Your
Life on Paper… Is It Really You?
Family
& friends know you. Your neighbors and co-workers know you.
However, there are information-gathering businesses that think
they know you. These are the many credit-reporting bureaus/agencies
(called "repositories" in lending) which gather data
reported to them by your creditors as well as public record data
they access and gather on a regular basis. This information may
be inaccurate, as your creditors and the folks who report public
record data are just like all of us…subject to human error.
However, if there has been turbulence in your credit history,
you have first-hand knowledge of the impact creditors' derogatory
reporting can have on your ability to secure credit.
Let's get to the "NUTS & BOLTS"
of Credit and Credit Scoring… and possibly the most important
financial document you can ever have: an accurate credit profile
which presents you as the financially responsible person you are
now or can become! We can show you how to have the credit profile
you've always wanted…and assist you in monitoring your good
credit to keep it that way! Let's make it as good as gold.
Keep in mind that credit scores are numerical
values that rank an individual according to his/her credit history
at a given point in time. These are variables THAT CAN BE GREATLY
IMPROVED…you do not have to have bad credit forever!
FROM
A TO Z…Your Credit Rating & More!
- What's my Credit Profile?
- INTRO to Credit Scoring
- What's the Meaning of a Credit Score?
- Credit Score Averages Nationwide
- 5 Credit Score-Determination Factors
- High Score Strategy "DOs!"
- Have Little or No Credit?
- Removing Inaccurate Information!
|
A CREDIT PROFILE
refers to a consumer credit history, which is made up of various
consumer credit bureaus' reports from your creditors. It is a
picture of how you have repaid the creditors from whom you have
borrowed money, and how you have met other financial obligations.
Here are five categories of information
on a credit profile:
- Identifying Information
- Employment Information
- Credit Information
- Public Record Information
- Inquiries
The following are NOT included on your
credit profile: race, religion, health, driving record, political
preference, income, or asset account information.
Further, they DO NOT consider a persons'
gender, marital status, religion, ethnicity or nationality. These
disclosures are expressly forbidden by law.
There are several major credit agencies/bureaus
which compile profiles on consumers: Trans-Union, Equifax, and
Experian (formerly TRW) which are often used by creditors. Creditors
may report to their own choice of bureaus. For example, one of
your creditors may belong as a "subscriber" (they pay
for the bureaus to document what they report) to Trans-Union and
Equifax, but not to Experian; thus, upon initial reporting, Experian
is not aware of your being late with your car payment last month!
Keep in mind that if you've been denied credit, you can get your
credit report for free by following instructions in the written
notice of credit denial you may receive.
INTRO TO CREDIT SCORING
- A credit score is a 3-digit number which ideally will reflect
whether or not you responsibly pay your bills in a timely manner.
Other data is oftentimes noted and is included in the "scorecard"
or scoring model - a mathematical equation designed to evaluate
information received from creditors by a credit bureau. The information
is compared to the payment patterns in thousands of past credit
reports "scored," and your risk level is determined.
Judgments, tax liens, collection accounts, etc., known as derogatory
information, lowers this score.
Although Credit Scoring has been around
since the 1950's, the concept was widely adopted by credit agencies
in the 1980's with credit scoring based solely on collected credit
bureau data. The data from large scoring projects, such as mortgage
portfolios, demonstrates their predictive quality and that the
credit scoring system does generally work.
There are actually many kinds of credit
scoring systems, but the most commonly used are the credit bureau
risk scores developed by Fair, Isaac, & Company. Although
bureaus have various names for the scores they consider proprietary
to their company, overall, they are generally known as FICO®
scores after the company that first developed them.
Today, not only lenders, credit card issuers,
and auto dealerships, to name a few, utilize credit scoring reported
to them by credit bureaus. Insurance companies, employers (who
often use this method as a character check), and Institutions
of higher learning utilize scoring. Just as your SAT score in
high school qualified you for some colleges and not others, so
it is with mortgages. Lower scores; higher interest rates due
to greater risk. As such, the payments you make to your creditors
AND your annual hazard insurance premium on your home is "score-based."
WHAT'S THE MEANING
OF A CREDIT SCORE?
| Credit
Score Range |
Delinquent
and Foreclosed Loans |
| Below 600 |
1 in 8 |
| 700 - 799 |
1 in 123 |
| Above 800 |
1 in 1,292 |
CREDIT SCORE AVERAGES
NATIONWIDE
| 400-499 |
1% |
650-699 |
16% |
| 500-549 |
5% |
700-749 |
20% |
| 550-599 |
7% |
750-799 |
29% |
| 600-649 |
11% |
800+ |
11% |
A borrower with a score of 680 and above is
considered an A+ borrower. A loan with this score will be put
through an "automated basic computerized underwriting"
system and be completed within minutes. Borrowers in this category
qualify for the lowest prevailing interest rates available.
A score below 680 but above 620 may indicate
to underwriters will take a closer look in determining potential
risk. Supplemental documentation may be required before final
approval. Borrowers with this credit score may still obtain "A"
pricing, but the underwriting process is longer due to additional
file review.
Borrowers with credit scores below 620 are not
limited in their program options; however, the terms and conditions
are less attractive. The lowest advertised rates are not available
to these score profiles. These B-C Program Mortgages require extensive
processing and documentation prior to closing. More issues; more
explanations.
Equity, stability, income, documentation, assets,
etc. play a larger role in the approval decision. Certain compensating
factors are allowed in determining your grade, but the worst-case
scenario will push your grade to a lower credit grade.
