Let’s take a look at how credit scores are calculated and manipulated.

Most credit scores are the invention of Fair Isaac, an outfit company founded in 1956 by an engineer and mathematician. It later trademarked itself into FICO, and became a publicly traded in 1986. By 1997 a big bankers group actually honored the company’s founders for “pioneering” work in credit reporting.

What are we missing here? Now there are calls for the reform of credit scoring. One major analyst laughed off credit scores, calling them “meaningless.” But to most banks, many insurance companies, and one Texas electric utility, a person’s (three) credit scores can make or break a loan, or jack the interest rate. It’s also used by insurance companies in charging premiums. That Texas outfit tried to use it for electric rates in 2004, but backed off.

As you’d expect in America, the credit score, first invented in 1981, is a huge industry. Fair Isaac was for many years deliberately secretive about exactly how credit scores (ranging from 300-850 with a median of 723) were calculated. It sold its “algorithms” to Experian, Equifax, and TransUnion, the three credit reporting bureaus. They use them to create credit scores.

As folks became scared of credit score secrecy, FICO got rich off its FICO score. Although any consumer can look at his credit reports once each year for free, they’re charged  $7.95 or so for a credit score — sold online to anyone with a credit card.

The score is most remarkable for what it doesn’t say. It does not take into account income or time on the job. It can’t distinguish between a consumer who won’t pay a debt (such as a disputed bill) from someone who can’t. And one of its largest components — “debt utilization” — can be easily manipulated.

About 30 percent of the credit score is based on how much of a consumer’s available credit is being used. That’s easy to fudge, either by paying down debt or getting existing cards to raise their limits. Credit counseling services can create bogus credit accounts for a fee. Only someone’s late-payment history is more important.

The next big industry to profit from credit scoring involved credit monitoring services. For a fee, they claim to watch who’s watching us, notifying “members” of a new credit inquiry. Since many people won’t buy credit monitoring straight up, they’re offered a free trial period, which many forget to cancel until their fees start piling up.

Credit scoring can become useless with the blizzard of mortgage tricks in use today. One West Coast bank ditched them entirely. It noticed that even the most exacting scores couldn’t help predict the performance of a borrower whose payment or interest rate periodically “reset” to a higher number. The credit score was muzzled by the subprime loan crisis.

There’s nothing we can do about a lot of credit scoring. Scores get better as people age, because they have longer credit histories and use different kinds of loans. People also learn the tricks of the trade as they go along.

One of the New York Times’ business writers, Joe Nocera, predicted new oversight of credit scoring a week ago. They are now subject to obscure regulatory prose by the Federal Reserve on their statistical rigor. Nocera found that his own report listed credit cards he didn’t have, listed him at the wrong address, and had mangled his job history. One of the three agencies had him working for Fortune magazine, while another reported he was no longer at the New York Times, but at a chain store.

So I decided to dig into my credit reports, since I hadn’t looked for three years. One had me living in a post office box in New Haven I hadn’t inhabited since college days. Another reported that I’d missed 12 consecutive car payments (the bank misapplied the first check, so each successive one was 30 days late).

The most astonishing note came from TransUnion. It showed I had a $1,000 court judgment against me in Denver from 2002. I did? I fished out the court record and found that yes, I did. I’d never been served but there was a default judgment from an insurance outfit. On close inspection, I discovered that my signature on the contract had been forged.

I was kind of proud of that. I mean, a bad dude inspires fear and respect, doesn’t he? Then I determined that unless I wanted to ask a judge, I couldn’t do much about it. But it was years old and I could go on bragging if I wanted.

As I started writing this, I answered my phone and found a droid talking. The droid wanted to collect a debt, so I called her back.

Verizon claimed I owed $247 for a California land line in 2008 that I’d not paid. Yes, Verizon kept billing me for a dial tone that didn’t respond to dialing. When I called to get it fixed, the outfit said they’d come right away — but it could cost extra. By now, Verizon had “sold” the debt to the droid’s outfit.

With Verizon and the Denver courthouse on my tail, there isn’t much I can do about my credit. But with American ingenuity, others in the industry can score a fee off fixing me up.

by Dave Danforth

Mortgage interest rates dropped to record lows last week, hitting rates not seen since the 1970s. But brokers say few of the many South Florida homeowners rushing to take advantage and refinance their loans will be able to qualify.

