Having good credit score: Priceless

BY JOE RUFF
WORLD-HERALD STAFF WRITER

For you and me and Main Street, one major implication of recent financial events is that it’s harder than ever to borrow money for a house, a car or even for a restaurant dinner you might want to put on a credit card.

The freewheeling days of escalating housing prices and loose lending requirements are gone. From now on, a person’s credit score will play a big role in whether he or she gets a loan, a credit card, even a job.

“Now, a credit score is like a pickup line - if your credit is 700, you get a date,” said Julia Craig of Family Housing Advisory Services in Omaha.

Three national companies compile information on you, produce credit reports and sell them to banks, insurance companies, landlords and other parties interested in potential customers’ creditworthiness. The reports affect a person’s ability to obtain loans and how much he or she has to pay to borrow money.

The most commonly used credit score ranges from 300 to 850. The higher the score, the lower the risk.

Source of credit scores

Consumers have three FICO scores, produced by the three national credit reporting companies: Experian, TransUnion and Equifax. FICO scores range from 300 to 850. The higher the score, the lower the risk. As information changes, credit scores tend to change as well.

Last week’s bankruptcy of Lehman Brothers and sale of Merrill Lynch, which were unable to borrow money to keep operating because they held too many worthless or questionable mortgage-backed securities on their books, were stark examples of tightened lending standards for businesses.

On an individual level, one example of a stingier approach to credit is American Express’ recent reduction in the maximum some cardholders can charge, spokeswoman Kim Forde said.

More significantly, the mortgage industry has tightened its standards.

Before the housing crisis - rising foreclosures, declining sales and falling home values - people with relatively poor credit scores could get mortgages, though at higher interest rates, Craig said.

But no more.

“The mortgage industry is being a lot more careful with their approval,” Craig said.

Lenders demand better credit scores and larger down payments, she said.

People have been hurt by past practices, Craig said.

She cited one real-life example:

Four years ago, a 72-year-old Omahan facing high-interest credit card debt and medical expenses obtained a $70,000 loan on the $84,000 home he owned.

He didn’t realize, though, that after two years, the adjustable rate mortgage went from monthly payments of $522 to nearly $810. The loan was too large for his income as a part-time security guard and with Social Security benefits, Craig said.

He wouldn’t get that kind of loan today, Craig said. The mortgage company would demand more information about his income and debts instead of relying on his credit score and verbal income estimate.

His credit score, by the way, has dropped from 720 to 545 because he is behind on his payments, Craig said.

A poor credit score can even keep a person from getting a job, Craig said, because some employers believe workers who are worried about their financial situations won’t be as productive, or will be bothered at work by creditors.

“The bottom line is, we want to lend money to someone who is able to pay it back,” said Kirk Kellner, regional president for Wells Fargo in Nebraska. “A credit score is part of that.”

But a lender considers other factors, as well, including income and expenses, he said.

Bret Huber, manager at Huber Automotive in Omaha, said at the height of the housing boom and loose-credit era, companies that made car loans didn’t personally review or analyze loan applications to determine if the customer was a good risk. Computers scanned applications and judgments were made based largely on credit scores alone, he said.

Now, lenders examine debt-to-income ratio and other factors, Huber said. Deals have to be structured more carefully to make certain that buyers aren’t trying to purchase cars that are out of their price range, he said.

“They’re looking a lot closer at the loans than they did previously.”

Even conventional home loans have tighter requirements, said Michael Jacobson, president of NebraskaLand National Bank in North Platte and chairman-elect of the Nebraska Bankers Association.

During the housing boom, a conventional loan - 20 percent down and a relatively low, fixed interest rate - likely would have been offered to people with a credit score of 620, Jacobson said.

Today, people generally need a score of 720 to get a comparable loan, Jacobson said.

Someone with a score of 680 might get a loan at 20 percent down, but with a higher interest rate, he said.

Scores of 520 were the cutoff for a conventional mortgage during the boom, Jacobson said. But now people whose scores are less than 620 probably won’t be able to get a conventional loan.

And those “conventional loans” that Jacobson cites are about all that remain.

The more liberal and exotic mortgages that allowed people with no down payment and questionable income to purchase homes have dropped from as high as 50 percent of new mortgages written to less than 5 percent, Jacobson estimated.

People who cannot qualify for a conventional loan can try for a federally insured loan through the Federal Housing Administration, or turn to a broker to arrange a loan with a high interest rate, Jacobson said.

But mortgage companies that acted as brokers and helped fuel the housing boom with unconventional loans at zero down payments are now few and far between, Jacobson said.

Rod Griffin, director of public education at credit reporting company Experian, said people looking at their credit scores need to look at the credit reports that accompany them, so they can understand what has affected their scores and, if necessary, determine ways to improve them.

Bob Batt, vice president of Nebraska Furniture Mart, said some people want more credit than they can handle. The Mart can check someone’s credit in seconds, quickly identify any risk and refer someone to a credit supervisor if there are questions.

Rarely is someone turned away entirely, though a smaller loan might be necessary, Batt said.

“We don’t want to burden people with debt, but we want to sell items.”

• Contact the writer: 444-1117, joe.ruff@owh.com
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