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How to Help Your Clients Establish Good Credit
Not every client has good credit, but that shouldn’t be a reason to give up on them. What if we could help our clients establish good credit so they can qualify for a mortgage? According to Josh Butcher, head of business development for credit restoration company Better Qualified, LLC, it’s not as complicated as you might think. Instead of having to tell your client, “Sorry, your credit is not where it needs to be,” become a viable resource and offer solutions to their credit needs.
“From my experience, clients will forever be grateful to you for not giving up on them from the start because of some credit issues,” Butcher says. Let’s start with the basics.
Credit Scores 101
Clients will have three different credit scores from the three credit bureaus — Equifax, TransUnion and Experian. Those credit scores will range from 350 to 850. For mortgage qualifications, it’s the middle credit score that matters most (not the highest or the lowest), and ideally you want that score to be at a 620 or higher. The higher the credit score, the more money your client can save on interest, and the more mortgage options they may have.
What Makes Up a Credit Score?
Think of a credit score as a pie chart:
- 35% of the pie is payment history
- 30% of the pie is credit owed
- 15% is length of credit history
- 10% is new credit.
The rest is the types of credit.
One of the biggest credit score-killers is late payments. One 30-day late payment can drop a credit score 50 to 100 points overnight. As a rule of thumb, it's a 50 point credit score drop for a 30-day credit card late payment, a 75 point credit score drop for a 30-day late car loan payment, and a 100 credit score drop or more for a 30-day mortgage late payment.
“I’ve had clients pay as agreed on their mortgage for 20 years, have one 30-day late payment, and their credit’s shot,” Butcher says. “Being one or two weeks late is one thing, but once you hit that 30-day mark, that’s when your credit scores are going to drop.”
In terms of credit owed, you want your clients to have credit card balances at 30% or less than the limit. In other words, if a card has a $1000 credit limit, you want to keep the balance owed at $300 or less.
With credit history, remember that no credit is better than bad credit. If a client has no credit history, there are several things you can advise them to do to establish a strong credit history. The best place to start is with secured credit cards. You don’t have to have any credit to qualify for a secured credit card because the bank will ask for a certain amount up front — usually at least $200. You give the bank $200 and they give you a credit card with a $200 limit. The idea is to go out and make small purchases every month, get the bill, pay the balance down, and do the same thing next month. You will build up a strong credit history in no time.
Another thing you can advise your clients to do is become authorized users on their significant other’s credit cards. Assuming their partner has good credit, that positive payment history will be reflected on the client who has no credit.
With new credit, we’re talking about credit inquiries, or requests by legitimate businesses to check your credit. Every time a client has their credit report ran for any type of financing, it’s going to knock 3-5 points off their score.
Ideally, you want your clients to keep their number of hard inquiries to about eight or less in one year. Anything over that starts to look funny in the eyes of creditors. Advise your clients to keep the time frame very short when they're shopping for financing, ideally 14 days or less.
It’s good for clients to have a mixture of credit types. Most types of credit are either revolving or installment accounts. A revolving account is an account created by a lender to represent debt where the outstanding balance does not have to be paid in full every month by the borrower to the lender, such as a credit card.
Installment accounts are those that have a fixed payment for a fixed period of time. Examples include a car loan, student loan or mortgage. Ideally, you want your clients to have a mixture of at least three open active accounts in good standing.
Do’s & Dont’s of Establishing Good Credit
- DO encourage your client to have some type of credit monitoring in case of a data breach or identity theft.
- DO have your clients access their credit report once a year for free via AnnualCreditReport.com to see if their are any errors that may be holding their credit score back.
- DO tell your clients to keep their old accounts open. If they close them they lose all that available credit history.
- DON’T let your clients bite off more than they can chew. Make sure your clients keep their credit card balances under control.
- DON’T let clients sign the back of their credit card. This will protect them from data breaches and identity theft.
Five Myths About Rebuilding Credit
- Collection accounts fall off your credit report after 7 years. It’s usually closer to 10-15 years.
- Paying off collections will remove the item from your credit report and boost your credit scores. The only thing the credit bureaus are required to do after you pay off a collection is to update it as being a paid collection with a zero balance. It will still sit there negatively impacting your credit score even after it's been paid off.
- Late payments are no big deal. One 30-day late payment can drop a credit score 50 to 100 points overnight.
- Credit Karma scores are accurate. The credit scores you see online a lot of times are higher than the actual scores that the banks use.
- I can’t fix my credit. There are options out there as long as you know where to look. As the realtor, you can be a valuable resource to help put your client on the road towards good credit.
For more information on Better Qualified, LLC or email Josh Butcher at email@example.com.