Credit Help - Understanding Your Credit Report
Credit is the single most important factor when it comes to getting a good rate on any type of loan, especially a mortgage, and can determine whether you’ll get one at all! If you’re credit score is too low, or you have very little established credit, there’s a good chance you’ll have trouble finding a lender or bank to offer you a mortgage. This may sound scary, but credit is an easy thing to keep track of and to subsequently improve. It just takes a little bit of work and responsibility.
A FICO score is another way of saying your credit score, a scoring system which was developed by Fair Isaac & Co. in the 1950s. It looks at a variety of different factors and comes up with credit score range between 300 - 850, with the highest score being the best. Three bureaus then report the scores, all a bit differently, and the middle score is used as your average, and determining score.
There are three bureaus that report scores on your consumer credit report. They will likely display different information, different name variations, occupations, date of birth, balances, tradelines, and so on. This is why they also come up with different FICO scores. The middle of these three scores is the most important, as it will be the score lenders use to determine your FICO score. The three bureaus that report scores on your credit report are:
Equifax
Transunion
Experian
You can visit the above credit bureau sites to learn more about each, or order a free credit report without a credit score at Annualcreditreport.com
The bureaus themselves offer credit monitoring programs for a fee and can actually be quite helpful, but aren’t necessary until you review your no frills, free credit report that the government should provide. If you look at the last page of your credit report you should see all three bureaus information and phone numbers. These may be useful if you feel a bureau is reporting in error. Feel free to call them and discuss any matters that you’re not clear on. But before you do that, make sure you how to read a credit report.
But before even thinking about your credit report, there are a number of different ways you can avoid any unnecessary score fluctuations:
- Don’t ever, ever ever pay any bill late!
- Avoid mortgage lates at all costs.
- Avoid major derogs like bankruptcies, collections, and chargeoffs.
- Reduce the number of accounts with high balances.
- Keep a large amount of overall credit available.
- Limit your total amount of credit inquiries.
- Increase the length of time credit accounts have been established.
First things first. DO NOT ever pay any bills late. No excuses. If you have any late payments, it tarnishes your credit for years, and drops your FICO score big time. That being said, anything beyond late payments such as bankruptcies, charge-offs, and collections are even worse.
And make sure you pay your mortgage on time every month without fail. Even if you already have a mortgage or multiple mortgages, you can still encounter difficulty in getting another one or refinancing a current one if you have any mortgage lates. If by chance you didn’t pay your mortgage on time, there are methods for removing mortgage lates.
Secondly, credit depth plays a significant role in your score as well. Creditors, or banks and lenders, like to see a solid credit history. If you’ve only had one credit card open for six months, and nothing else, it doesn’t say much. Sure you may have paid it on time every month, but it takes a lot more than that to establish trust with your lender. You need to have at least 3 tradelines with a 2 year history. By tradeline, I mean any line of credit, whether it be a student loan, credit card, car payment, mortgage, etc. Alternate lines of credit such as cell phone bills and utility bills can be used as well, but come second to traditional trade lines.
So the first step to establishing good credit is easy, open up some tradelines and pay on time. Whether it be a credit card, auto loan, or a gas card, these will qualify as your necessary 3 seasoned tradelines that lenders typically require for any new homeowner. Even if you have no intention of getting a home in the near future, opening at least three tradelines and keeping them open and current is a must. Two years is a long time, so it’s never too early to plan ahead. And make you keep them active, even if it’s a small charge here and there. Some people think they have great credit history when in fact they continuously open and close credit cards and other credit lines without establishing two year history.
And once you open these tradelines, make sure you make all your monthly payments on time and avoid any credit disputes or credit fraud. Be careful with your accounts and monitor them online using the creditor’s online system. It’s not wise to wait for monthly mailed statements to determine whether your charges are legit or not.