The region’s high levels of unemployment and depressed property values have made it tougher for many borrowers, and lenders are demanding better credit histories and proof of income before they’ll refinance a loan. Only about half of those in the region seeking to refinance may actually qualify for a loan — far lower than before the housing market bust, South Florida mortgage brokers say.

Still, for many borrowers who don’t face those problems, the rush to refinance is on.

“There’s been a lot of activity,” said Claudine Claus, owner of Home Financing Center, which operates in Palm Beach, Broward and Miami-Dade Counties. She says the part of her business devoted to refinancing mortgages has quadrupled in the past 30 days, compared with the 30 days before that.

“Rates have dropped,” she said. “A whole new group of people are interested in refinancing even though every loan can’t be refinanced.”

The people for whom refinancing makes the most sense are those who didn’t get caught in the housing bubble and bust.

“There are a lot of people who purchased homes before [that cycle], who bought from 2002 to the 2005 peak in market,” said Andre Brooks, who is in charge of the mortgage business in Florida for Wells Fargo Home Mortgage. “They have interest rates that are higher than the current market levels and they may not be experiencing negative equity.” Negative equity is the term for owing more on a mortgage than a home is worth.

Applications for refinancing are up in Florida and nationwide, according to online lender Lending Tree.

Nationwide, four out of five conventional loan applications and more than half of Federal Housing Administration and Veterans Administration loan applications were for refinances in the last month, according to Freddie Mac Economist Frank Nothaft. The Mortgage Bankers Association says its weekly index of applications to refinance nationwide for the week ended July 16 was at the highest point since mid-May last year.

The rates are truly great. Thursday, the average rate on a 30-year, fixed-rate mortgage was a record-low 4.56 percent, down from 5.2 percent the year before, according to Freddie Mac, a federal government-backed mortgage provider. Previously, the all-time low was 4.57 percent. Freddie Mac has been releasing the weekly mortgage rates for 39 years.

According to Bankrate.com, the average mortgage interest rate at the end of 2008 was 6.33 percent. A borrower who had a $200,000 loan then could save $200 a month in payments if he or she refinanced today.

To see if refinancing makes sense, borrowers should divide the fees they pay to refinance their loans by the monthly amount that they’ll save. That will tell them how many months they would have to live in the home to recoup the expense of refinancing.

Dan Longman, president of Priority Lending Corp. in Cooper City, said lenders want borrowers to have a 740 credit score or higher to qualify for the lowest-rate mortgages loans. Two years ago, he says a 680 score would suffice. Lenders also now require full documentation of a borrower’s income, unlike during the housing boom when “no documentation” loans were often called “liar loans.” And some are requiring borrowers to re-verify their income in the time between the application and final approval.

Indeed, anyone who is out of work will have a difficult time qualifying because they don’t have sufficient income to make their loan payments. With unemployment ranging from 10.1 percent to 12.8 percent in Broward, Palm Beach, Miami-Dade and Orange Counties, that eliminates a huge swath of Floridians from the possibility of refinancing mortgages.

The other big obstacle is depressed home values. Because property values have fallen so far in the four-year downturn in the housing market, close to half of Fort Lauderdale’s borrowers owe more on their homes than the property is now worth, according to CoreLogic, a real estate analytics firm. They probably won’t qualify to refinance, either, because private lenders will not refinance a loan for more than the value of a home. The proportion of “underwater” loans are similar throughout South Florida.

There is one option for borrowers who are underwater to refinance. If the loan is owned by Fannie Mae, a government-sponsored mortgage funding corporation, it can be refinanced if the amount is 125 percent of the home’s value. To find out if a loan is owned by Fannie Mae, use the “loan lookup” tool at www. Fanniemae.com.

Given the hurdles, “it’s a real shame that all of these people can’t take advantage of the rates,” said Lane Barron, a senior mortgage consultant at Element Funding in Sunrise. His office this month has almost twice as many applications for new loans than in January, but none of them are for refinancings. Brokers say homeowners who know they are seriously underwater on their mortgages aren’t even bothering to apply. But tougher standards are affecting even some folks with sterling credit seeking new mortgages. David Kosowski, of Miami, had an enviable credit score of more than 800 and a steady job. But he says he could not get a lender to give him a loan because part of his income depends upon the profits of his company. Profits had fallen during the recession. He instead paid cash to close on his home in June.

