The Washington Post; Washington, D.C.; Nov 7, 1998 By Kenneth R. Harney As mortgage lenders nationwide increasingly use "credit scoring" to decide what interest rates and fees consumers qualify for, a troubling new trend is emerging: With little or no reliable information available, loan applicants are trying to raise their credit scores â?? often with calamitous results. Take the case of a California couple, both highly paid professionals, who sought to qualify for the lowest interest-rate refinancing available. The key test, their mortgage broker said, was that they have a FICO score of 720 or higher. FICO is the most common type of scoring in the mortgage market. Devised by Fair, Isaac and Co. of San Rafael, Calif., the score represents a statistical evaluation of a borrower's risk of future default. The score ranges from the low 300s to more than 800. The higher the score, the lower the probability of default. The score is produced by running a consumer's credit bureau data through proprietary statistical modeling software marketed by Fair, Isaac. The score isn't generated by the lender; instead, the lender requests it as part of the credit report it obtains from one of the three national credit information companies â?? Equifax, Trans Union and Experian, formerly TRW Corp. In the case of the California couple, both husband and wife assumed they'd get exceptional scores. After all, said the husband, "we've never missed a mortgage payment, we've never been late on anything. We've got a perfect record." When the mortgage company pulled their FICO scores electronically from the credit bureaus, both had good scores â?? more than 700 â?? but neither hit 720. The broker was not legally bound to divulge the scores but did so as a courtesy and also provided copies of the reports. That's when the trouble began. The couple decided to "fix" their credit profiles to raise their scores. They paid off the small balances on several high-limit credit cards. Then they canceled those cards and two others, shifting thousands of dollars of balances onto just three cards. Their broker assured them that this strategy should boost their FICO scores significantly. Two months later, the couple reapplied for the same low rate. The broker pulled their scores again, but to everyone's shock, they were 20 to 30 points lower. They didn't get the loan. Cases like this are popping up across the country because mortgage lenders are shifting to "risk-based pricing," that is rewarding higher scores with lower rates, credit bureau experts say. Probably the key mistake the California couple made in their credit score quick-fix effort was to suddenly cancel six cards with relatively small unpaid balances and combine their debt on just three cards, said Michael Rapaport, one of Fair, Isaac's top officials for credit score design. That had the effect of raising the ratio of their unpaid balances to the maximum credit lines available on the three cards. Before the card cancelations, by comparison, they had more cards and a higher overall dollar limit of credit available to them, but they had lower balances spread among half a dozen cards. The net result was to make them look more "extended" on their credit use than they looked before the fix. With this in mind, here's Rule 1 on maintaining or getting a higher score: Don't even come close to "maxing out" on your cards. It's statistically better to have smaller balances on more cards than high balances relative to your credit limits on just a few cards. Rule 2 is perhaps more obvious: Pay everything on time, in the amounts agreed upon. That's probably the single most important factor in your score, Rapaport said, but it's not something you can fix overnight. Rule 3: Order copies of your credit reports periodically or before you apply for new credit. Dispute any information you find that is incorrect. All "derogatory" information drags down your score. If it's wrong, get it deleted by contacting the creditor responsible. Rapaport says the most dramatic, rapid improvements in a credit score can come when erroneous data is eliminated from your file. Finally, if someone says you can do a quick fix on your score to get a lower mortgage rate, don't believe it. The only sure-fire strategies are correcting errors, keeping credit balances modest and paying on time. Reprinted with permission of Kenneth Harney, November 1998.