Consumers Need to Know Their Credit Score
Posted in Finance on 08/29/2010 02:56 am by admin
Dale Siegel asked:
I have been in the real estate industry since the early 80′s. I was a bank closing attorney, and now a full time mortgage broker. I remember the days when we ran a three-bureau credit report for clients and did an analysis of late payments and credit inquiries. We used to be able to obtain a written explanation for poor credit from the borrower and beg the lender to accept it. Illness, loss of employment, divorce and death were always good excuses for missing a car payment. My clients wrote lengthy, sorrowful explanations for their deadbeat credit. The people reviewing the file took out the tissue box and approved the loan anyway.
Thanks to Fair Isaac and Company, those explanations are no longer required. Most lenders will not even accept a letter, no matter how tearful it will make the underwriter. We now use a scoring process referred to as a FICO score. This is a mathematical formula calculating your credit risk based on five main factors and comparing your credit score to that of others [credit] in the system. There are three major reporting agencies, each basing their score on a slightly different formula. Lenders will look at the middle score of all three (as opposed to averaging).
When shopping for a home, the first question a realtor will ask is “Do you have a pre-approval letter?” When going to get a pre-approval from a lender, the first question a loan officer will ask you is “How is your credit?” Here you will learn how to obtain your credit report, get your credit score and improve it. If you are considering buying a house in the next year, I suggest you begin working on it now.
A credit score can range from 450 to 850- 850 being the best. The acceptable cutoff for Fannie Mae is 620, although they have accepted much lower scores with compensating factors. A compensating factor would be considerable amount of equity in the property, low income to expense ratios, or a lot liquid assets. There are alternative lenders and loan programs for people with bad credit and no compensating factors. You may get a higher interest rate or have to put down more money.
The main items included in the FICO formula are:
Types of Credit: Mortgages, lines of credit, student loans, car loans, major credit cards and retail cards. They (the computer) will look at how many types of credit and how many of each do you have. Although it is not required, a greater mix shows a mature and responsible borrower. You should have at least three active accounts and one major credit card. A score will not register unless there is one piece of credit that has been used for a minimum of six months. Most banks prefer four active trade lines with a 24 month history. Mortgage history is given the most weight. Retail store and gas cards are given the least. Make sure that you use your cards, but do not forget to pay them on time. If you have no credit, start with a secured credit card, store card and move up to Visa/MasterCard.
Inquiries: Inquires and obtaining new credit will always affect your FICO score. An inquiry is when a potential creditor does a credit check to see if you qualify to obtain credit from them (ie: you are shopping for a car at multiple dealers whom all run a credit check on you to see if you qualify for a loan.) Every time you apply for credit, an inquiry will show up on your credit report. If it does not result in a new trade line, it will negatively affect your credit. If it does result in new credit, the trade line will be new and will have a potentially negative effect until you have a proven history with the account. An inquiry stays on your credit report for 24 months. It is your responsibility to request the credit agency (each of the three individually) to remove them after 24 months. So, do not have a company run your credit unless, you have decided to do business with them. Do not obtain free credit reports over the internet. Do not get a new store credit card, simply to obtain the discount off of your first purchase.
Length of credit history: The longer you have credit history, the better your scores. Having a few credit items for a period of 12 months is better than having many credit items for six months. A rapid account buildup looks too new and risky and will affect your scores negatively.
Amounts owed and amounts available: Amount owed is the total of your balances on your credit cards when the report is run. Amount available would be the high credit available to you on all cards open, even if you do not use it. Thus, keep as few cards open as possible and keep low balances if you can. The fact that everybody approves you for a card and sends it to you is not good. If you have ten major credit cards with available credit in the amount of $10,000 each and only owe $2,500 on three cards, your scores will be based on the fact that you can owe $100,000 at any given time. Good sense would be to keep two major credit cards open and close out the rest by consumer request. All gas and retail stores accept Visa and MasterCard, so think twice before you go for the Pottery Barn credit card to get the 10% discount on those candlestick holders. If you have not used a card in two years, chances are you do not need it.
