Increase Your Buying Power: Understanding Your Credit Scores Will Save You Thousands
Credit scores are the measuring tool mortgage lenders and loan officers use to determine how great of a loan risk you are. In other words, the score is like a code which tells them how likely you are to pay the real estate loan on time and in full, to make late payments, or worse, to default on it altogether. It lets them know if you can handle the magnitude of a house payment and still live up to your current economic standards and obligations.
Unlike your credit history report, which you can get free every year from each of the three credit bureaus, discovering your credit score will cost you money. The scoring formula was developed by Fair and Isaac Corporation in the 1980′s, but for years only lending institutions were allowed to have access to it. Whether they shared that information with you or not was their discretionary privilege. In 2001, the federal government stepped in and declared that score should be made available to you, but not for free.
What goes into calculating the scores?
The scores range from 300 – 850. The higher the score, the better of a credit risk you are. Each debt is graded on a point system that takes into account
Your payment history. That shows how often you pay your bills, how much you pay and to whom. Both past paid off debt and current debt is listed. This is 35% of the score.
o Do you pay your credit on time?
o Length of positive credit history
o Severity & quantity of delinquencies
The ratio of the outstanding debt to your paid off debt and your annual income as has been reported to the IRS. This is 30%.
Quantity of credit accounts – too many credit cards with balances can lower a score.
The length of time you have had credit with each company. For example, the longer you have a credit card the better. That shows you can stay in good standing and know how to manage debt. This is 15%.
o The longer the history the better.
o How long have your credit accounts been established?
o How long has it been since you used certain accounts?
The types of credit you currently have. If you owe too much, the mortgage lender may decide you are not able to take on more debt. On the other hand, if you have not owed very many people that can lower your score because there is no pattern of how well you pay. This makes up 10%.
o Research shows that opening several credit accounts in a short period of time does represent a great risk – especially for people who do not have a long established credit history.
Types of Credit in Use (Healthy mix) = 10%
o 2 installment loans
o 3 revolving accounts with balances
o Balances on revolving debt below 30% of the high credit
o No collection accounts
o No public records
o No foreclosures
o No late payments
Just as your report card averaged up all your grades in your classes, so does the credit score total up all of these factors listed above. It is the fairest way to assess a person’s credit and debt ability compared to millions of other people. But that does not mean it is error free.
Are all the credit bureaus the same?
The three credit bureaus used by the majority of mortgage lenders and banks are Equifax, Trans Union and Experian. Each of the three bureaus has their own variations on a theme, and it is up to the mortgage lender to know how to interpret the reports. Since most companies do not take the time to report to each of the bureaus, because they have to become members for that privilege, not all of a person’s debt is recorded with each company. Equifax uses what is called the BEACON system, whereas Trans Union relies on
the original Fair and Isaac or (FICO) scoring. Experian has its own combination called the Experian/Fair Isaac RISK system. The mortgage lender will review all three bureaus, utilizing the middle score for your mortgage preapproval. Add to that some of the lender’s own criteria such as your income increase patterns and how long you have been at each job you have held, and you can see the scoring is not totally objective. It does, however, evaluate you against what the rest of the population of debtors are doing in comparison.
The difference in a score in the low 600′s versus one in the low 800′s can be huge. Once you find out your credit score and obtain your free credit history, go over it with your bank loan officer or mortgage lender to see if you can improve your standing before you look at real estate. Doing that may save you thousands of dollars.
Pay all your bills on time or early.
Don’t co-sign for ANYONE – their late payments are late payments
Don’t close old revolving accounts you no longer use. You will lose your length of credit history which accounts for 15% of your score
Don’t open new accounts
Report fraud immediately. If you find yourself the victim of fraud, immediately contact the credit bureaus, your credit card companies, banks and the FTC at www.ftc.gov.
Monitor your credit. Order a copy of your credit report once a year from annualcreditreport.com
If you are planning to refinance or buy a home, do NOT make any purchases or run up the balances on your credit cards prior to the transaction.
How to receive free credit reports throughout the year?
Every year, you can apply once for a free credit history report from each of the three credit bureaus licensed in the United States. They are -
Equifax 1-800-685-1111 or www.equifax.com
Trans Union 1-800-916-8800 or www.transunion.com
Experian 1-888-397-3742 or www.experian.com
TIP: To monitor your credit all year for free, pull from 1 of the above bureaus every four months
How to review credit history?
Step 1: First and foremost, check all of your demographic information. Is your name spelled correctly and does it match the name on your driver’s license and Social Security card? Is your address correct and current? Is your social security number correct? If there is an error, there very well may be errors in your credit history report as well. In other words, what is on it may not be yours, or there may be debt (paid or not) that you have that is not listed.
