Avoid Lowering Your Fico Credit Score with a Loan Modification

March 27, 2010 No comments

Perfect Payment History – Low Fico Credit Score.

Yesterday I talked to a customer who had a 740 fico rating. I knew this customer because I had worked with her in the past. This woman was very meticulous and she worked hard to manage her debt and keep her rating high. I believe what happened to her could happen to many people who do not know how their fico scores are calculated. She attempted to reduce her debt and she applied for a loan modification. She contacted her lender, requested information and based upon a preliminary conversation the lender agreed that she could have her loan modified and save just under $100 per month. In an effort to reduce her total debt she also planned to pay off her revolving cards. So she closed all of her revolving accounts and began to pay down her debt. This all happened within a 30 day period. By the time she got her papers she read that her financial rating would be affected by the loan modification and decided not to do that. Instead she contacted us to apply for a streamline refinance. We could save $140 per month (more the the loan modification) so she began the process and was quickly denied. Her fico had gone from 740 to 583 and she never missed a payment.

The Loan Modification Destroys Your Fico.

When she received a copy of her credit report it read that the customer was paying less than agreed upon payments. So even though she was not late and really never accepted the modification her credit score was impacted. This was corrected by her mortgage company and they sent her a letter that they would also sent to the credit bureaus only because she cancelled the modification and never made a lower payment. But for everyone else considering a loan modification I would also look at the streamline refinance. This may offer you similar savings without negatively affecting your fico scores.

Canceling Her Accounts Lowered Her Credit Score.

There are a few reasons this lowered her score. The main reason is by canceling all of her accounts but one she no longer had available credit and was considered by the financial scoring model as being maxed out. The closer you are to your maximum limit the lower your score is. The highest points are given to the client who has less than 20% balance on their cards. If they have more than 50% balance then the scoring model lowers points from your rating. Another means of positive points are the length of time accounts have been open and active. These points go away when you close your accounts.

Reduce Your Debt and Keep Your Fico Credit Score High.

In this case our client would have had a higher financial rating if she methodically paid down her accounts without closing them. In fact her rating would have gone up.

Regarding the Loan Modification she did the right thing by comparing the streamline refinance to the modification. If they are close choose to refinance verse modify and you can save your credit rating. But, in some cases the loan modification can be far more beneficial even with the lower financial rating. This is only temporary and it may take a a while to build your rating but the savings may be worth it.

Monitor Your Credit Report.

If she was not denied a loan this customer would have never known the misinformation reported by her mortgage company. It is important to monitor the information reported to the bureaus to make sure your information is accurate and that creditors are not making a mistake so you qualify for the best credit and get the lowest interest rates.

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