After about six months you can request higher credit lines on all your credit cards. This is great opportunity to increase your overall available credit limit. Imagine if you have three credit cards, each with $1,000 balances. Even if they are all paid for and have zero balances, if you can increase each card’s credit line to $2,000, do so. You’ll have double the amount of available credit, and thus show any potential bank or lender that are able to manage double the amount of debt.
And if you use a smaller percent of your overall available credit, your FICO score will also increase. Think of it like this. If you have those three same credit cards with balances of $500 each, you’ll only have 50% available overall credit. But if you increase all those credit lines to $2,000 each, you’ll only be using 25% of your available overall credit.
There are a number of private party companies that offer free credit reports and credit report fixes. If you just want to look at your credit, it might be best to go with the bureaus directly and order a free report, although they may take a bit longer and won’t offer as many tools to fix your credit. If you use a private party company such as Freecreditreport.com or something similar, which consequently is owned by one of the bureaus, Experian, you’ll get a credit report instantly and you’ll be able to submit disputes if you see anything on your credit that doesn’t seem valid. As long as you cancel within 30 days you shouldn’t be charged either as it is usually a free trial.
When I pulled credit with a similar company I found a medical collection on my account that wasn’t legitimate, and was able to have it removed using their dispute request system, and my score jumped from 660 to 730. In mortgage terms, this is the difference between a rate of 7.25% and 6.5% potentially, so it makes sense to order a credit report and get things sorted out before speaking with a bank or broker.
This is another important factor in regards to credit scoring. Any major “derogs” such as bankruptcies, collections, and charge offs will significantly lower your score and tarnish your credit for the years to come. A bankruptcy can remain on your credit report for 10 years, although it’s usually removed after 7 years. Although many lenders will offer you a mortgage if the bankruptcy was discharged and a foreclosure occurred 4 years from the mortgage application date. But, you will need to re-establish credit between that time as well, and make sure you avoid any other late payments or more serious delinquencies. Anything beyond a typical credit card late could mean a serious rate increase if you try to get a new mortgage.
Any new or recent credit inquiries can drop your FICO score by enough points to raise your interest rate dramatically. That’s why it’s so important to avoid applying for any new credit or making any large purchases on existing credit lines at or around the time you apply for a mortgage.
Of course credit is always fixable, but doesn’t always happen overnight. Because the housing market is deadline driven, many companies have begun offering a procedure called rapid rescoring. A rapid rescore allows potential homeowners to boost their FICO scores in as few as two business days. If for some reason a credit bureau is reporting inaccurate data, or if you recently paid off a bill or credit line and the balance isn’t up to date on your report, a rapid rescore can expedite the reporting in a matter of days. And that new data can lead to a drastically higher FICO score and a much lower interest rate on your mortgage.
However, rapid rescoring does come at a cost, so it’s important to do your research and make sure errors should be overturned before you venture out to dispute them.
Keep in mind that if there is a borrower and a co-borrower on a proposed loan, the bank or lender will use the lower midscore of the two borrowers unless it is full doc. If it is full doc, the lender will use the FICO score for the primary borrower, and if it’s higher, it will benefit you rate wise.
This is especially important when considering whether to include a co-borrower on the mortgage. If one borrower has a score of 620 and another has a score of 720, you’d really want to do all you can to remove the 620 borrower off the loan. This could result in a rate more than 1% lower, and huge savings on your mortgage payment.
The only issue with removing a borrower is that you may have trouble qualifying for the loan with just one borrower, and the removed borrower won’t have the mortgage on their credit report. Despite not being on the loan, the removed borrower can still be added to title, and if the mortgage payment is coming from a joint account for 12 months, the borrower could refinance with both borrowers on the loan without incident.
One final thing to note is that your credit report will list previous employment and current employment, so if you try anything fraudulent related to your employment, you’ll likely run into problems if the information you state in your mortgage application doesn’t match up with what’s found on your credit report.
Credit is really the first step in the mortgage process. Without it, you’ll find it very difficult to obtain a good rate. Consider checking out a credit help website and diving into your own credit repair project.
