Understanding Your Credit
A credit score is a number that indicates how likely a borrower is to repay future debts. The most common credit score is the FICO score which ranges from 300–950. The higher your score, the better.
Sample credit report from Equifax
Most mortgage lenders use scores that come from one of the three private, national credit bureaus: Equifax, Experian and Trans Union who collect and store consumer information electronically in individual consumer credit records. The credit bureaus generate credit scores based on the information in these consumer credit records. Each credit record includes the following data, collected from creditors and public records:
- Identifying information (name, address, employer, Social Security Number, etc.)
- Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
- Previous collections
- Tax liens, judgments and bankruptcies
- Inquiries for new credit
FAQ About Credit
What is a FICO Score?
The FICO score is generated by a mathematical formula (called a scoring model) developed by Fair, Isaac Company. To generate a FICO credit score, a credit bureau runs the data in a consumer’s credit record through its FICO scoring model.
Most lenders get credit scores directly from the credit bureaus or from a credit reporting agency that typically gets its scores from the credit bureaus. However, some lenders generate their own credit scores or get credit scores from a custom credit score developer.
How To Improve Your Credit
Three steps to improve a low credit rating:
- Pay your bills on time. This is the single most important thing you can do to improve your credit rating. Pay at least the minimum amount required by the date it is due. The faster you start paying your bills on time, the quicker your credit rating will improve.
- Minimize your debt and apply for new credit cautiously. Pay down high credit card balances. Don’t charge close to your credit limits. The closer you charge to your credit limits, the lower your credit rating will be.
Tip: On average, lenders would like to see 3 - 4 open accounts; any combination of charge cards, auto loans, etc. Balances on credit cards should be no more than 33% of your line of credit.
Consider closing accounts you never use. Don’t apply for loans or credit cards that you don’t need. The more you apply for new credit, the more you may appear to be taking on more debt than you can handle, and the lower your credit rating may be.
Limit your department store cards and finance company loans. The more department store cards or finance company loans you have, the lower your credit rating may be.
If you don’t have a credit history, consider opening an account and using it responsibly, making the minimum monthly payments as required. In addition. having a very limited credit history can have a negative effect on a credit rating.
- Review and protect your credit records. Once a year or before applying for new credit, make sure your credit records are accurate and correct them. You can check your credit records by ordering a credit report from each of the three credit bureaus – Equifax, Experian and Trans Union. Or for free at www.freecreditreport.com.
If you’ve been denied credit, you can get a free credit report by following instructions in the adverse action notice. Otherwise, you can receive a copy for a minimal fee.
Annually, you should check your report at all three bureaus. Each bureau might contain slightly different information.
If any of your credit reports contains any inaccuracies, contact the credit bureau that compiled the report. The Fair Credit Reporting Act (FCRA) requires the bureau to investigate your disputed items within 30 days. The credit bureau must provide you with written notice of the results of the investigation within five days of its completion, including a copy of your credit report if it has changed based upon the dispute.
Who Oversees the Fair Credit Reporting Process?
The Federal Trade Commission (FTC) is responsible for enforcing the FCRA. The FTC also publishes consumer-related brochures where you can obtain additional information on credit reports. To contact the FTC, call or write:
Federal Trade Commission
Public Reference Branch
6th Street and Pennsylvania Avenue, NW
Room 130
Washington, DC 20580
Phone: 202-326-2222
Web Sites: http://www.ftc.gov/bcp/consumer.shtm and http://www.ftc.gov/ftc/moreinfo.shtm
How Do You Order A Credit Report?
To order your credit report by phone or Internet, contact:
Equifax Consumer Services
Phone: 1-800-997-2493
Web Site: www.equifax.com
Experian
Phone: 1-888-397-3742
Web Site: www.experian.com
Trans Union
Phone: 1-800-916-8800
Web Site: www.tuc.com
What Factors Are Considered In A Credit Score?
The law is very specific about what may and may not be considered in a credit score.
These factors are considered in most credit scoring systems:
- The amount of credit you have compared to your credit limit
- The length of your credit history
- The number and types of credit accounts you have
- How active you are in applying for new credit
- Public records pertaining to credit
These factors are NOT considered in credit scoring systems:
- Income
- Race
- Religion
- Gender
- Marital status
- Nationality
- Age
- Receipt of public assistance
What Do Credit Scores Mean and How Do They Benefit Consumers?
Credit scores speed up the mortgage approval process for most consumers. The truth is that most Americans represent very little risk and have high credit scores. Credit scores help lenders identify—quickly—which consumers are lower risk borrowers. This speeds up the mortgage approval process for most consumers.
Credit scores are not based on human judgment. Credit scores apply the same standards to everyone. Using credit scores helps lenders to treat each consumer objectively. Credit scores are blind to cultural or demographic differences among people.
How Much Does A Credit Score Count In Qualifying For A Loan?
Whether you are applying for a mortgage to purchase or refinance your home, a good credit history is essential. During the approval process, lenders must determine that you will be able and willing to repay the mortgage debt. To ensure that you will be able to pay off the debt, lenders may look at many factors, including:
- Employment history
- Income and outstanding debt
- Savings patterns and amount of savings
- The type and amount of loan requested
- The amount of down payment or the existing equity in the property
To ensure that you will be willing to pay off the debt, lenders typically look at your credit report and credit score. Your credit score predicts how likely you are to repay the mortgage debt.
Lenders will use your credit score to help them determine:
- What loan types you are eligible for
- Whether to approve your loan
- What your interest rate will be.
