PARAMOUNT MORTGAGE - LENDER'S BLOG

Low Credit Scores Have a Huge Impact - But Can Be Repaired

Rejection is always hard to take after applying for a job or being turned down for a loan, "particularly when you aren't given a reason." Sandra Block, Your Money columnist for USA Today reports that lenders will now "be required to tell you why."

President Obama signed into law on July 21st the most sweeping overhaul of Wall Street financial regulations since the 1930s. Among the consumer protections is a requirement that a lender must provide a "copy of the credit score" used in the decision to deny a loan to a borrower.

"Lenders will also be required to give you a free credit score if you're offered a loan with a higher interest rate than the rate offered to borrowers with excellent credit."

The law is not limited to lenders. If you receive an "adverse action" concerning a credit decision, such as being forced to pay a higher auto insurance premium or being rejected by a landlord to rent an apartment, "you'll be entitled to receive a copy of your credit score," continued Block.

Unfortunately, consumers who order a free score from a service like www.annualcreditreport.com will not get the same credit score that a lender may use to make a credit decision. "Lenders and credit bureaus use lots of different scores to evaluate borrowers," says John Ulzheimer, director of consumer education at Credit.com.

The FICO score is the most widely used scoring model, but some lenders use the VantageScore. Additionally, "the credit bureaus have their own proprietary scores, which some sell to consumers," according to Ulzheimer.

But the good news for consumers, "the law ensures that when you are turned down for a loan, or suffer an adverse action, you'll receive the exact score that was used to make that decision," stated Ulzheimer.

Consumers with sub-600 scores usually have serious credit blemishes such as foreclosure, bankruptcy or multiple 90-day late accounts. "Once your score drops below 600, it's nearly impossible to get a loan, and rehabilitating your credit could take years," Ulzheimer says.

A chapter 13 bankruptcy or a foreclosure stays on your report for seven years. Chapter 7, which eliminates most debts, stays on your credit report for 10 years.

Craig Watts, spokesman for FICO, offers a little relief for bankruptcy filers. They can "restore their credit score into the 600s in three or four years by paying their bills on time and maintaining low credit card balances."

If late payments have depressed your score, "you can repair the damage in a year or two by scrupulously paying your bills on time," continued Watts. "The credit score model gives more weight to recent history, so the impact of delinquencies diminishes over time."

Consumers should take steps to improve their score. "If you're in the 650 to 680 range, you're in the frying pan, but not in the fire," Ulzheimer says, however "you're one incident or event away from being in the fire."