|
As you might have already learned, credit
is one the most important factors lenders look to
determine borrowers' risk. Your credit score may have a
direct impact on what interest rates you might qualify
for. Lenders might even decline your loan application if
your credit score doesn't meet their minimum requirement.
So I like to share with you the things you should know
about credit reports and what to do if you believe your
credit reports are not accurate and want to consider
re-scoring. Credit Scores -
Things To Remember
1) Credit bureau scores are often called
"FICO scores" because most credit bureau scores used in
the US are produced from software developed by Fair Isaac
and Company. FICO scores are provided to lenders by the
three major credit reporting agencies: Equifax, Experian
and TransUnion. Credit scores are based on the borrower's
good and bad credit data.
2) Credit scores range from 350 to 950,
depending on the bureau: Experian (XP), TransUnion (TU)
and Equifax (EF). The score predicts the risk of the
borrower defaulting on the mortgage.
3) About 40 different factors are used
to calculate score cards that when combined yield the FICO
score.
4) Credit scoring is very time
sensitive. The most recent the credit activity, the most
impact it has on the score.
5) You must have at least one active
tradeline within the past six months to generate a credit
score.
6) There are many "credit scores" on the
market. The mortgage industry will only accept the FICO
score.
7) If the borrower has more than one
credit file with a bureau, an additional credit score will
be generated. This is because the client has used
different names. In this case, use the name with the
highest score.
8) The score is calculated by the
following formula:
- Past credit history = 35% (good and
bad payment history)
- Outstanding debt = 30%
- Length of time credit has been
established = 15%
- Types of credit = 10%
- Inquires = 10%
Past credit history includes credit
repayment, as well as bankruptcies, foreclosures, tax
liens from public records.
Outstanding debt includes the number of
accounts with balances, the proportion of balance to
credit limit, and the amount owed on accounts.
The "date opened" column of the credit
report indicates how "seasoned" the account is. Accounts
opened for a longer period are a better predictor of risk.
Types of credit include any accounts
with "finance", or higher interest rate type companies.
These would indicate an inability for the borrower to
obtain credit elsewhere.
Not all inquires affect the credit
score. Multiple auto and mortgage inquires, within a
14-day period count as one. A maximum of 7 inquires are
used to calculate the score. Inquires used to maintain an
existing account do not affect the score. Also, inquires
for direct mail, or phone solicitation does not affect the
score.
More Things To Remember
- Good and bad credit will stay on your
report for at least 7 years from the date of last
activity.
- Bankruptcy and Federal tax liens will
stay on for 10 years.
- There is no such thing as "credit
clean-up", only credit correction.
- A divorce decree will not release
either party from their financial responsibility to pay
joint accounts.
- Paying off a derogatory account will
not remove it from the credit report.
- The 3 major credit repositories do
not share data.
- A payment is reported late only when
it is made at least 30 days after the due date.
- Receiving a pre-approved credit card
offer does not mean that your credit report was ordered.
- The credit bureaus make every effort
to report accurate credit information. This includes the
good credit as well as the bad.
- If possible, do a loan on 1 person
(the person with the best FICO score) and add other
persons to the title later.
- To get a good loan there must be a
certain number of seasoned tradelines on the credit
report. 4 is about the optimal number of tradelines.
When Considering Re-Scoring
As a general rule, removal of incorrect
data will yield better results than modifying existing
data.
The credit bureaus do not have the
ability to "back-date" information. Even though the
account was paid months ago, the date of last activity, or
paid date, will be when the bureau updates the account.
In most cases, items over 2 years old
are not worth re-scoring.
Always check to see which bureaus are
reporting the incorrect data. Just because all three
bureaus report the trade doesn't mean that all 3 have the
wrong information.
Re-score only those bureaus that you
need in order to close your loan. Instruct the borrower to
contact the bureaus directly after the loan has closed in
order to correct all the erroneous data.
What Does It Take To Have A High
Credit Score?
- About 3 to 5 credit cards with
balances below 30% of their available credit
- At least 3 years of clean credit
history
- One or two seasoned installment
accounts
- One seasoned mortgage account
- No finance company accounts
- No new accounts opened within the
last 2 years
- Virtually no inquires for new credit
No credit history? Uneven credit record?
CircleLending can help you obtain the funds you need from people in your personal network. Quickly. Easily.
The service offers everything you need to professionally approach and structure custom loans from someone you know. From the initial agreement through payment processing services, CircleLending provides a formal, yet flexible, framework for a professional business-like transaction. As a neutral third party, they ensure clear communication and protect your personal relationship. Check it out. It’s free to get started.
|
