As we all know, how a credit score is determined is a well guarded secret. However, over many years, I have reviewed a lot of credit reports and here are a few things I have noticed. These are solely my opinion:
Student Loans
Student loan lenders are known for keeping detailed records. It is almost impossible to get any lates or collections off your credit report if they are a student loan. Please keep this in mind when pre-qualifying your borrowers.
Student Loans are not a positive piece of credit unless they are more than 50% paid down. When they are deferred they are treated like a maxed out credit line, which hits the scores significantly. They adversely effect the credit score until they are about 50% paid down.
Revolving Credit
Revolving credit can boost your scores at varying degrees depending on time and use. Secured cards give your credit score a boost sooner than unsecured credit cards. If you have 4 or 5 months of reporting, then the increase will be about the same if you use them consistently. Consistancy is as important as balances. If you charge something and pay it off every month, then it is good to have a zero balance. Charge a tank a gas and pay it off every month. If you are going to charge $100.00 pay it down to $20 and then charge $80 more and pay it down to $20, then you are consistent and that helps your scores even more.
Installment Credit
The ratio of what you borrowed against what you still owe is still important even though it is not a revolving line of credit. Installment loans impact you negatively until they get to the 50% mark and then they become a positive account, assuming you have made all of your payments on time.
Was Delinquent But Is Now Current
An underwriter cares most about your last 24 months of pay history, as long as your scores meet the minimum requirements. Unfortunately, scoring credit goes by a different set of rules. Once an account has been 30 days delinquent, it is always scored differently than an account that has never been delinquent. It is ALWAYS considered a delinquent account. Long term it is better to shut down the account and open another one than to keep the account open. Not always realistic for short term gain though. When looking at the possibility of raising the scores, however, keep in mind that this is a detriment that has to be over come.
How Do We Determine If they Need Secured Cards?
Clients need at least 2 lines of current, non-delinquent, revolving credit. Keep in mind that even if they have revolving credit, but it is over in the delinquent section, then it does not count for this purpose. Even if the account has been positive for over 2 years, if it has ever had a late pay on the report, then it is considered a delinquent account and does not satisfy the need for 2 lines of revolving credit.
Three secured revolving lines may be over-kill and may lower scores instead of raising them for unseasoned accounts.
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