Wednesday, March 16, 2005

Credit Reports Defined

Your Credit Report Is A Record of Your Financial Behavior.
These records deonote patterns established over your borrowing lifetime You may be surprised to see records of employment and mortgages or credit card accounts over twenty years ago still reporting. Three national credit reporting bureaus maintain these records. These reporting bureaus: are Equifax, Experian, and Trans Union.

Credit reports (also known as your credit file, credit profile, or credit history) contain: Your identification, including your name, telephone number, and address, as well as your Social Security Number, birth date, and employer. (The information usually includes previous addresses and employers too.)

Your credit history, which details how you pay your bills to banks, credit unions, finance companies, mortgage companies, and retail stores. Also included are any existing public records, such as bankruptcies, judgments, and tax liens. Inquiries, or authorized credit checks by companies receiving your applications for credit, or your name for the purpose of offering you credit (usually within a 90 day period) are also reported and can affect your score negatively. Usually 1 to 3 points per 'hit'.

Your business accounts, medical history, purchases paid by cash or check, as well as your gender, national origin, race, and religion are not contained in a credit report.

How Credit Scores Work & What Lenders Look For:
When you apply for loans, credit cards, and/or leases, issuers review your credit report while evaluating your application, as well as your credit score(s). Today, some employers review the credit reports of applicants. Your credit also may be checked to qualify you for overdraft protection as well as to determine your ATM limit. Also, most insurance companies check their customer’s credit data when considering applicants or even setting premiums. The score information they receive helps establish the liklihood of claims filed for financial risk categories.

The information on your credit report detailing each of your accounts is sent to the credit bureaus by lenders. Also, information is obtained from public records, or provided by consumers themselves. Information usually remains on credit reports for seven to 10 years from the date the account is paid and/or closed, except for adverse information. Adverse information usually is recorded for seven years and generally includes late payments and other delinquencies as well as any civil judgments and bankruptcies. Foreclosures stay on you report 10 years but all these things have less and less effect as time goes on. Unsatisfied tax liens may remain on credit reports indefinitely and can be real show stoppers!

Credit Score Rating System: A Numbers Game
The FICO Score system was first invented by the Fair Issac Corporation. Lenders pull your credit report when taking a loan application. You should receive a copy of your report with your FICO Score and review from your lender or mortgage broker. Not all banks like to give you your report...I don't personally understand this approach to withholding information that you have every right to see. You can go to and order one free report every year.

Unfortunately, Free Credit Reports now offered to every US citizen (once a year) do not list you FICO Score. While the information provided in free reports is useful to verify that everything on your report is accurate, you still need to know your score to approach negotiating a rate for a mortgage or credit card. Your FICO Score puts you in a paticular 'risk category' and the better your score, the better interest rate you will be offered. It's the holy grail of credit risk. It's a great idea to order one Bureau (of the three) and see how that looks first. If anything is amiss you can dispute it...and then check again in a month or so with a 2nd request.

Your credit score is a numeric indication of how likely you are to repay debts such as loans or lines of credit. Credit scores also are designed to indicate your creditworthiness in comparison with other consumers. Credit scores are based on the data in your credit report and are generated by computers using artificial intelligence. The scoreing range is from 300 to 900. Because there are 3 bureaus, you will have 3 FICO Scores. The middle number is called your FICO Mid Score and that is the number most widely used to determine your risk category. Some lenders prefer a particular bureau's score and you can hope it's your higher score!

Many types of credit scores are used, including custom scores or Alternative Credit reporting for people who have not maintained credit accounts. In addition, each lender requires different score minimums for application evaluation and approval. Also, lenders may review several credit score reports before making a final decision during the course of an application. Underwriters have their preferred sources that report up to the minute information.

Because no one score is the definitive credit score, 720 and above is generally considered a high score, while scores below 600 are considered low. Still, cases always vary by lender. And, because so many different scoring methods are used, a score of 750 from one source may not indicate the same as a score of 750 from another. 700 seems to be a magic number for self employed people and 680 will suffice if you can document full employment for two years.

It seems frustrating, but the difference of one point..say 679 instead of 680..could mean the difference in a favorable interest rate. You may need to take some quick steps to improve your score! (Paying down a credit card under 30% balance is a good rule of thumb to improve your score within 30 days.) When you apply for a loan, your broker or banker should review any issues for you in person or over the phone after reviewing your Credit Report. They take into account other factors (including your current debt-to-income ratio) when you apply for a specific loan. Your broker or bank is legally required to give you a copy of your complete report and they should be able to explain the codes for you.

Lenders always obtain the most recent score whenever an applicant applies for credit because each person’s score changes every time information is added (reported) to credit bureau files. For example, your credit score may change when you pay a credit card bill, make a loan payment, or open a new line of credit.

Credit scoring is based on many factors that may include:
* Payment history
* Amount of available credit
* Amount of credit currently being used
* Length of credit history
* Recent requests for credit

Under the Equal Credit Opportunity Act, credit scoring may not use gender, martial status, national origin, race, or religion as factors.

Of course, lenders usually do not base credit decisions solely on credit scores. Lenders usually make other considerations, such as income and length of employment at current employer, when evaluating applications. Also, many consumers do not realize that achieving the best credit scores may take 20 to 30 years because lenders consider older credit histories optimal.

Become informed about the status of your business and personal partners credit scores before entering into any joint ventures. When you marry or enter into joint credit accounts such as bank or credit cards, the credit scores of your partner or spouse will automatically impact each other, often in a negative way if one party has lower scores.

You can assist another person in raising their score if they have minimal or no credit history. Tread carefully here! The reverse of the desired result can happen! Avoid this by keeping your finances appropriately separate. Discuss your concerns with your mortgage planner or banker before applying for joint credit of any kind. These days, the more time you have the better!

Wishing you every credit sanity,

©2005 susan templeton loannetter