“Now I’m hoping to refinance,” he said.

Time may be on his side. Concerns about the economy’s recovery are the reason why rates have declined. Economists think they may stay there as the uncertainty continues.

“Mortgage rates are also expected to remain low heading into 2011,” said Sam Khater, senior economist at CoreLogic, a real estate analytics firm. But he warned that the outlook could change if inflation, which is pretty much absent today, comes roaring back.

Harriet Johnson Brackey

Whether you’re applying for a job or looking for love, rejection is painful, particularly when you aren’t given a reason for the rebuff. “It’s not you, it’s me” doesn’t count.

But soon, when a lender rejects your request for a loan, it will be required to tell you why. The financial reform bill President Obama is expected to sign this week requires lenders to give customers who have been turned down for a loan a copy of the credit score used to make that decision. Lenders will also be required to give you a free credit score if you’re offered a loan with a higher interest rate than the rate offered to borrowers with excellent credit.

The requirement won’t be limited to lenders. You’ll be entitled to receive a copy of your credit score any time it results in an “adverse action” against you, which could include everything from a higher auto insurance premium to a landlord’s refusal to rent you an apartment.

The law doesn’t require credit bureaus to give you a copy of your credit score when you order your free credit reports from www.annualcreditreport.com. That will disappoint a lot of consumers who want to know where they stand, even if they’re not applying for a loan.

Nonetheless, the new requirement will benefit consumers, says John Ulzheimer, director of consumer education for Credit.com.

FREE REPORT: You can and should check your credit profile for free
NOT-SO-FREE REPORT: Rule helps consumers avoid free credit reports that aren’t

The problem with mandating free credit scores for everyone is that lenders and credit bureaus use lots of different scores to evaluate borrowers, Ulzheimer says.

While the FICO score is the most widely used score, some lenders also use another score model known as the VantageScore. In addition, the credit bureaus have their own proprietary scores, which some sell to consumers.

The law ensures that when you’re turned down for a loan, or suffer an adverse action, you’ll receive the exact score that was used to make that decision, Ulzheimer says.

Once lenders start providing scores, many consumers may be surprised by what they see, Ulzheimer predicts.

“A lot of people make the assumption that as long as they’re making minimum payments (on credit cards) they have good credit,” he says. “I think this is going to remove any shadow of a doubt as far as where they stand creditwise.”

New data from FICO show that in April, 25.5% of consumers — more than 43 million people — had FICO scores of 599 or lower. That’s up from 24.1% in April 2008.

Consumers with sub-600 scores typically have serious blemishes on their credit records, such as foreclosure, bankruptcy or multiple payments that were delinquent by more than 90 days. Once your score falls below 600, it’s nearly impossible to get a loan, and rehabilitating your credit could take years, Ulzheimer says.

Chapter 13 bankruptcy, in which you agree to repay your debts over three to five years, stays on your credit record for seven years. Chapter 7, which eliminates most debts, stays on your credit report for 10 years. Foreclosure remains on your report for seven years.

That doesn’t mean that you’ll be barred from obtaining credit until these items are removed from your credit report, says Craig Watts, spokesman for FICO. Even consumers who have filed for bankruptcy can restore their credit score into the 600s in three or four years by paying their bills on time and maintaining low credit card balances, he says.

“You don’t have a big red B on your chest,” he adds. “You can outgrow the bankruptcy as long as you establish a credit habit that lenders and the credit score model can see.”

If your score has been depressed because of late payments, you can repair the damage in a year or two by scrupulously paying your bills on time, Watts says. The credit score model gives more weight to recent history, so the impact of delinquencies diminishes over time.

The FICO analysis also shows that 11.9% of consumers have scores of 650 to 699, down slightly from April 2008. Consumers in that group can still get credit — although at less favorable rates than borrowers with higher scores — but they’re in the danger zone, Ulzheimer says.

If you’re in that range, it’s important to take steps to improve your score so you’ll have access to credit in an emergency, he says. For most consumers, that means getting credit card debt under control.