Payment history: This is the most important scoring factor. It shows your responsibility in making past payments and indicates how you will make the inquiring creditor’s payments. Open judgments, profit and loss write-offs, collection accounts, foreclosures and bankruptcies are part of your credit history. Each late payment type will affect your score differently. For instance, 30-day late payments on three major accounts in the last two months will affect your score more negatively than a bankruptcy discharge three years ago. Remember, the last 12 to 24 months are most important, and this would be the most crucial time to be good if you are planning on purchasing a home.
Tips: Obtain a free copy of your credit report at least once a year and review it. (Contacting the three main bureaus directly, for this does not count as inquiry.)
Contact each bureau concerning errors or accounts that have been paid or closed. Send a cover letter and any supporting documents as proof. Ask to have your report updated within the required 30-day period and ask for revised report for your review.
Make a list of any collection, judgment and profit and loss write-offs. Contact the creditors directly and ask them to settle on the account. When they accept, ask them to send you a letter accepting your offer before you send them your check. Send this letter to the bureaus with proof of payment, asking them to update your account and send a revised report.
Close any unnecessary accounts by writing a letter directly to the creditor asking that your account be closed, then, report to the bureaus that it has been closed by consumer request.
Ask the bureaus to remove any inquiries from your report that are older than two years.
If you declare bankruptcy, so the following immediately after the bankruptcy has been approved: send a discharge letter to the bureaus with the attached creditor schedules asking them to show that these items have been included in the bankruptcy. This will show that they are no longer owed and will not be considered a debt. Otherwise they will probably show as open judgments or profit and loss write-offs. These would be huge negatives.
Ask the bureaus to remove any foreclosure or bankruptcy from your record after 10 years. You can actually start at seven years. Sometimes this works and it also removes anything that was included in the bankruptcy. Remove judgments and collection accounts after seven years.
Make sure that student loans show as consolidates, deferred or paid off. This always affects your score.
If you do not have enough credit or have none, start by establishing an account with Capital One or another secured lender.
If there has been irreparable damage to your credit, you are entitled to place a 100-word narrative on the report itself to explain. (i.e. stolen credit card, same name fraudulent use of your social security number.) The creditors will be alerted to these comments and will review them.
Corey
I have been in the real estate industry since the early 80′s. I was a bank closing attorney, and now a full time mortgage broker. I remember the days when we ran a three-bureau credit report for clients and did an analysis of late payments and credit inquiries. We used to be able to obtain a written explanation for poor credit from the borrower and beg the lender to accept it. Illness, loss of employment, divorce and death were always good excuses for missing a car payment. My clients wrote lengthy, sorrowful explanations for their deadbeat credit. The people reviewing the file took out the tissue box and approved the loan anyway.
Thanks to Fair Isaac and Company, those explanations are no longer required. Most lenders will not even accept a letter, no matter how tearful it will make the underwriter. We now use a scoring process referred to as a FICO score. This is a mathematical formula calculating your credit risk based on five main factors and comparing your credit score to that of others [credit] in the system. There are three major reporting agencies, each basing their score on a slightly different formula. Lenders will look at the middle score of all three (as opposed to averaging).
When shopping for a home, the first question a realtor will ask is “Do you have a pre-approval letter?” When going to get a pre-approval from a lender, the first question a loan officer will ask you is “How is your credit?” Here you will learn how to obtain your credit report, get your credit score and improve it. If you are considering buying a house in the next year, I suggest you begin working on it now.
A credit score can range from 450 to 850- 850 being the best. The acceptable cutoff for Fannie Mae is 620, although they have accepted much lower scores with compensating factors. A compensating factor would be considerable amount of equity in the property, low income to expense ratios, or a lot liquid assets. There are alternative lenders and loan programs for people with bad credit and no compensating factors. You may get a higher interest rate or have to put down more money.
The main items included in the FICO formula are:
Types of Credit: Mortgages, lines of credit, student loans, car loans, major credit cards and retail cards. They (the computer) will look at how many types of credit and how many of each do you have. Although it is not required, a greater mix shows a mature and responsible borrower. You should have at least three active accounts and one major credit card. A score will not register unless there is one piece of credit that has been used for a minimum of six months. Most banks prefer four active trade lines with a 24 month history. Mortgage history is given the most weight. Retail store and gas cards are given the least. Make sure that you use your cards, but do not forget to pay them on time. If you have no credit, start with a secured credit card, store card and move up to Visa/MasterCard.
