Your Credit: Know Your Score

A credit score is a number that indicates how likely a borrower is to repay future debts. The most common credit score used by lenders is the FICO® score, which ranges from 300 – 850. The higher the score, the better. The FICO score is generated by a mathematical formula or scoring model. This scoring model applies the same standards to everyone and is not based on human judgement. Your FICO score affects how much money and what loan terms (interest rate, type of loan, etc.) lenders will offer you at any given time.

The credit reporting agencies Experian, TransUnion and Equifax collect and store individual consumer credit information that they use to generate a credit report. To generate a FICO credit score, the credit agency runs the data in a credit report through its FICO scoring model. When the information on your credit report changes, your credit score tends to change too.

Obtain a copy for free

By law, you are entitled to receive one free credit report from each of the three national credit reporting agencies once per year. You can order them by calling 1-877-322-8228 or view them immediately online at www.annualcreditreport. com - after you provide identification information. You also may order your credit score from each agency, but you will have to pay a small fee per score.

Data included in your credit report:

  • Identifying information (name, address, employer, Social Security number, etc.)
  • Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
  • Previous collections
  • Tax liens, judgments and bankruptcies
  • Inquiries for new credit

How payment and debt information ranks in your score:

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • New credit: 10 percent
  • Types of credit used: 10 percent

In general, when people talk about your "credit score," they are talking about your current FICO score. Many lenders get credit scores from smaller credit bureaus that typically get FICO scores from the national credit reporting agencies. However, some lenders generate their own credit scores or get them from a custom credit score developer. As a result, there is no one score used to make decisions about all borrowers.

Your FICO score may be different at each of the main credit reporting agencies. The FICO score from each credit reporting agency considers only the data in your credit report at that agency . If your current scores from the credit reporting agencies are different, it's probably because the information those agencies have on you differs. You should check your report at all three agencies once a year.

If any of your credit reports contains inaccuracies, contact the credit agency that compiled the report. All three agencies detail their dispute processes on their Web sites. The Fair Credit Reporting Act (FCRA) requires the agency to investigate your disputed items within 30 days. The credit reporting agency must provide you with written notice of the results of the investigation within five days of its completion, including a copy of your credit report if it has changed based upon the dispute. If ever you are denied credit, you are entitled to a free credit report.

Head off unwanted surprises

Before meeting with your mortgage broker or lender, obtain copies of your three credit reports. Review them before your meeting to check for errors. If you see errors, take steps to correct them before you submit any loan application.

If you have had credit problems, be prepared to discuss them honestly and provide your lender with a written explanation. Every lender knows there are unavoidable reasons for credit lapses, such as unemployment, illness or other financial strains.

If you have had a problem but have worked with your creditors to correct it, and your payments have been on time for a year or more, you’ll probably have nothing to worry about.

If a lender asks you to pay off an account to improve your debt ratio, it typically takes 30 days for the new information to appear on your credit report. If you need to prove this sooner, talk to the creditor about getting a letter or ask the closing attorney to indicate the paid account on the closing statement.

Tips to improve your credit score

  • Pay loans first.
  • Pay off credit cards every month.
  • Remind yourself that credit cards are loans and use them sparingly.
  • Charge less than your card’s credit limit.
  • Only apply for credit you need – not to simply get a promotions discount on a retail purchase.
  • Pay more than the minimum due each month.
  • Keep track of bills and pay them on time.

Source: Mortgage Bankers Association