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Facts
About Credit Scores
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Your
Credit Score.
What it is.
What it means.
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You may have heard
of credit scores and wonder what they are. How do they affect your
ability to get it a loan? How do they affect the interest rate and
the points you have to pay? You may wonder whether your credit score
is accurate. Here we will explain credit scores and how you
can improve your score.
Choose
a topic below:
- What
is a Credit Score?
- What
is a Fico Score?
- How
can Credit Scores affect the price of a loan?
- How
to improve your Credit Score:
- How
to correct mistakes on your credit report:
What
Is A Credit Score?
When lenders evaluate
your loan application, they use a process called underwriting - they try
to evaluate your ability and willingness to repay your loan. They
judge your ability to repay by looking at the amount of your income and
how stable your past earnings have been. This helps them to determine
if you can afford the loan payments. They judge your willingness
to repay by looking at your past credit history. Generally speaking,
someone who has made payments on time in the past will probably do so
in the future.
Lenders want their
evaluation to be as accurate, objective and consistent as possible.
In an effort to achieve these goals, mortgage lenders recently began using
credit scores to help in the underwriting process. Credit scores
are numerical values that rank individual's according to their credit
history at a given point in time. Your score is based on your past
payment history, the amount of credit you have outstanding, the amount
of credit you have available, and other factors. According to Fannie
Mae and Freddie Mac, two of the largest purchasers of home loans from
lenders, credit scores have proven to be very good predictors of whether
a borrower will repay his or her loan.
Many lenders use credit
scores to help evaluate loan applications. However, a credit score
is just one of many factors considered in the underwriting process.
Lenders look at the entire picture. Even when a credit score is
low, lenders try to find other factors that could overcome the negative
credit issues and satisfy their underwriting criteria. The decision
to approve or deny a loan may be made based on sound, flexible underwriting
guidelines.
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What
Is A FICO Score?
"FICO" scores are
a type of credit score developed by a Fair Isaac & Company.
FICO scores use credit bureau information to obtain a score which indicates
how likely someone is to make their loan payments on time. Millions
of consumers' credit bureau records were used to develop the scorecards,
and all of the consumer data - not just negative information - was included
to develop the system. FICO scores range from approximately
350 to 900. The higher the score the more likely someone is to make
their payments. Similarly, the lower the score the more likely someone
is not to make their payments.
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How
Can Credit Scores Affect The Price Of A Loan?
Just as credit scores
are one factor in determining if you qualify for a loan, they may also
be a factor in determining the price of your loan. The price of
a loan means the interest rate and the points charged by the lender and/or
a mortgage broker. The price charged for a loan will be higher or
lower depending on various factors.
Credit scores are
used in determining the price of a loan because they are believed to be
good predictors of the borrowers ability and willingness to repay a loan.
Many mortgage loans are sold to investors, and investors will pay a more
favorable price for loans they feel have a low risk of default.
Fannie Mae and Freddie Mac use credit scores as their analysis when
pricing loans they buy from lenders because of this very reason.
Thus, applicants with lower credit scores may pay higher prices for their
loans because of the higher risk of default and loss.
There are many other
factors relating to an individual borrowers situation that may also affect
the price of a loan, often even more so than credit scores. These
include: the type of property securing the loan (detached single family
residence, duplex, etc.); the amount of the borrower's equity in the property;
the lenders costs to make the loan; and the type of loan selected.
For example, a loan secured by a single family residence may have a lower
price than a loan secured by a duplex because duplexes are more difficult
to sell than single family residences. Similarly, the price of a
loan where the borrower has made a 20% down payment may be less than a
loan where the borrower has made a 5% down payment because the first borrower
has more equity in the property and, thus, the greater incentive to make
the payments on the loan.
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How
To Improve Your Credit Score:
Because each borrower's
credit score is a reflection of his or her unique credit profile, it is
not possible to quantify in advance exactly how each item in your credit
history numerically impacts upon your ultimate credit score. No
one can tell you, for example, how much your credit score will be affected
if you pay off a
delinquent account or cancel a credit card. We do know, however,
that there are things you can do to improve your credit profile.
