Check Your Credit
You may have heard of credit scores (FICO) and wonder what
they are. These "scores" affect your ability to
get a loan, the interest rate and points you will pay. You may
also wonder whether your credit score is accurate. The
following explains credit scores and how to improve your score.
What is a Credit Score?
When lenders evaluate your loan application, they use a
process called "underwriting" - they try to evaluate your
ability and willingness to repay your loan. They judge your
ability to repay by looking at the amount of your income and how
stable your past earnings have been. This helps them to
determine if you can afford the loan payments. They judge your
willingness to repay by looking at your past credit history.
Generally speaking, someone who has made payments on time in the past
will probably do so in the future.
Lenders want their evaluation to be as accurate, objective and as
consistent as possible. In an effort to achieve these goals,
mortgage lenders recently began using credit scores to help in the
underwriting process. Credit scores are numerical values that
rank individuals according to their credit history at a given point in
time. Your score is based on your past payment history, the
amount of credit you have outstanding, the amount of credit you have
available and other factors. According to Fannie Mae and Freddie
Mac (two of the largest purchasers of home loans from lenders) credit
scores have proven to be very good predictors of whether a borrower
will repay the loan.
Many lenders use credit scores to help evaluate loan applications;
however, a credit score is just one of many factors considered in the
underwriting process. Lenders look at the entire picture.
Even when a credit score is low, lenders try to find other factors
that could overcome any negative credit issues and satisfy their
underwriting criteria. The decision to approve or deny a loan will be
made based on sound, flexible underwriting guidelines.
What is a FICO Score?
"FICO" scores are a type of credit score
developed by Fair Isaac & Company. FICO scores use credit
bureau information to obtain a score which indicates how likely
someone is to make their loan payments on time. Millions of
consumers' credit bureau records were used to make the scorecards and
all of the consumer data - not just negative information - was
included to develop the system. FICO scores range from
approximately 350 to 900. The higher the score the more likely
someone is to make their payments.
How Credit Scores Affect the Price of a Loan
Just as credit scores are one factor in determining if you qualify
for a loan, they may also be a factor in determining the price of your
loan. The price of a loan means the interest rate and the points
charged by the lender and/or the mortgage banker. The price
charged for a loan will be higher or lower depending on various
factors.
Credit scores are used in determining the price of a loan because
they are believed to be good predictors of a borrower's ability and
willingness to repay the loan. Many mortgage loans are sold to
investors and investors will pay a more favorable price for loans they
feel have a low risk of default. Fannie Mae and Freddie Mac use
credit scores as part of their analysis when pricing loans they buy
from lenders because of this very reason. Thus, applicants with
lower credit scores may pay higher prices for their loans because of
the higher risk of default and loss.
There are many factors relating to an individual borrower's
situation that may also affect the price of a loan, often even more so
than credit scores. These include:
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The
type of property securing the loan (detached single family
residence, duplex, etc).
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The
amount of the borrower's equity in the property
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The
lender's costs to make the loan
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The
type of loan selected. For example: a loan secured by a
single family residence may have a lower price than a loan
secured by a duplex because duplexes are more difficult to sell.
Similarly, the price of a loan where the borrower has made a 20%
down payment may be less than a loan where the borrower has made
a 5% down payment because the first borrower has more equity in
the property and, thus, a greater incentive to make the payments
on the loan. |
How to Improve Your Credit Score
Because each borrower's credit score is a reflection of his or her
unique credit profile, it is not possible to quantify in advance
exactly how each item in your credit history numerically impacts upon
your ultimate credit score. No one can tell you, for example,
how much your credit score will be affected if you pay off a
delinquent account or cancel a credit card. We do know;
however, that there are things you can do to improve your credit
profile. Some of the factors which may impact your credit score
include:
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Making
Timely Payments: Making your payments on time is the
best way to increase your score. Delinquencies,
foreclosures, bankruptcies and judgments will decrease your
score.
