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!
A CREDIT PROFILErefers 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:
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 SCORINGA 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.
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 AVERAGES NATIONWIDE
The "middle" or median score of your 3 scores on a tri-merged credit report, each scored by the 3 bureaus on their proprietary models, If you search for an "average credit score," you will get various answers from each website you visit! FICOS run on a 300 to 850 scale; Experian uses a 330 to 830 scale. The new VantageScore, developed by the 3 major bureaus several years ago, have a scale of 501 to 990; however, it is rarely used.
In relying on FICO, as they have reported average scoring for many years on an annual basis. The average credit score for Americans from FICO is 723; 1/2 of individuals have a lower score, 50% have a higher.
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. More issues mean more explanatory documentation.
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
HIGH SCORE STRATEGY "DO's"
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:
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. Go to annualcreditreport.com for your FREE credit report(s) from each of the 3 bureaus previously discussed. 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.
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:
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