Inquiries: Inquires and obtaining new credit will always affect your FICO score. An inquiry is when a potential creditor does a credit check to see if you qualify to obtain credit from them (ie: you are shopping for a car at multiple dealers whom all run a credit check on you to see if you qualify for a loan.) Every time you apply for credit, an inquiry will show up on your credit report. If it does not result in a new trade line, it will negatively affect your credit. If it does result in new credit, the trade line will be new and will have a potentially negative effect until you have a proven history with the account. An inquiry stays on your credit report for 24 months. It is your responsibility to request the credit agency (each of the three individually) to remove them after 24 months. So, do not have a company run your credit unless, you have decided to do business with them. Do not obtain free credit reports over the internet. Do not get a new store credit card, simply to obtain the discount off of your first purchase.
Length of credit history: The longer you have credit history, the better your scores. Having a few credit items for a period of 12 months is better than having many credit items for six months. A rapid account buildup looks too new and risky and will affect your scores negatively.
Amounts owed and amounts available: Amount owed is the total of your balances on your credit cards when the report is run. Amount available would be the high credit available to you on all cards open, even if you do not use it. Thus, keep as few cards open as possible and keep low balances if you can. The fact that everybody approves you for a card and sends it to you is not good. If you have ten major credit cards with available credit in the amount of $10,000 each and only owe $2,500 on three cards, your scores will be based on the fact that you can owe $100,000 at any given time. Good sense would be to keep two major credit cards open and close out the rest by consumer request. All gas and retail stores accept Visa and MasterCard, so think twice before you go for the Pottery Barn credit card to get the 10% discount on those candlestick holders. If you have not used a card in two years, chances are you do not need it.
Payment history: This is the most important scoring factor. It shows your responsibility in making past payments and indicates how you will make the inquiring creditor’s payments. Open judgments, profit and loss write-offs, collection accounts, foreclosures and bankruptcies are part of your credit history. Each late payment type will affect your score differently. For instance, 30-day late payments on three major accounts in the last two months will affect your score more negatively than a bankruptcy discharge three years ago. Remember, the last 12 to 24 months are most important, and this would be the most crucial time to be good if you are planning on purchasing a home.
Tips: Obtain a free copy of your credit report at least once a year and review it. (Contacting the three main bureaus directly, for this does not count as inquiry.)
Contact each bureau concerning errors or accounts that have been paid or closed. Send a cover letter and any supporting documents as proof. Ask to have your report updated within the required 30-day period and ask for revised report for your review.
Make a list of any collection, judgment and profit and loss write-offs. Contact the creditors directly and ask them to settle on the account. When they accept, ask them to send you a letter accepting your offer before you send them your check. Send this letter to the bureaus with proof of payment, asking them to update your account and send a revised report.
Close any unnecessary accounts by writing a letter directly to the creditor asking that your account be closed, then, report to the bureaus that it has been closed by consumer request.
Ask the bureaus to remove any inquiries from your report that are older than two years.
If you declare bankruptcy, so the following immediately after the bankruptcy has been approved: send a discharge letter to the bureaus with the attached creditor schedules asking them to show that these items have been included in the bankruptcy. This will show that they are no longer owed and will not be considered a debt. Otherwise they will probably show as open judgments or profit and loss write-offs. These would be huge negatives.
Ask the bureaus to remove any foreclosure or bankruptcy from your record after 10 years. You can actually start at seven years. Sometimes this works and it also removes anything that was included in the bankruptcy. Remove judgments and collection accounts after seven years.
Make sure that student loans show as consolidates, deferred or paid off. This always affects your score.
If you do not have enough credit or have none, start by establishing an account with Capital One or another secured lender.
If there has been irreparable damage to your credit, you are entitled to place a 100-word narrative on the report itself to explain. (i.e. stolen credit card, same name fraudulent use of your social security number.) The creditors will be alerted to these comments and will review them.
Corey