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The
Number of Trade Lines: The number of credit cards,
lines of credit and other types of credit ("Trade
Lines") you have available will affect your score. If
you have a lot of "trade lines", this may decrease
your score because of the risk that you might not be able to pay
off all of your accounts, and this may affect your ability to
pay off your mortgage loan. You may wish to consider canceling
credit cards you do not use regularly or choosing 2-4 cards to
use and canceling the rest. If you close or cancel an
account voluntarily it will not have a negative effect on your
credit score. You may wish to reconsider accepting
"pre-approved" offers for credit cards, or if you
accept an offer, perhaps you should cancel another credit
card. On the other hand, if you have no trade lines, this
will likely decrease your score. Lenders generally want to
see that you have some available credit and that you can handle
your credit wisely.
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Avoid
Unnecessarily High Credit Limits: Lenders also
consider the amount of credit available (your credit limit)
compared to your income when making underwriting
decisions. Having credit limits that are too high
(relative to your income) can affect your score just like having
too many trade lines.
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How
You Use Credit: The amount outstanding on each of your
credit cards will also affect your score. In general, the
lower the amount outstanding, the more likely it is that your
score will be higher.
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Do
Not Apply For Credit You Do Not Need: Whenever you
apply for credit, the creditor will obtain a credit report from
one or more of the three credit bureaus. Each such credit
inquiry will stay on your record and will affect your credit
score. Even if you are turned down for the credit or
change your mind and withdraw your application, your credit
score will be affected. This is because each inquiry
suggests that you are increasing the amount of credit available
to you. Before you give your Social Security number to someone,
make certain you know how they are going to use it (a Social
Security number is almost always required to run a credit
report.) Don't let the fear of inquiries stop you from
shopping for the best deal when you need auto or home
financing. Recently, the credit bureaus have recognized
that borrowers may apply for credit at more than one place for
the same transaction. Generally, the credit scoring companies
will consider all auto or mortgage loan inquiries received
within a 14 day period as 1 inquiry so the additional inquiries
will not affect your credit score. And remember, if you order a
copy of your credit report to make sure it is accurate, this
will NOT show up as an inquiry on your record. |
How To Correct Mistakes on Your Credit Report
(We provide the following contacts for your information only--we do
not endorse nor do we have any affiliation with the following
companies.)
Because credit scores are based upon your credit record, it is very
important that you obtain a copy of your credit report from time to
time to make certain the information is accurate. If the information
is not accurate (for example, someone else with the same name as you
may have their credit mixed up with yours), you should immediately
take steps to get it corrected. No one can do this but you.
Lenders, credit card issuers and other credit providers send
regular reports about their accounts to the major credit bureaus. This
is where information on your credit report comes from. There are
three major credit bureaus, you should contact each one because not
all credit providers report to each bureau. Also, if you have
joint credit (for example, if you are married and have joint accounts
with your spouse), it is a good idea to get the credit report for each
of you because there may be information in one report that does not
appear on the other. If you ask for a copy of your credit report
to check your credit history, it will not affect your credit score.
You can reach the three credit bureaus here:
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Equifax: |
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800-685-1111 |
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TransUnion: |
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610-690-4909 |
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Experian (TRW): |
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800-682-7654 |
In most cases, there is a small charge to obtain a copy of your
credit report. If you find errors on your credit report, follow
the directions included with your credit report regarding disputes or
errors. Generally, you must write the credit bureau and advise
them of the error or dispute. You may need to provide proof that the
bill was paid or other information about the claim or dispute. The
credit bureau will then contact the provider of credit who reported
the information and that, provider will have 30 days to respond.
If the provider of the credit agrees that there is an error, it will
instruct the credit bureau to delete the item from your credit report.
You should allow at least 30 days after you have notified a credit
bureau of an error in your credit report for that error to be
investigated and resolved. It may take longer depending upon the
nature of the error and the investigation to be done.
Not everyone has perfect credit and we are here to help. If you
have had credit problems in the past, whether you have tax liens,
foreclosures, or even bankruptcies, don't worry, there are many loan
programs for you.
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