Want to buy notes, flip houses, or buy and hold? Your ability to access investment funds rests in large part on your FICO (Fair, Isaac and Company) score. FICO doesn’t share how its analytics assesses borrowers, but CreditSense has reverse-engineered the formula to help clients. In this Q-and-A with contributing writer Susan Thomas Springer, CreditSense’s founder and chief strategist, Merrill Chandler, talks about what goes into building and maintaining a strong credit profile.
Think Realty Magazine: Is your credit score important in any economic cycle?
Merrill Chandler: The ability to improve your credit profile and make it attractive to lenders is vital regardless of the state of the economy. In 2008 when credit markets froze, it took a year or so before the debacle began because people dipped into their savings and charged their credit cards to make payments. After 2010, there was this huge interest in credit services because so many people who had never had problems with credit now had slow pays, late pays, foreclosures and collections. Whether we’re in prosperity or recession, everybody wants the best possible interest rates.
What is the magic credit score number?
Now 760 is the floor, but it doesn’t make you fundable. We focus on 800-plus credit scores because less than 10 percent of the market has them, so we want our clients breathing rarefied air.
What are the ingredients that make up that profile?
Underwriters give money to borrowers—not credit scores. FICO scores are only one out of five or 10 lending criteria, so there’s far more to a lender’s ability to loan than simply a score.
We help clients weaponize their personal credit profile and then leverage that for business. You need three ingredients.
First, most people don’t understand the importance of flawless identity. If you have multiple versions of your name or addresses, there’s a downgrade in FICO.
There’s automatic underwriting, and then there’s manual underwriting. We never want human eyes on our application. We want it crystal clear that the data from the bureaus matches the data on the application. This includes names, addresses, dates of birth, Social Security numbers and employers.
Second is your revolving accounts portfolio. Tier one are institutions like national banks. Tier four institutions are kind of shady with high interest—they’re commercial versions of loan sharks, but their credit terms are easy so they can bury unsophisticated borrowers in more debt. Those institutions will red-flag a credit profile, so when underwriters and FICO notice too many finance company cards, that’s the kiss of death for legitimate borrowing.
Third is installment loans, which are basically the ballast. It’s vital to have the right types of lenders, preferably tier one lenders like big banks. You’re not harmed necessarily by having community banks and credit unions for your car loan or mortgage, but you also aren’t representing yourself as a sophisticated borrower. A phrase that we use all the time is, “We make lenders fall in love with you because you look good on paper.”
What actions make borrowers look good on paper?
Establish strategic relationships with banks that are leverageable. If you only have a $5,000 credit card from Victoria’s Secret and no installment loans and want to access cash for business deals, the most you’ve ever proven to a lender is that you can handle $5,000. They’re not going to give you a $50,000 business line of credit. They work in the aggregate, so if you’ve got $20,000 worth of credit cards, they may consider you for that loan amount.
FICO says economic cycles for individuals and families are 24 months long. So even though a bankruptcy or collection may stay on your credit for seven years, they only count it as part of their decision-making. We want strategic loans comparable to what you want in a line of credit. If you’ve proven that you can pay back a $50,000 auto loan, you have more chance of getting that amount in a line of credit than if you only have a $20,000 auto loan.
How can you leverage a great score and profile?
Leverage is everything. We tell people all the time, “Show me a borrower with a million dollars and a 720 credit score, and I’ll show you a borrower who has a million dollars. Show me a borrower with a million dollars and an 800-plus fundable credit profile, and I’ll show you someone who can leverage that into two, three or even five million dollars in credit lines.”
The reason is your reputation goes further than your cash. A history of faithful payment on strategic loans and lines of credit creates a positive reputation that lenders are looking for. People feel that there’s an adversarial relationship between borrowers and lenders, and it’s not true. Lenders want to give their money out. They just want a sure thing. That’s where your financial reputation is the most potent.
The collection of accounts and history that you have intelligently built, with our help, results in your looking attractive to underwriters.
What’s the most surprising thing people learn from your free Credit Funding Analysis?
They’re stunned about how messed up their identities are. The other thing they don’t know is there are several versions of the FICO software. Lenders don’t tell us what version of the software they’re using, so borrowers have no idea how they’re being graded.
Do you run your clients through all versions of FICO software?
Yes, that’s why we build perfect profiles. Our promise to clients is to ensure every single one of their FICO scores—regardless of the version—exceeds 800. For those in business, we also promise we will not stop until they have a minimum of $100,000 in business lines of credit.
What’s the difference between business lines of credit and business credit cards?
Some websites promise to help capitalize your business, but they don’t say you may be applying for personal credit cards rather than actual business lines of credit. The language is so shady on these websites, they beat the hell out of the client’s personal credit profiles and lower their scores.
Your personal credit profile is the goose that lays golden eggs. If you ruin your personal credit profile, you will forever hobble your chances of getting business credit or getting further credit even on the personal side. Protect your personal credit profile zealously.
What’s credit repair versus credit optimization?
Credit repair is so “last century.” Outfits write letters on behalf of clients asking for items to be verified and removed. Lexington Law firm, which I co-founded in 1992, is the largest credit repair loan firm in the country with a published deletion rate of 24 percent. We at least double that, but it’s just on the repair side. About 60 percent of our clients have good credit, but it’s not fundable credit. You can’t repair your way to an 800-plus fundable profile so we build profiles with tier 1 credit. We make all the right choices so our clients get the best personal credit profiles possible so they can leverage that for business.
What is the biggest challenge to a great profile?
Education. We’re in the process of publishing guides based on vertical markets like college-age students. Many Millennials don’t believe they need credit, so we show them how to build perfect profiles from the ground up. Teenagers going into adulthood think they get a Limited card or something from the mall to start a credit profile. Those are 40 percent junk cards and do nothing for your profile later on.
With older adults, the biggest problem is recovering from 2008. Many bankruptcies or collections didn’t even get started until 2010 or 2012 because they managed those first couple of years, so we’re barely getting past the seven-year mark. The 10-year mark will be in 2020. A lot of clients now have bad credit and want to get back in the credit game, especially real estate investors who took a bath in 2008.
How can people learn more?
We have 100 free videos and market guides launching in January 2017 such as soft landings for divorce and bankruptcy.
ABOUT CREDITSENSE:
Basecamp: Salt Lake City, UT
Founded: 1997
Number of Employees: 14
Number of Active Clients: 850
Phone: 801-997-9120
Web: www.CreditSense.com
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