“If you’re at 650 or 680, you’re in the frying pan, but you’re not in the fire,” Ulzheimer says. “But you’re one incident or event away from being in the fire.”

Question. I am 62 and retired. I have an American Express gold card and an American Express Hilton branded card. I would like to cancel the gold card and retain the Hilton card because the gold card costs $110 per year and we rarely use it anymore. I’ve had the gold card since 1971 and the Hilton card is newer, since 1988. My credit scores are 765 to 800 and we have no credit card debt or mortgage, just an $11,000 car loan and a $28,000 home improvement loan. How much of a hit do you think I will I take if I cancel the gold card?

Answer. For you, the hit should be minor and temporary. Still, there are considerations to make before you cancel.

Ask yourself if you’ll be applying for any major loans, such as a mortgage or car loan, in the near future.

“You might want to keep the card until that credit is obtained to get the best possible rate of interest on the loan,” said Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown.

Take out any loans first because canceling your oldest card will have an effect on your length of credit history, which makes up about 15 percent of your credit score. Keeping the oldest card is good for that part of your score, but given the rest of your credit history, it sounds like you’d make up any decline rather quickly.

“The nick on your credit should be minimal, and as long as you continue to pay your bills in a timely fashion, then you should have little cause for concern,” she said.

If there was no annual fee, D’Agostini said she’d recommend sticking the card in a drawer and not using it, though sometimes inactivity will cause the lender to close the line of credit.

Although you’d be closing your oldest card, you still have the Hilton card, which goes back to 1988 — not bad and certainly proof of a long credit history.

Something else to consider before closing the card is your credit utilization ratio, which compares how much credit you have available and how much you’re actually using, said Michael Gibney, a certified financial planner with Highland Financial Advisors in Riverdale.

Gibney said closing the card will lower your available credit, and together with your outstanding auto and home improvement loans, your credit utilization will move higher — and higher in general is bad for your credit score.

This again, given your overall solid credit history, will be a temporary hit.

“I agree with canceling the gold card because of the annual fee,” Gibney said. “I find it hard to justify an annual fee on a credit card because there are many offerings available with no annual fee.”

Question : Can I buy a house again after selling my home as a short sale?

A Millions of Americans have lost their home to a foreclosure or short sale. Fannie Mae and Freddie Mac, who control the majority of home mortgages in the United States, realize restricting buyers from purchasing homes in the future is not a good economic decision.

Until recently, Fannie Mae and Freddie Mac had a five-year waiting period before a previously foreclosed borrower could finance a mortgage on a new home. The time frame for an FHA loan is three years and two years for a VA loan.

Fannie Mae and Freddie Mac have changed their policy and reduced the waiting period to two years for those home-owners who previously experienced a short sale or deed-in-lieu-of foreclosure. The new loan must be a loan-to-value of 80 percent. This means the borrower will be required to have 20 percent as a down payment on a new home. After four years the maximum loan- to-value jumps to 90 percent, so only 10 percent down payment will be needed by the borrower.

Fannie Mae did supply a loophole to their guidelines in an effort to help those genuinely affected by the recession and the housing down-turn. It is possible for a borrower to put down 10 percent after a two-year period under mitigating circumstances. Some of these circumstances might include a job loss or health condition that appeared to be the primary cause of the initial mortgage default.

In all instances, the borrower must have re-established their credit and meet minimum credit score requirements. From the time of the foreclosure or short sale, it is extremely important to pay your bills on time and pay down your debts to re-establish good credit. Currently your credit score must be at least in the 680 range. The foreclosure or short sale will continue to be a derogatory mark on your credit for several years. Maintaining a positive credit history from the time of the setback is critical.

Borrowers that do not qualify for this program are those with mortgages on second homes and investment properties. Anyone who obtained a home equity line of credit (HELOC), or took out a second mortgage and pulled the cash out, will not qualify for the shorter wait period.

Keep in mind if you are paying cash for a home, your mortgage history and credit scores are not important. A cash transaction will allow the buyer to purchase a home at any time in the future.

These new guidelines are in their early stages, so it will be interesting to see how banks and lenders react to borrowers who defaulted and lost their homes to a foreclosure or short sale. These new regulations always look encouraging “on paper”. We will have to wait and see whether this is a step in the right direction for the housing economy.

