Credit – Do you know your score?

Dave Surgeon, Mortgage Broker and Credit Counselor

          Whether you’re wanting to buy a house, a car or any other major item, lenders will pull your credit report as a part of their decision process.  These reports give prospective lenders a great deal of information about past and current debt, legal or public issues; and they will give you a grade…your credit score.

          The most widely used credit score is the FICO score.  This system was developed by Fair, Isaac & Co. and are provided to lenders by three national credit bureaus: Equifax, Experian (the only true FICO score) and TransUnion.

          Scores range from the 300s to about 850.  The majority fall into the 600s to 700s.  By Freddie Mac standards, borrowers with FICO scores above 660 are considered as “acceptable” risks…over 720 are minimal risks.  Between 620 and 660 are considered “uncertain” and will require thorough review of the borrower’s entire credit history.  Below 620 indicates “high risk” and traditional financing is difficult to obtain.  That’s where sub-prime or “B-C” lenders come in.

          So do you know your score?  How important is your score? 

Are there any errors…or worse yet – identity theft?  I have found both while working with prospective borrowers.  Do you know what to do to correct erroneous information from your credit report?

          If you would like to know more about your credit score and how it might affect your ability to purchase or refinance a home…and your rate, as well, please give me a call.  I can help you out.  In the process, you will gain insight into your credit and actual ability to purchase real property.

Credit – What factors affect your credit score?

          So now you understand a bit about the credit scoring system, its quantitative standards and acceptability ranges.  Let’s take the process one step further, into the way credit repositories look at and evaluate your credit-worthiness.

          There are several factors that influence one’s credit or FICO score.  Accounting for over one-third of the weighting is a borrower’s credit payment history.  Although reporting payment delinquencies is not mandatory, most companies will report a late payment to one or all three bureaus, once that payment is 30 days late.  They will report again in 60 days, 90 days and so forth.  A single 30 day late report will affect your score – perhaps significantly.  Obviously, the more late payments your have, the lower your score goes.  Late payments affect your credit score for 12 months or longer.  Lenders look at your payment history to determine your willingness to repay obligations.  Are you responsible…a good manager of your credit?  Of course, the worse extension of payment history is the progression to collection, bankruptcy or foreclosure.

          Too few or too many lines of credit are negative factors in the evaluation of your credit.  More important though is the balance-to-credit-limit ratio, also known as utilization.  The lower your balance is relative to your credit limit tells the lender you are responsible and controlled with credit.  About 30% of your credit score is derived from this factor…don’t overlook it.  As an example let’s suppose you have credit card limits of $10,000 (5 cards) and your total balances were $4,000.  That’s not bad because the ratio is under 50% (40%.)  It is best to keep it around 25%.  However let’s suppose you tried to improve your credit score, thinking that closing an unused account would help; therefore you closed one of those accounts that had a $2,000 limit with no outstanding balance.  You have just changed your ratio from 40% (10,000/4,000)to 50% (8,000/4,000).  With all the best of intentions you can harm your credit score.

          Other factors include the length of credit history.  Lenders want to see longevity and variety of credit type with consistently good payment trends.  Most lenders want to see four open lines of credit; with three opened for at least 12 months and one for 24 months.  The longer, the better.  This factor accounts for 15% of your total credit score.

          New credit, type of credit and credit mixes account for 20% of your total credit score.  New credit lines can actually hurt your credit score during the first 6-12 months after they are opened.  Also, a mix of revolving along with installment loans is better than strictly credit card debt.

          Keep in mind that lenders look at your credit report differently depending on they type of loan you are seeking.  A mortgage lender will give weight to credit factors differently than a credit card issuer.

          Your credit report is a very important document and can affect you in ways beyond your borrowing capability.  Routinely, automobile insurers, landlords and even employers rely on information obtained through your credit report.  It is your responsibility to monitor it from time to time to verify accuracy and correct false information.  My suggestion is take the time to do so before a problem is created by an erroneous entry.