Step 2: Gather all of your loan and credit card information from the past five to seven years and make sure each is listed properly on the report. Check to make sure any debt you have paid off is listed as such, be it a car loan, or a credit card balance or a personal loan. Some rental leasing companies and utility companies will also report to the credit bureaus. Your track record with them may show up on the history as well.
Under each debtor should be listed their contact information, your identifying number with them, and the amounts of payment you have made versus how much you still owe. More often than not, the highest amount you owed over the history of the debt will be listed as well as the lowest amount. There may be listed the amount or ratio of late payments versus that of on-time payments. Each of the bureaus has a different report format.
The mortgage lender will go over your report history very carefully, which is the reason you should as well. Start the process several months prior to applying for the home loan. Why several months? It may take that long to clear up any discrepancies or make payment arrangements to resolve some past due debts that are accurately recorded. The general rule of thumb is the more past debt you can satisfy, the better off you will be as far as obtaining a good mortgage interest rate. However, if that drastically dips into the amount you have saved for a down payment that might be such an advantage.
How to dispute or report errors and/or discrepancies?
If you do find an error or discrepancy on your report, you must contact each bureau and follow their step by step procedures for correcting it. To dispute any item on your credit history, can cause issues for you once you are qualifying for a mortgage, so if you are wanting to buy within 3 months, contact your mortgage broker to verify this will not cause any issues for you.
For disputes and discrepancies, you may reach each at the following addresses -
Experian NCAC PO Box 9556 Allen, TX 75013
Equifax Information Services P O BOX 740256 Atlanta, GA 30374
Trans Union Customer Disclosure Center Trans Union Consumer Relations PO Box 2000 Chester, PA 19022-2000
Not all of your creditors will report to all three bureaus. Therefore, it is important that you obtain your credit history from each one long before you jump into a real estate decision.
How to Avoid Identity Theft
Monitor your credit report annually! Each bureau allows you to pull 1 report per year. Rather than pulling all three reports a once, pull your credit report from 1 of bureaus every 4 months. This will ensure you catch something quickly. Go to www.annualcreditreport.com
Secure your mail – have it delivered to and mailed from the post office or a secured mail box.
Electronic keypad signatures – add the date to the end of your signature
Never list your social security number or carry it with you
Destroy all statements and solicitations – don’t just throw them away – shred, shred, shred.
Don’t leave paper trails – take all ATM and gas receipts with you.
Always review your statements – make sure all charges are yours.
Know who you are dealing with – don’t give out personal information over the phone or internet
Know your delivery dates – if the bill isn’t there when you expect it – call them.
Remove the bar codes form magazines and shred them – bar codes can tell volumes about you.
Keep your medical insurance card safe – medical ID theft is the newest wave of identity theft.
If you pay your bills by check – -put your work phone and address on your checks not your personal information.
Will paying off a collection account remove it from my credit report?
No – a paid collection will remain on your credit report for seven years from the original date of inception.
If I have a collection, should I pay off the collection agency or the original creditor?
Always pay the collection agency that is collecting for the original creditor
How can I get accounts removed from my credit report that were awarded to my ex-spouse in the divorce decree?
A divorce decree does not supersede an original contract with a creditor. You must contact each creditor individually and seek the legal binding release of your obligation.
I have no credit (or only negative credit) and I cannot get a finance company or credit card company to approve me – how can I stat to establish credit?
Apply for a secured credit card.
How can I get inquiries removed form my credit report that I did not authorize?
You will need to contact the bureaus directly to dispute these items.
Why do Experian, Equifax and Trans Union sometimes have different information?
Creditors voluntarily provide information to the credit bureaus and are not required to report all three. Some companies do not report to the bureaus at all. The creditors all report information on a national basis, but no always to all of the bureaus.
Opt Out 888-567-8688
To pull your credit once a year make sure to use www.annualcreditreport.com
Would You Like to:
See your current credit scores?
Know how much you qualify for?
Receive a preapproval letter so you can make an offer?
In 10 minutes you can submit an online application by going to www.comortgageresource.com and click on “apply online”. Or call us at 503-656-5848 firstname.lastname@example.org your questions. We’d love to hear from you!
What first time home buyer programs are out there?
Want money to fix-up your new home?
There is a little known government program called the FHA 203K Loan that allows you to leverage the bank’s money to buy and fix up any home as long as
it’s your primary residence. Never heard of it? You don’t know about it because most banks choose not to offer it. You can update the kitchen, finish the basement, put in new flooring or even scrape and rebuild! Great if you’re wanting a foreclosure or short sale. Click on the 203k” tab.
If you have VA eligibility this is a great loan!! No down payment, no mortgage insurance. We can help you get your eligibility done online. Call/email us with questions. 503-656-5848 email@example.com
When to Refinance?
Why refinance, when is the right time to refinance, what is the process to refinance. Please click the “Refi.” tab.