Also, these new guidelines are just another reason why homeowners facing a potential default on their mortgage or foreclosures should consider pursuing a short sale as opposed to letting the home go into foreclosure.

Hundreds of thousands of credit cardholders’ accounts have been zinged in recent years by credit card companies based in part on where consumers shopped, what they bought, who they bought from or who held their mortgages, according to a new federal report issued Friday.

The cardholders were hit with credit limit reductions, interest rate hikes or had their accounts closed by issuers who told federal regulators that decisions to clamp down on credit to these consumers were based on tracking their spending and loan data.

Among the consumer shopping practices that triggered negative account changes:

Use of such information in credit decisions Here’s a breakdown of what actions were taken against cardholders due to data mining, and how many consumers were affected :

The 72-page report, conducted by the Federal Reserve Board, was quick to point out that profiling card users’ spending habits was rare among credit card issuers and actually affected a relatively small number of card users. Still, the report gives the first official glimpse at how some in the credit card industry have used a technique called behavioral modeling to mine spending data for clues about whether customers will default on their credit card loans.

The types of behavior that might trigger adverse credit card changes could include changes in spending habits. If you shop at pawn shops, casinos, discount stores and low-end retailers when you haven’t frequented these establishments before, it might signal an increased risk of defaulting on credit card loans. Having a troubled mortgage lender in a ZIP code full of foreclosures might mean your net worth is rapidly dwindling. Buying retread tires could also hint at someone just scraping by.

Or, critics say, the changes in behavior could mean nothing but you blew off some steam, shopped with a new friend or found yourself a super bargain.

The Fed report confirmed a practice that was widely reported and criticized by consumer groups: Where you shop and the type of people who shop at that same store could impact your credit limit. The Fed report recounts the response of an unnamed credit card issuer:

“In considering whether to reduce the credit line of a given cardholder, this issuer considered the performance and spending patterns of other cardholders with similar credit-related characteristics who shopped at the merchants where the given cardholder had made purchases.”

Two credit card issuers reported using merchant category codes and geographic locations of stores along with the customer’s payment history to develop risk models. “A third issuer grouped all charges into a small number of very broad categories and considered the performance of its other customers within those categories in deciding on line reductions for a given individual,” according to the report.

The report was a mandate of the Credit CARD Act of 2009. It required the Fed to investigate whether credit card companies engaged in these practices at any time during a three-year period before the credit card reform law was enacted.

Is it profiling?

Members of Congress, led by Rep. Maxine Waters of California, were concerned after reports surfaced in 2009 about credit cardholders whose credit limits were reduced and interest rates jacked up because they began to shop at discount stores. Other consumers complained they may have been hit with less favorable credit terms based on where they lived. Waters, who was not available for comment on the new Fed report, suggested last year the practices might be a form of “profiling,” targeting certain groups for different treatment.

Waters said the actions also appeared to border on credit card redlining, a controversial practice used in the insurance or mortgage industries during the 1960s and 1970s to keep African Americans and other minority groups from purchasing homes in certain neighborhoods or targeting some areas for discriminatory treatment. Today, federal fair housing and equal opportunity lending laws ban such treatment.

The Fed report was based on a survey of 175 financial institutions, including the 100 largest issuers of general-purpose credit cards. Together, the banks, credit unions and lending firms included in the survey issue about 98 percent of the open-end consumer credit cards in the United States. The Fed sent written surveys to the 175 lenders in November 2009. Credit card issuers were asked if they had engaged in any of a list of practices between Nov. 30, 2006 and Nov. 30, 2009.

The CARD Act requested information for a three-year period, but because banks are required to keep data for only 25 months, the Fed’s results are based on the shorter reporting period of Nov. 1, 2007 to Nov. 30, 2009. Participation in the survey was mandatory. In addition, Fed investigators interviewed other banking regulators and major credit card issuers as part of the study.

The Fed’s report does not identify any of the credit card issuers involved in the study. Of the major credit cards issuers, only American Express acknowledged in 2009 that it had used information about where consumers shop to lower credit limits. But after negative news coverage and public outcry over the practice, the company said it would discontinue the practice. The Fed said that several of the card issuers in the survey said they would discontinue monitoring practices because of negative publicity about their methods.