Some of the factors which may impact your credit scores include:
- Making
timely payments:
Making your payments on time is the best way to increase your score.
Delinquency, foreclosures, bankruptcies and judgments will decrease
your score.
- Limit
the number of trade lines:
The number of credit cards, lines of credit and other types of credit
(" trade lines ") you have available will affect your score. If
you have a lot of trade lines, this may decrease your score because
of the risk that you might not be able to pay off all of your accounts,
and this may affect your ability to pay off your mortgage loan.
You may wish to consider canceling credit cards you do not use regularly
or choosing 2 to 4 cards to use and canceling the rest. If you
close or cancel an account voluntarily, it will not have a negative
effect on your credit score. You may wish to reconsider accepting
"pre-approved" offers for your credit cards, or if you accept an offer,
perhaps you should cancel another credit card. On the other hand,
if you have no trade lines, this will likely decrease your score.
Lenders generally want to see that you have some available credit and
that you can handle your credit wisely.
- Avoid
unnecessarily high credit limits:
Lenders also consider the amount of credit available to you (your credit
limit) compared to your income when making underwriting decisions.
Having credit limits that are too high relative to your income can affect
your score just like having too many trade lines.
- How
you use credit:
The amount outstanding on each of your credit cards will also affect
your score. In general, the lower the amount outstanding, the
more likely it is that your score will be higher.
- Do
not apply for credit you do not need:
Whenever you
apply for credit, the creditor will obtain a credit report from one
or more of the three credit bureaus. Each such credit inquiry
will stay on your record and will affect your credit score.
Even if you are turned down for credit or change your mind and withdraw
your application, your credit score will be affected. This is
because each inquiry suggests that you are increasing the amount of
credit available to you. Before you give your Social Security
number to anyone, make certain you know how they are going to use it.
A Social Security number is almost always required to run a credit report.
But don't let the fear of inquiries stop you from shopping for the best
deal when you need auto or home financing. Recently, the credit
bureaus have recognized that borrowers may apply for credit at more
than one place for the same transaction. Generally, the credit
scoring companies will consider all auto or mortgage loan inquiries
received it in a 14 day period as one inquiry so the additional inquiries
will not affect your credit score. And remember, if you order
a copy of your credit report to make sure it is accurate, this will
not show up as an inquiry on your record.
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How
To Correct Mistakes On Your Credit Report:
Because credit scores
are based upon your credit record, it is very important that you obtained
a copy of your credit report from time to time to make certain the information
is accurate. If the information is not accurate (for example, someone
else with the same name as yours may have their credit mixed up with yours),
you should immediately take steps to get it corrected. No one can
do this but you.
Lenders, credit card
issuers and other credit providers send regular reports about their accounts
to the major credit bureaus. This is where the information on your
credit report comes from. There are three major credit bureaus;
you should contact each one because not all credit providers report to
each bureau. Also, if you have a joint credit (for example, if you
are married and have joint accounts with your spouse), it is a good idea
to get the credit report for each of you because there may be information
on one report that does not appear on the other. If you ask for
a copy of your credit report to check your credit history, it will not
affect your credit score. You can reach the 3 credit bureaus
at the following phone numbers:
| Equifax: |
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800-685-1111 |
| TransUnion: |
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610-690-4949 |
| Experian
(TRW): |
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800-682-7654 |
In most cases, there
is a small charge to obtain a copy of your credit report. If you
find errors on your credit report, follow the directions included with
your credit report regarding disputes or errors. Generally, you
must write the credit bureau and advise them of the error or dispute.
You may need to provide proof that the bill was paid or other information
about the claim or dispute. The credit bureau will then contact
the provider of credit who reported the information, and the provider
will have 30 days to respond. If the provider of credit agrees that
there is an error, it will instruct the credit bureau to delete the item
from your credit report.
You should allow at
least 30 days after you have notified a credit bureau of an error in your
credit report for that error to be investigated and resolved. It
may take longer depending upon the nature of the error and the investigation
to be done.
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Need
more mortgage loan information?
Go
to the Mortgage Information page
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