Buyer beware: The Federal Trade Commission has brought numerous actions against so-called credit repair services, and has partnered with some states to bring hundreds of additional lawsuits. Many of these charlatans take your money but do little, if anything, to help with your credit.