Of the 175 institutions, six — including five identified as among the largest commercial banks — indicated they had engaged in at least one of the questionable practices that had contributed to the decision to lower the cardholders’ credit limits. Of the six issuers, two also said they had raised interest rates and four said they closed accounts based on cardholders’ behavior. No credit unions in the survey reported using any of the practices.

Relatively rare practice

The proportion of cardholders affected was small compared to the total number of U.S. credit cards and the cases where profiling behavior or shopping habits were used were “relatively rare” incidents. “For those institutions that have used such information, the proportion of cardholders actually affected has been small,” according to the report. It cited the example of two credit card issuers that together have 53 million active accounts. Only about 340,000 of those accounts had credit limit reductions — for any reason — in November 2009. Of those, only about 1,900 accounts had credit limits reduced because of any of the questionable monitoring practices during that month.

All credit card issuers said the decisions to reduce credit or increase rates were not based solely on the spending data. The issuers weigh a number of factors when reviewing accounts, including past payment history. According to the Fed: “Discussions with card issuers and their federal supervisors found that other metrics used to manage credit risk, such as measures of late payment behavior or measures of cash advance activity, are much more important factors in reducing lines or setting interest rates than the practices” reviewed in the study.

“Moreover, significant changes in broad economic conditions can be important factors leading to changes in account terms or account closures.”

The report revealed that some credit card issuers are also monitoring other types of transactions not specifically requested for review in the CARD Act. Some issuers said they consider how much consumers spend and how frequently they use their credit cards as indications that they may be at greater risk of defaulting on their credit card loans.

Four banks said gambling activity of cardholders who were behind on their payments was a factor in reducing credit limits. “If the delinquency arose from ‘excessive’ gambling, they would cut the available credit line or close the account,” according to the report.

Cash advances as red flag

In addition, “One card issuer indicated that, for some of its new cardholders, it monitors cash advance activity in conjunction with card purchases at certain types of merchants (for example, jewelry and electronic goods stores). According to this issuer, it has found such behaviors among new cardholders to be an early warning of elevated credit risk.”

In another instance detailed in the report, a credit card issuer admitted it had lowered credit limits on cardholders with low credit scores if they did not shop at the retailer affiliated with the card issuer. “This issuer reported that it found that cardholders with lower scores who did not shop at the affiliated retailer had elevated delinquency rates,” according to the Fed.

For those uneasy about the amount of personal data that is tracked, the Fed offers this explanation of the tracking methods used by industry: “Card issuers that make use of transaction-related items in adjusting account terms tend to rely on fairly general metrics — for example, the total amount spent on a purchase rather than the amount spent on a specific item; broad merchant category codes, such as hardware stores, entertainment establishments, or grocery stores, rather than a specific merchant identity; or general geographic location of the merchant rather than the street address, census block group or census-tract designation, or local five- or nine-digit ZIP code of the business.”

Racial discrimination unclear

The report concluded it was “impossible to know” whether there was a link between negative credit card changes and demographics, such as the race or income level of the cardholder. The Equal Credit Opportunity Act (also called Regulation B) prevents lenders from collecting information about the race or ethnicity, among other things, of borrowers. However, a 2008 Boston Fed study by economist Ethan Cohen found a potential link when he studied U.S. Census tract data based on the ZIP codes that are provided on credit reports. People living in white neighborhoods were more likely to be approved for new credit cards than those living in black neighborhoods.

Fraud detection tool

The Fed made no specific recommendations, but urged Congress to be cautious in writing any law to ban or limit monitoring of cardholder spending. The same tools used to monitor spending habits for credit reduction purposes are also vital in detecting fraudulent use of credit cards.

“Transaction-specific information, such as the identity of the merchant or the amount of a charge, is an essential element of fraud detection and prevention systems,” the Fed report notes. “In this context, credit card issuers routinely use transaction-related information to temporarily block access to accounts or to close accounts until the cardholder can be contacted to verify the authenticity of the transaction.”

“The identity of the merchant, the merchant location, and the size and timing of charges are all central elements of fraud detection and prevention systems,” according to the report.

By Connie Prater

Don’t apply for new credit between the time you apply for a home loan and the day the mortgage closes.

The price of ignoring this advice: You could be turned down for the loan while you’re sitting at the closing table.