Late mortgage payments and Bankruptcies/Foreclosures
significantly lower your score(s). Credit patterns, such as a
high number of recent inquiries or more than a few outstanding
loans, may signal a problem. Since an indication of a "willingness
to pay" is important, several late payments overall in the
same time period is better than random delinquencies.
If you have had credit problems, be prepared
to discuss them openly and honestly. Legitimate reasons may exist
which cause credit problems, such as unemployment, illness or
other financial difficulties. If you had problems that have been
corrected (re-establishment of credit), and your payments have
been on time for a year or more, your credit may be considered
satisfactory.
5 CREDIT SCORE-DETERMINATION
FACTORS
- 35% of the score is compiled of payment
history to your creditors, with recent timely payments having
more weight than older accounts.
- 30% is based upon all outstanding debt
you currently have with creditors.
- 15% is calculated on the basis of how
long you have had a credit history. Duration of credit is good
only if you have a timely payment history.
- 10% is comprised of very recent history,
and whether or not you're been actively seeking (and getting)
loans or credit lines in the past few months.
- 10% is calculated from the "mix"
of credit you hold, including installment loans: car loans,
leases, mortgages, credit cards etc.
HIGH SCORE STRATEGY
"DO's"
- DO pay your bills on time! If you do not,
start immediately! Credit scoring's negative impact is based
largely on your most recent payment history. Late payments,
collections (paid & unpaid), and bankruptcies adversely
affect your credit score(s).
- DO use credit wisely. Use only the credit
you need and can afford to pay.
- DO avoid "maxing out" your credit
cards. Keep balances low, preferably under 50% of your available
credit line.
- DO apply for or open credit accounts within
the same time period.
- DO avoid sudden closing or opening of accounts.
As scores are based on complex mathematical models, such activity
could be interpreted adversely.
- DO avoid so-called "credit repair"
services. Good credit is created over time.
Our analysis several years ago indicated that
there were approximately 120 factors which affect your credit
score. We'll help you understand what factors may be affecting
you.
HAVE LITTLE OR NO CREDIT?
There are some individuals who prefer to pay
cash for everything they buy. You may never have taken out a loan.
Perhaps you are recently divorced and do not have any credit in
your name. If you have never made a loan payment or used a credit
card, you may not have a credit history. This can be a problem
when you get ready to buy a home and apply for a mortgage, as
underwriting will want to review how well you can pay bills and
manage credit.
There are specific mortgage programs which allow
you to utilize "Non-Traditional" credit alternatives;
however, you must have SOME credit to augment the non-traditional
documentation. Your telephone bill, car insurance and timely paid
utility bills are examples of non-traditional creditors: those
who do not subscribe and report to credit bureaus.
Here are suggestions for documenting a non-traditional
credit history:
- Keep copies of bills you pay, including your
rent, telephone, electricity, cable television, gas and insurance...AND
PAY THEM ON TIME!
- Keep copies of the canceled checks used to
pay your bills.
- Ask your landlord, the telephone company,
and the gas and electric company to write a"Letter of Credit"
for you, requesting them to include how long you have been a
customer and how well you have paid your bills every month.
REMOVING INACCURATE
INFORMATION
We recommend that you obtain a copy of your
credit report on an annual basis. Keep in mind that requesting
a copy of your credit report to check your credit history will
not affect your credit score. There is a minimal charge to obtain
this copy; however, complete instructions are included with the
report regarding how to dispute errors.
If you believe certain items on your credit
profile are erroneous, and you have documentation to provide the
credit reporting agency who entered it on your report(s), you
can have errors removed. The Fair Credit Reporting Act allows
the credit reporting agency a "reasonable period of time,"
generally not to exceed 30 days, to investigate consumer-disputed
items. This period may be extended 15 more days if the borrower
provides additional relevant information that may be requested.
Most credit reporting agencies make a special
effort to resolve disputed information affecting a mortgage decision.
If the credit reporting agency cannot verify with the creditor
who originally reported to them any erroneous information, it
must be deleted. We have extensive experience in assisting clients
to resolve these matters.
- EQUIFAX, INC.
- ATTN: Customer Service
P. O. Box 740256
Atlanta, Georgia 30374-0256
1- 800-685-1111
- www.equifax.com
- EXPERIAN -
ATTN: Customer Service
701 Experian Parkway
Allen, TX 75013
1- 888-EXPERIAN (1 888- 397-3742)
- www.experian.com
- TRANS-UNION
CORP. - ATTN: Consumer Disclosure Center
P.O. Box 2000
Chester, PA 19022-2000
1- 800-888-4213
- www.transunion.com
Additional Helpful Information
Sources:
The Federal Trade Commission (FTC) is responsible
for enforcing the Fair Credit Reporting Act (FCRA). The FTC also
publishes consumer-related credit brochures. You can obtain additional
information regarding credit reports from their offices.
To contact the FTC, call or
write:
Public Reference Branch
6th & Pennsylvania Avenue, N.W.
Washington, D.C. 20850
(202) 326-2222
WEB
SITE RECOMMENDATIONS
www.ftc.gov/ftc/consumer.htm
www.ftc.gov/ftc/moreinfo.htm
The National Foundation for Consumer Credit
(NFCC) is a network of 1,300 local non-profit organizations providing
consumer credit education, confidential budget and debt counseling,
and debt repayment programs to families and individuals. Their
web site is: www.nfcc.org
E-MAIL: CreditQuestions@1stopmortgage.net
