April 01, 2008

Random Credit Scoring Rant

I'll admit it, in my early 20's I was a little financially irresponsible. Mistake #1: Not understanding how to use my credit. Mistake #2: Working at a job that didn't offer health insurance. Those two mistakes, combined together, made 1997 the worst financial year of my life.

It took me a loooooong time to get my credit score to the sparkly, glistening number it is today. It took a lot of self-education, and a lot of self-discipline. The downside is now I'm a little obsessive about my credit scores, specifically maintaining the shiny, happy FICO score I have. I don't think that's necessarily a BAD thing, others think I place too much importance on it. They can eat it! :P

Anyhow, Erik and I are starting to officially consider home-ownership. "Starting", in this regard, equals many years on my part watching the housing markets, and trying to get myself as prepared as possible, and now the market seems to be turning for the better, so we're making contacts. The few people I know who have purchased homes recently (in the last 5-10 years) have remarked as it being the most confusing and stressful purchases they've made. I don't like making confusing purchases. I like to feel empowered.

So anyways, we're starting to interview real estate agents and lenders/mortgage brokers. Here's my issue, and maybe it's a non-issue, but it refers back to my sparkly credit rating. Some of you may know this already, but there's all sorts of things that can affect your credit score negatively. Sure, missing payments is one thing that will mess you up. Having maxed-out credit cards is another. Taking out a new loan will also ding you. And guess what? Paying OFF a loan (like a car loan) will decrease your score as well. Weird, ain't it?

The one thing that negatively affects your credit that I currently have the biggest problem with, in principle, is INQUIRIES. An inquiry is when a lender or service-provider checks your credit report to determine if you're worthy of their services. All those credit card pre-approvals you get in the mail? They don't count. Checking your own credit report? Not a problem for you, thankfully.

But guess what? When you put in an application to rent an apartment, THAT'S a ding (thanks, Montebello apartments!). And say you plug in your social online at one of those "Have Lenders Give You Competitive Auto Loan Quotes!". That could mean MULTIPLE dings. Sure, I don't suffer gladly those fools who apply for every department store credit card offered them, but on large purchases, like a car, or a house, the credit reporting agencies (or the Fair Isaacs Corporation's score algorithm) actually make it so a responsible person looking to find the best rate available to them will have their score REDUCED by anywhere from 5 to 50 points, in some situations.

So here's the rub. To start looking at homes, every real estate agent will recommend you get pre-approved for a loan. It helps you understand your buying power better and gives you an additional leg to stand on in a multiple-offer situation. Sure, that's reasonable. But you don't want to take the first loan you're offered. So you shop around, right? The credit reporting agencies actually allow for this (or so they SAY). They say that multiple inquiries within a 14 day period of time will only count as one. Okay, fine.

So say we shop around for two weeks and decide that a certain lender has the best rate, and we get a pre-approval letter, and start looking. Only we don't find anything for a few months. This is totally possible. But the pre-approval letter doesn't mean you're locked into a rate, or even really guaranteed a loan. These are weird times right now, and mortgage rules are really wonky. What it comes down to is that the lender MAY in-fact need to run your credit again. And then there's another ding. And say the rate is crazy, and you decide you need to shop around again.

You see where I'm going with this, right? Say my score is all shiny right now, but after a first round of shopping it drops 5-10 points. Then the next time it's checked, the score is lower because of those inquiries from before, so there might be a chance I have to take a higher rate for my lower credit score... See, my score is sufficiently high that I don't THINK this will REALLY be a problem, but what if I was on the cusp? What if I was at 722 (720 being the typical cutoff for A-grade loan offers) and the first inquiries reduced my score to 717? That could increase a loan APR by some percentage (even .25%), but that could mean THOUSANDS and THOUSANDS of additional monies paid in interest over the life of the loan.

It just bothers me. The more I learned about credit scores, and how they come up with them, and how your TransUnion score might be different from your Experian score, and that your Equifax might be different from both of those, and how paying off the rest of my auto loan, even though it will decrease my debt-to-income ratio, would make my credit score go DOWN... the more I despised the system. And now, in dealing with trying to a) determine our buying power while b) keeping our scores in tip-top shape, it's causing me a bit of trepidation.

Am I over-thinking this? *Sigh* Probably.

posted by julie at April 1, 2008 11:49 AM

things people have said

I know how stressful and confusing it all can be. Ben and I actually just got back from agreeing our first ever mortgage!!! It all happened so quick - we got a letter from the estate agent managing the property we rent that the owners are selling in June and we could have first refusal. So we started looking into mortgages and then we thought we should look at some other houses. It happens we found one that we like and in less than a week it's all systems go! Very scary but exciting! It can be so overwhelming - we've had to just make a decision and not look back because if you overthink it you'll talk yourself out of it all!

so said: Rachel at April 3, 2008 09:20 AM