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Tighten Credit Habits When Lenders Tighten Credit

by Broderick Perkins

Check your credit report for accuracy, avoid large credit purchases and pay off or pay down as much outstanding credit as possible if you are in the market for a mortgage.

Lenders are tightening credit standards on residential mortgage loans and it behooves you to clean up your credit act.

The fewer reasons you can give your lender to reject your application, the greater the likelihood you'll get the mortgage you need and the cheapest rate.

If the economy remains soft, that could be more and more true.

The Federal Reserve's quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices -- a survey of 60 large domestic banks and 24 foreign branches -- found, in January, that the share of banks tightening standards on residential mortgage loans inched up to 11 percent from 10 percent in the October survey.

The numbers are relatively small, but the increases were the first two quarterly indications of noticeable tightening in more than a decade. While most lenders -- 88.9 percent -- revealed no change in their standards, there were no lenders that eased credit standards.

The tightening was more pronounced among smaller banks of which 15 percent tightened standards, compared to only 8.8 percent of large banks, the Fed reported.

In line with continued economic softness, there was a more apparent drop in home purchase loan demand -- the net fraction of respondents that reported stronger demand for mortgages to purchase homes over the past three months dropped to 7 percent in January from 40 percent in the previous survey. The share of banks reporting substantially stronger demand for the loans was also off dramatically from 14 percent in October to 2 percent in the January survey.

The Fed typically surveys the banks quarterly making the results available for the January, May, August, and November meetings of the Federal Open Market Committee. At those meetings the Fed decides to lower or raise benchmark interest rates.

The survey's questions cover changes in the lending standards and terms, the state of the lending business and household demand for loans.

On mean average, bank standards were nearly unchanged for down payments, credit scores and the extent to which loans are granted when customers don't meet credit scoring thresholds. However, in all three cases, that mean average leaned more toward tightening standards somewhat than easing standards somewhat, the Federal Reserve reported.

Fair, Isaac, the company that invented the credit scoring system most lenders use, offer the following tips designed to help you improve your credit score. They can also help you avoid the impact of banks' tighter standards.

  • Keep tabs on your credit report, pulling it at least once a year to check for errors. Also pull it before you apply for credit to know your standing and deal with any dings.

  • Make timely bill payments as long as possible. The longer your timely bill payment, the better your credit score.

  • Keep revolving credit balances low and pay it off rather than consolidating whenever possible. Owing the same amount with fewer accounts can actually lower your score.

  • Apply for and open credit accounts only when you truly need a credit assist. Rapid fire credit applications and opening new accounts lowers your score. It looks like risky business to lenders.

  • Rate shop in a short period of time. The credit scoring system can spot the difference between a search for a single loan than a quest for many new credit accounts.

  • It's better to have a limited amount of well-managed credit, than it is to have no credit at all. A well-managed credit history is revealed to the lender. No credit raises red flags.

    Published: February 6, 2003



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