'What-if' tool lets you explore the credit score consequences

The computer programs don't repair a damaged score; they allow you to tinker with tactics and devise a plan.
By: Lew Sichelman: Los Angeles Times
A young couple fell into the trap that ensnares many home buyers: While waiting for their home purchase to be completed, they rushed out and, on credit, bought enough furniture to fill a house.

They thought they had been approved for a mortgage at the lowest possible interest rate. But what they didn't know was that a few days before settlement their lender would run another credit check just to make sure they were still a safe risk.

Just when they were about to close on their loan, their credit scores were below the threshold needed to obtain the low rate they had been promised. They were faced with the prospect of paying not only a higher rate, which would mean a larger-than-expected house payment, but also coming up with a larger down payment.

A credit score is based solely on the information in your credit report and is a number that helps lenders predict how likely you are to make your payments on time. Overall, the higher your score, the lower your mortgage rate. And for many people, one interest point on a loan can mean the difference between an affordable mortgage and one that pinches their wallet so tightly they would have to switch from sirloin steaks to hamburger to buy a house.

Enter "if," as in, what would happen to my score if I closed out this account or paid off this car loan? If I paid off this judgment? If I moved all my outstanding card balances to a single card with a lower rate?

Valid questions all, but too often they are put to a loan officer or mortgage broker who hasn't a clue what effect these or other steps might have on the buyer's score. Worse, acting on an incorrect response can send a score tumbling, a disastrous step from which it could take months to recover.

Help is available in the form of computerized modeling programs known as "what-if" simulators, which allow people to explore the effect certain actions — adding or removing accounts, for example, or correcting errors — could have on your score before actually taking them.

This is not rapid rescoring, which is a quick way of correcting and updating information in your credit files. And it's not so-called credit repair or credit restoration, which is a questionable method of removing negative items from your profile, even if they are true, by filing a protest with a credit repository.

(You have a right to question inaccurate, unverifiable or erroneous information. But it is impossible to permanently remove accurate items. They may be lifted for 30 days while the credit bureau investigates your complaint. But once the creditor responds, it will go back on your record.)

This is an interactive way to see how applying for a loan, opening new accounts, missing payments, consolidating debt or transferring balances can affect your credit score. Think of it as a game in which you can change a balance, pay off a collection or delete an account to find out how to improve your score before you actually take those steps.

Using a simulator, borrowers can "play" with any number of possibilities and combinations until they find a solution that works best for them. The programs can also help borrowers avoid misguided actions.

The aforementioned young couple used a program called ScoreWizard to scan their credit reports and see recommendations on how to get back to where they started. By implementing the suggestions, they were able to elevate their scores by 99 points for one person and 52 points for the other, which was more than enough to qualify for the loan they needed.

ScoreWizard, which also automatically scans credit files for opportunities to raise credit scores, is one of a number of powerful simulators that would-be borrowers can use to test various scenarios. Another is ScoreRight, which uses common assumptions to suggest ways to increase your score. A third system, CreditXpert, lets you use its predictive capabilities to test any combination of options.

Unfortunately, you can't access these or other what-if calculators directly. Rather, you must go through a mortgage broker or loan officer to use the programs, which are marketed to industry professionals as tools to help them attract and keep clients.

There's nothing wrong with that. After all, a broker or loan rep offering to help borrowers reach their target credit score quickly and effectively is a sign he or she has their best interests at heart.

At the same time, there's nothing to keep you from taking your business elsewhere if you so desire, whenever you so desire. You may lose the $35 to $50 credit-report fee, but otherwise you are free to walk.

Either way, though, these credit advisory programs can prove valuable to anyone who is searching for the best interest rate possible.

The difference between a 720 score and 580 could be as much as three full percentage points, according to the booklet "Your Credit Score," which was prepared by the Consumer Federation of America and Fair Isaac, the company that developed the scoring programs used by each of the three major credit repositories — Equifax, TransUnion and Experian.

On a $200,000, 30-year loan, the difference between 6.5% and 9.5% is an expensive $418 per month, $5,016 a year and $150,480 over the loan's 30-year life. Nothing to sneeze at.