Fannie Mae has a new rule that goes into effect June 1. It requires lenders to check your credit report right before closing. A lot of lenders are going to interpret that as “the day of closing.” And if you took on a new credit obligation, the lender has to recalculate your debt-to-income ratios.

You could be turned down for the mortgage at the last hour if your debt-to-income ratio exceeds Fannie’s guidelines.

Say you got a Home Depot charge card a week before closing, and bought a lawn mower. And you got a new Sears card and bought a washer and dryer and a refrigerator. You know, the necessities. Buying those things on credit could torpedo the mortgage.

According to a Fannie bulletin issued in March, Fannie Mae “directs the lender to review and evaluate the ‘inquiries’ section of the borrower’s credit report to determine if the borrower has received additional credit that is not reflected in the credit report or disclosed on the loan application. If additional credit was obtained, a verification of that debt must be provided and the borrower must be qualified with the monthly payment.”

For years, mortgage lenders have pleaded with borrowers to refrain from getting car loans or applying for store charge cards or credit cards between the time they apply for a mortgage and the day they are approved. Now lenders are begging borrowers to wait beyond loan approval and all the way until closing day.

Brian Koss, chief storyteller and managing partner of Mortgage Network, a lender based in Danvers, Mass., advises: “Once you start the process, don’t touch a thing. Freeze the time.” Don’t apply for new credit, and just to be safe, don’t close any accounts, either. Don’t change employers, and don’t switch from a salaried position to a commission-based job.

By Holden Lewis

The recession may have done a number on your credit score, even if it spurred you to reform spendthrift ways and cut up your credit cards. For many, the drops have come at the same time that lenders have tightened their standards and demanded higher scores to get the best interest rates.

Even if you haven’t had major credit troubles, like a foreclosure, your score may have dropped if you missed a few deadlines or boosted your balances when cash was tight. A study by credit bureau Experian found that average credit card balances in the top tier of borrowers are 22 percent higher than they were a year ago.

And some people’s scores have suffered even though they thought they were doing everything right. Credit card companies have been lowering credit limits and closing accounts in an attempt to minimize their risk — 13 percent of people surveyed in January by Credit.com said their card company had lowered their credit limit over the past few months, and 11 percent said a card company closed their account.

Your credit score is the numerical summary of the information in your credit reports, which lenders use to predict the likelihood that you will repay your loans. The most common score that lenders use is the FICO score, which ranges from 300 to 850. The higher the score, the better. The median score tends to run between 710 and 720.

Your credit score can have a surprisingly large impact on your life affecting not only interest rates and terms made available to you, but your ability to get an apartment, cellphone service and affordable car insurance. And this magic number can make or break your ability to qualify for a good mortgage deal.

“It has become a very score-driven industry,” said John Ulzheimer, president of consumer education for Credit.com. You generally need a credit score of at least 620 to qualify for a loan that can be bought by Fannie Mae or Freddie Mac, which gives you a wide range of mortgage options. Borrowers with low credit scores have always found the Federal Housing Administration mortgage program more welcoming, but even the FHA is growing more demanding about scores. The agency has proposed that, starting this summer, the program allow only borrowers with scores above 580 to qualify for a loan with 3.5 percent down payment. Those with scores below 580 would be required to make down payments of at least 10 percent.

Brad Sherman, vice president of residential lending for Nationwide Mortgage Services in Rockville, said most people need a 740 or higher to get the best rates these days. For people with scores below that level, Fannie and Freddie generally base rates on 20-point brackets of credit scores — the lower your score, the higher your interest rate and the higher amount of equity, or cash down payment, the lender will require. “Having more equity in a house could counteract a poor score, but you still need to have at least a 620,” Sherman says.

Just under one-third of your score is based on the amounts you owe. A key element is the portion of your available credit that you’ve used, called your “credit utilization ratio.” Your available credit shrinks when your card company decreases your credit limit or closes an account. If the balances on your other cards remain the same, then your utilization ratio goes up and your score can go down.

There’s good news, however, for homeowners whose home-equity credit lines’ limits have been lowered because of declining property values. Such limit reductions do not affect credit scores.

