| Credit Score Truths and Myths |
|
|
|
|
Credit scores are central to the loan process. Nearly every lender uses them. The better your credit, the lower the risk to the bank, the lower your interest rate. Most lenders use your FICO score to determine whether or not you qualify for a home. It's such an important issue that you should understand the basics of the credit reporting system and the many myths surrounding it. Credit scores give lenders a fast, objective and impartial snapshot of a person's credit risk based on their credit history. That's why lenders use FICO credit scores when making credit decisions. The higher the individual's score, the lower the risk to lenders when extending new credit to that person. Its fast, easy, and, usually, effective. ABOUT YOUR FICO SCORE Think about your credit report as a story about your financial life, as told through your credit history. This has nothing to do with you personally. Everything is there from the first credit card you got out of high school to your cell phones to your most recent mortgage. It all has a very telling payment history. Some of it is good and some of it is maybe not-so-good. Regardless, it tells a lender what he needs to know about you. It tells the lender how committed you have been, historically, to paying your bills, both big and small, on time. It simply tells us how risky it is to loan you money. A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring. It is a method of determining the likelihood that credit users will pay their bills. It helps lenders determine the "risk" in granting you a loan. This method has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower's credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal exactly how these scores are computed and The Federal Trade Commission has ruled this to be acceptable. However, credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. It basically gives us a risk rating today of how likely you are, compared to the rest of the people in the U.S., of paying your bills tomorrow. Credit scores measure the likelihood of default, so credit scores are generated using factors that have been found to predict credit risk. These factors are not weighted evenly and several minor instances may indicate a higher risk than one major, but isolated, credit problem. There are five main categories of credit information which impact your credit score:
1. Late payments, delinquencies, bankruptcies: Past inability to pay on time will hurt your chances of getting credit in the future. More recent problems will be counted more heavily than those in the past.
Most lenders use the middle of these three scores. For example, if Experian gave you a 689, Trans Union 704, and Equifax 696, we would throw out the top score (Trans Union 704), throw out the bottom score (Experian 689) and use the middle score of 696 from Equifax. Your FICO score for the purposes of our loan would be 696. The bureaus don't all share the same data and thus all have different scores. One bureau may list more accounts for you than another, for example, and the differences (in types of accounts, payment histories, credit limits and balances) will be reflected in the score that bureau computes for you. Because of those differences, it makes sense to pull and examine your credit reports from all three bureaus before you apply for a mortgage. Fixing errors in all three reports before you shop for a loan is smart. We will discuss how to get a copy of your credit report and how to fix it later in this article. Here are the most frequently asked questions about credit reports: WHAT IS A GOOD CREDIT SCORE? Credit scores generally range from the mid-300's to a perfect score of 850. The following will give you a general idea of what your score tells lenders, but remember there are no set rules. Different products and lenders use different guidelines for what is an acceptable score. Also, there will usually be differences in the scores calculated by each of the three credit bureaus. As stated, lenders will often use the middle of your three scores.
720+ = Excellent credit. You should have no problems as most loan programs will be available to you. The average person in the U.S. has a credit score around 675. As you can see on the list above, the average borrower's file needs a "closer look" and is not a "slam-dunk."
HOW DOES MY SCORE AFFECT MY INTEREST RATE? Let's say that John Doe is buying a new house for $300,000. He is employed, can document his income through his tax returns,and has enough funds verified in the bank to put 20% down on the purchase of his new 300,000 home. e wants a 30-year fixed mortgage. Below you will find an example of how Mr. Doe's interest rate may fluctuate based on his credit score. MID-FICO:INTEREST RATE:
This is a primary example of why when you ask your lender, "what is the rate today?" the answer is not simple unless they know the credit score and financial profile of the borrower. Rates change based primarily on credit scores, use (owner-occupied vs. investment), income documentation, down payment, and availability of funds. WHAT FACTORS MAKE UP MY SCORE? Some of the factors considered in credit scores: Past problems:
Limited information:
Factors correlated with higher risk:
Factors not considered in credit scores:
DOES MY CREDIT SCORE GO DOWN EVERY TIME IT IS CHECKED? Credit inquiries are a negative factor in determining credit scores. That's because statistical studies show that multiple inquiries are associated with high risk of default. Distressed borrowers often contact many lenders hoping to find one who will approve them. However, multiple inquiries can also result from applicants shopping for the best deal. The credit bureaus understand this and try not penalize you for it. Credit scorers usually ignore inquiries, from the same industry, that occur within 30 days of a score date. Suppose I shopped a lender on May 30, for example, and the lender has my credit scored that day. Even if I had shopped 5 other lenders in May and they had all checked my credit, none of those inquiries should affect my credit score on May 30. Now, if you are also shopping for a new car, a new big screen TV, and applying for new credit cards during this same period, yes, that will create negativity on your credit report. Remember, this score is assessing the "risk" in giving you a new loan. If you are contacting may different types of lenders for many different products, you are giving the appearance of extending your credit our further and that makes you more risky. You may also damage your credit if you spread your shopping over many months. Circumstances can cause a consumer to shop, drop out of the market, and return later when conditions are more favorable. You minimize the adverse effect by concentrating each shopping episode to as short a window as possible. WILL CLOSING SOME OF MY ACCOUNTS HELP MY CREDIT SCORE?
