and is the easiest to manipulate to boost scores in the
short term. When your client utilizes a high percentage
of available credit, the credit bureaus view this as an
indicator of an overextended and high-risk borrower,
even though this may not be the case.
So, what’s the sweet spot? It’s generally accepted
that the lower the credit utilization, the better — although there’s an argument that being in the 10 percent to
30 percent utilization range will result in better scores.
As mentioned earlier, credit utilization is the easiest
component to manipulate. Following are some ways
to improve the ratio.
Pay down open accounts. This one may seem obvious, but if your client has the liquidity to do so, one
of the easiest ways to boost their credit score is to advise
them to pay down their revolving-credit balances.
Credit issuers report to the credit bureaus monthly,
so by simply lowering outstanding credit-card or
other credit-line balances, your client may quickly
Ask for a credit-line increase. If your client has
established tradelines and a good relationship with
the credit issuer, then they are likely to extend a larger
credit line to your client. This will inherently lower their
credit utilization so long as spending is not increased
as well. As a broker, you must be vigilant when advis-
ing your borrower to utilize this tactic. Some credit
issuers may conduct another credit inquiry when a
borrower asks to increase their credit limit, so be sure
to do your homework as too many hard inquiries can
have adverse effects.
The third most important component of your client’s
credit score is the length of their credit history. This
comprises 15 percent of their total score and is by far
the most difficult component to alter.
A majority of your clients will be seasoned investors
and already have established credit, so this component of their credit score will be a nonfactor. One
measure that FICO considers is average length of credit
accounts; therefore, advise your client against opening
new tradelines as you work to increase their score.
A fourth variable is the new-credit component of
your FICO score. It accounts for a mere 10 percent of
your client’s overall credit score, but it can make a difference on a month-to-month basis. The new-credit
component takes into consideration the following:
number of new accounts, time since opening new
accounts, number of requests made and the number
of inquiries due to rate shopping.
It’s best if your client does not open new accounts or
rate shop when attempting to build up their credit score,
in order to avoid unnecessary credit inquiries. This can be
the difference between a 675 and a 680 FICO score, a
spread that for some lenders may entail as much as a
0.25 percent rate difference.
The final component is the credit mix, which comprises
10 percent of your client’s FICO score. Credit mix simply
refers to the different types of credit being reported:
Any seasoned investor will typically show a diverse
credit mix, and this component will be a nonissue. A
unique scenario might include working with a green-
card holder who may be in the process of establishing a
credit background in the United States.
n n n
Now that you understand the basic components of your
client’s FICO score, utilize them. Nurture your otherwise
dead leads and turn them into revenue generators. If your
client is unhappy with proposed loan terms or flat out
doesn’t qualify, you now have the tools to be a catalyst
in preparing them for more appealing financing options
in the future.
Your lead-generation expenses can be costly. Don’t
let your potential clients walk away without exhausting
all your resources. Be the commercial mortgage broker
who will go the extra mile for their clients. Your efforts
will be recognized and rewarded with increased client
referrals and transactions. n
<< FICO continued from Page 36
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