Even a relatively minor score change can make a big difference in your interest rate. According to the FICO Web site, borrowers with scores of 760 to 850 paid average rates of 4.613 percent on 30-year $300,000 mortgages this week, while those with scores of 660 to 679 paid average rates of 5.226 percent — translating to a payment difference of about $40,300 over the life of the loan. (You can run your own numbers at http://www.myfico.com.)

No matter what happened to your score during the recession, taking the following steps a few months before you apply for a mortgage can improve your score and translate into big savings.

Check your credit reports from all three credit bureaus, Equifax, Experian and TransUnion. Your credit score is based on information from your credit reports, and errors can unfairly hurt your score.

Start paying down credit card balances. “It’s the fastest way to improve your score,” said FICO spokesman Craig Watts. The lower your balances, the better for your score. Keep in mind that it’s the balance that the credit card company reports to the credit bureau that counts — usually the total charges reported on your monthly statement — not whether you pay your bill in full. Ulzheimer recommends keeping your balances below 10 percent of available credit, starting three to six months before you apply for a mortgage.

Pay your bills on time. This is the most important factor in your credit score. Late payments remain on your credit report for up to seven years but have a smaller impact on your score as time passes. If you’re having cash-flow issues, make at least the minimum payment by the due date, which is more important to your credit score than whether you pay the bill in full. And be vigilant about payment changes — several card companies increased their minimum payments from 2 percent to 4 percent or 5 percent over the past several months, which caught many cardholders off guard.

Don’t close accounts before applying for a loan. Closing credit card accounts can never help your score, Watts said. In fact, your score is likely to drop if you close the account and maintain the same balance on your other cards, which increases your utilization ratio. Even though you may want to stick it to the card company after it raises your interest rate or imposes a new annual fee or inactivity fee, wait until after you get the mortgage to make your move. Then pay down the balances on your remaining cards so you can keep your overall utilization ratio low.

Avoid opening new cards in the months before taking out a mortgage. “Each time you apply for a new card, there’s a very slight impact on your credit score,” said Steven Katz, a spokesman for TransUnion. “Three or four applications over a period of months multiplies that impact and can have the effect of making you look credit-hungry in the eyes of lenders.”

Pay off old fines. A library fine, parking ticket or missed utility bill can ding your score by as much as 100 points if the account ends up going to collection. Check your credit report for signs of trouble, and pay off any old fines before they come back to haunt you.

By Kimberly Lankford
Special to The Washington Post

CLEVELAND — Two congress members and one senator are taking up the cause of 62 DFAS workers being fired for bad credit ratings. A noted civil and worker rights lawyer thinks they would have a good chance to regain their jobs if they sue.

Regina Hairston worked at DFAS 13 years. She says her job duties consisted mainly of filing checks.

Regina was dismissed from her job after the agency decided her indebtedness made her a security risk.

In subsequent hearings, the agency claimed she did not supply complete information. “It was a slap in the face.  My job and personal finances never intertwine…one has nothing to do with the other,” she said.

Regina now claims to owe about $20,000 to five or six creditors for things including medical bills andhome improvements.

Noted civil rights attorney Avery Friedman thinks workers would have a strong case in a lawsuit.

He said the government would have to show a judge that a certain amount of indebtedness transforms a good-performing worker into a security risk.

“These are not people involved in sophisticated defense issues. They process payroll,” he said.

Congresswoman Marcia Fudge had a Monday conference call with the DFAS director. A spokeswoman said it was unproductive.

Congressman Dennis Kucinich said, “I’m outraged. If DFAS persists in this, I’m going to subpoena credit records of DFAS brass to see if they meet their own standard.”

Senator Sherrod Brown said, “I’m concerned valuable workers are being let go, particularly in the current economic environment.  I understand security clearances must not be granted or reviewed lightly, but to summarily dismiss hardworking, dedicated employees needlessly and inappropriately pushes more families into the ranks of the unemployed…I’m going to contact the Department of Defense and request an investigation.”

How much indebtedness triggers firing? What is the sensitive information handled by a military payroll office?  How much weight is given to employees’ prior work record? These are all questions we hoped to answer.

The Cleveland DFAS spokesperson was off Monday. The National DFAS communications director referred all questions to the Pentagon.  A contact there — spoke on Friday — said it would take more time to provide answers did not return a Monday call.