Anyone applying for a mortgage will probably hear the term
"credit score" mentioned at least once, and you'll ask "What's
my credit score?" Depending on where you live, you may or may
not get a straight answer. Some lenders or credit companies may
tell you that they cannot legally release it to you, which is
not true. The law does not prohibit the release of this
information. However, in most states, lenders and mortgage
professionals are not required to tell you even though many
times that is the primary consideration being used when
extending or refusing you credit.
A "credit score" can carry a lot of weight. It can be used to
determine the size of your loan, the terms on which the money is
lent to you (i.e. interest rate, length of time to repay, and
whether or not you're offered a long-term fixed or short-term
variable rate), the amount of related fees, and your ability to
purchase mortgage insurance. In the long run, your credit score
can cost you quite a bit of money.
For example, inability to purchase mortgage insurance could mean
that you'll have to bring a larger downpayment to the closing
table when purchasing a home. Or, an individual with low credit
scores can expect lenders to charge him higher interest rates
because the lenders feel they are taking a greater risk with him.
Lenders are concerned with only one question: "will you repay me
as agreed or will you default?" Credit scores are considered
good predictors of a consumer's ability and willingness to
repay. A lower score predicts that you're more likely to
default, so they charge a higher fee (interest rate) to loan you
the money. That higher interest rate could make a big difference
in the amount of money you pay out each month for housing and
that translates into thousands of additional dollars paid over
the life of your loan.
If your credit score is really low (520 or less), it can even be
the single determinant used to deny your loan application
without considering anything else about you or your credit
situation. So, as you see, your credit score can be very
important.
The state of California recently passed a law mandating that
credit score information be given to prospective borrowers if
they ask for it. Other states, as well as the federal
government, are considering passing similar legislation. So, if
you're in California and applying for financing, ask for your
credit score and an explanation of how it's being applied to
your application. For the rest of us, here's more information
about credit scores and ways to improve yours as much as
possible.
A credit score (also called a FICO score) is a
computer-generated numerical grade given to each consumer based
on a wide range of criteria. This grade is used by lenders to
predict their risk in doing business with you by analyzing your
past behavior. FICO scores are generated and released through
the big three credit reporting bureaus. Each bureau has a name
for its credit/FICO score. They are as follows: Equifax calls it
a Beacon score, TransUnion calls it an Empirica score, and
Experian (formerly TRW) calls it a Fair Isaac score. FICO scores
can change day to day depending on what information is reported
to the credit bureau(s).
The information used to calculate your credit score is widely
varied, but each factor is given a numeric equivalent and added
into the equation. Some of the thirty or so factors used to
figure a FICO score are: time on the job; how long you've lived
at your current address; how many and what types of accounts you
have; how high your account balances are; how much unused credit
you maintain each month; the age or newness of your accounts;
and of course, the negative factors such as too little or too
much credit, too many inquiries in the last 90 days, late
payments, collections, consumer credit counseling, judgments,
bankruptcies and foreclosures.
Credit scores range from 300 to 900, and scores from 640 to 700
are considered excellent. Most lenders flatly refuse to even
consider scores of less than 500, but still others will approve
loans to new borrowers who have no credit scores at all.
Needless to say, the borrowers with the "excellent" scores
qualify for the most favorable rates and terms.
To find out what your credit score is you'll have to contact a
lender or mortgage professional because the report you request
from any of the credit reporting bureaus will not show your
score. However, requesting your credit report (even from one of
the bureaus) can be a great first step to repairing and/or
improving your credit score. So, at least once a year, get a
copy of your report and READ ALL OF IT. The report will come
with instructions on how to read it and how to correct
misinformation. Once you have your report, do the following:
1. Look for anything that may indicate someone else is using
your credit such as reports that you have changed your address
or newly opened accounts that you are not familiar with, etc.
This is a good way to make sure you are not the victim of an
identity thief.
2. Correct errors on your report without delay by following the
instructions that came with it.
3. Pay your bills on time every time, ESPECIALLY YOUR MORTGAGE.
Also remember that some bills that wouldn't ordinarily report to
the credit bureaus (such as your rent, utilities, phone bills
and medical bills) will show up on your credit report as
delinquencies if you don't pay them, and these "little,
unimportant" bills can pull your credit score down just as
quickly as other larger accounts.
4. Close any unnecessary accounts. Most lenders prefer that
borrowers have a minimum of four open (active) accounts over the
last 24 months but once you've reached four, the fewer
additional accounts the better.
5. Pay down your credit card accounts. Keeping your balances
under 50% of the approved limits is a definite plus for credit
scoring.
6. Pay off collections and judgements. Full payoff is always
preferable but if necessary, contact the creditor and arrange a
settlement for less than the full amount owed. Afterward, make
sure that you get written confirmation that the debt has been
paid and make sure that the credit bureau reflects this on your
credit report.
7. Think twice before authorizing new inquiries on your credit
report. Too many in a short period of time really makes lenders
nervous.
The three credit report bureaus are listed below. You can
contact each of them by phone, mail or online. Credit reports
cost about $9 each, unless you've been turned down for credit in
the last 60 days, in which case, the report is free. Your credit
report request should include your full name, social security
number, current address, date of birth, and previous address if
you've moved in the last 2 years.
Equifax P. O. Box 105496 Atlanta, GA 30348-5496 800-997-2493
www.equifax.com
TransUnion P. O. Box 1000 Chester, PA 19022 800-888-4213
www.transunion.com
Experian (formerly TRW) P. O. Box 9595 Allen, TX 75013-0036
888-397-3742 www.experian.com
About the author:
Carole Talley has been involved in numerous aspects of real
estate such as examining property titles, originating and
closing mortgage loans, purchase and sales contracts and more.
She and husband, J. R., are veteran Real Estate
Investors/Entrepreneurs in Ohio. For more information about this
lucrative investment tool, contact them at www.mrdendi.cjb.net.
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