Too many open accounts can hurt your score. But once you've opened the accounts, you've done the damage. You can't repair it by shutting the account, and you may actually make things worse. The credit scoring agency looks at the difference between your available credit and what you're using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score. The score also tracks the length of your credit history. Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score. Rather than closing accounts, pay down your credit card debt. That's something that actually can and usually will improve your score. If you must close accounts, transfer the balances from newer accounts to older ones and close the ones you have opened most recently.
HOW OFTEN DOES MY SCORE CHANGE? The FICO score is calculated based on the latest snapshot of information contained in your credit report at the time the score is requested. Your FICO score from a month ago is probably not the same score a lender would get from the consumer reporting agency today. Fluctuations of a few points from month to month are quite common.
IF MY CREDIT REPORT HAS SOMETHING WRONG ON IT, WHAT CAN I DO? The first thing you must do is get a copy of your report. I strongly suggest for the best and quickest response, you get a copy of your report from each of the three major bureaus. The easiest and most effective way is to request this online. Each of the bureaus will charge you a small fee for your credit report but you will get online access and better response times. If you want to save time and money, you can visit a website called www.myfico.com. The site is owned by Fair, Isaac and Co. In my opinion, it has the best tools for credit repair. Be sure to purchase their top package, which is $48 at the time of this writing. You may be able to get a free copy once per year at www.annualcreditreport.com. Both will give you a copy of all three major bureau reports and also have ready-to-use, simple online tools for credit repair like pre-written letters for dispute. Here is the contact information for each:
Equifax
Experian
Trans Union Once you get your report, review it very carefully. If there is an item on your credit report that you feel is inaccurate, and there likely will be, you should challenge it. Details on how to challenge will be sent you with your credit report. The credit bureau is required to begin investigating the issue within 5 business days. They are held to this action by an Act of Congress and they will move fast. They will contact the creditor on your behalf. You can also contact the creditor yourself, but be prepared to experience complete and utter frustration at its highest level. Do not only contact the creditor. The bureau is absolutely your best bet! Within about 30 days, you should have an answer to your complaint. If, at that time, the original grantor of credit has not responded to the disputed item, it will be removed from your credit report. However, if the creditor responds and challenges your claims, you may have more work to do. I am amazed at how many people have never seen their credit report until they actually buy their home. There is rarely enough time in the period between the day you make an offer until the day you close to correct your credit report in such a manner that will make a substantial difference in your score. Planning ahead can result in cleaning your report, raising your score, and saving you $10,000's in interest through the years. I COMPLETELY PAID OFF ALL OF MY DEBT, WHY IS IT STILL ON MY CREDIT REPORT?
If you were late on your MasterCard five times in six years, just because you paid it off does not mean it is now a positive reflection on your credit report vs. the negative reflection it was before, which some people automatically assume. It simply shows that you were late at times but then paid it off. Don't expect a huge increase in your score as a result of this action. Keep in mind, the score is based on your credit history, not just how you are today. HOW CAN I IMPROVE MY SCORE?
HOW LONG DOES IT TAKE TO SEE MY SCORES GO UP?
William "Art" Sexton
|
|||||||||||
Your credit score is the single biggest factor in getting a new home loan! 
There are really three FICO scores computed by data provided by each of the three major bureaus; Experian, Trans Union and Equifax.
Usually not. Closing accounts will not usually help your credit score, and may actually hurt it.
A credit report shows your entire credit history, including paid off debts. Judgments and liens will remain in your history for up to 10 years. A bankruptcy may stay on your credit report for 10 years as well. Just because you paid it off, does not mean it did not exist. Like I stated earlier, if you look at this report as the financial story of your life, this existed and although it is now paid, it tells a story about a time when the debt, for whatever reason, went without being paid.
| < Prev | Next > |
|---|