2 Mortgage lenders must determine if borrowers have the willingness and ability to repay their loans. To help make this determination, lenders will consider your credit report and score. Credit records include the following information: • Identifying information (name, address, employer, Social Security number, etc.) • Debt and payment history on credit cards, student loans, consumer loans, car loans, etc. • Any previous collections • Any tax liens, judgments, and bankruptcies • Inquiries for additional credit UNDERSTANDING YOUR CREDIT SCORE A credit score is generated when a credit reporting agency runs credit information through its scoring system or model. When information on your credit report changes, your credit score may change as well. Also, your score may be different at each of the main credit reporting agencies. The score from each agency uses only the data in your credit report in that company’s system. If your scores from the credit reporting agencies are different, it’s probably because of information and system differences. By law, you are entitled to receive one free credit report from each of the three national credit reporting agencies — Equifax, Experian and TransUnion — per year. You can order them or view them immediately online at www.annualcreditreport.com — after you provide information to identify yourself. With this service, it is easy to check your credit report at all three agencies once a year. For your scores to be calculated, each of your three credit reports must contain at least one account that has been open for at least six months. In addition, each report must contain at least one account that has been updated in the past six months. This ensures that enough information — and enough recent information — is in your report to generate a credit score. MBA.ORG/CONSUMERTOOLS 15469 FIVE STEPS TO HOMEOWNERSHIP Evaluate Your Credit
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Mortgage lenders must determine if borrowers have the willingness and ability to repay their
loans. To help make this determination, lenders will consider your credit report and score.
Credit records include the following information:
• Identifying information (name, address, employer, Social Security number, etc.)
• Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
• Any previous collections
• Any tax liens, judgments, and bankruptcies
• Inquiries for additional credit
UNDERSTANDING YOUR CREDIT SCORE
A credit score is generated when a credit reporting agency runs credit information through its scoring system or model. When information on your credit report changes, your credit score may change as well. Also, your score may be different at each of the main credit reporting agencies. The score from each agency uses only the data in your credit report in that company’s system. If your
scores from the credit reporting agencies are different, it’s probably because of information and system differences.
By law, you are entitled to receive one free credit report from each of the three national credit reporting agencies — Equifax, Experian and TransUnion — per year. You can order them or view them immediately online at www.annualcreditreport.com — after you provide information to identify yourself. With this service, it is easy to check your credit report at all three agencies once a year.
For your scores to be calculated, each of your three credit reports must contain at least one account that has been open for at least six months. In addition, each report must contain at least one account that has been updated in the past six months. This ensures that enough information — and enough recent information — is in your report to generate a credit score.
mba.org/consumertools15469
FIVE STEPS TO HOMEOWNERSHIP
Evaluate Your Credit
Credit Score ModelsThere are several credit scoring models used by lenders. While they may vary slightly, they are all based on the same basic criteria. The factors considered in most credit scoring systems include:
• How you have handled credit in the past
• The amount of credit you have used compared to your credit limit
• The length of your credit history
• The number and types of credit accounts
• How active you are in applying for new credit
• Public records pertaining to credit
These factors impact your score differently. For example, in one scoring model, this is how information is weighted:
• Payment history: 35 percent
• Amounts owed: 30 percent
• Length of credit history: 15 percent
• New credit: 10 percent
• Types of credit used: 10 percent
It is important to note that there are several factors that may NOT be considered in credit scoring, including:
• Race
• Religion
• Gender
• Marital status
• Nationality
• Age
• Receipt of public assistance
Important Facts About Credit ScoresNo single factor, such as a previous collection or a bankruptcy, can cause a “low” score. Credit scores improve as credit behavior improves. Recent credit behavior weighs more heavily on scores than credit behavior in the past. As time passes, the relative weight of a poor mark on your credit record diminishes. However, there are no quick fixes. A short-term improvement will not cause a low score to improve dramatically.
HOW YOU CAN IMPROVE YOUR CREDIT SCORE
Pay Your Bills on TimeThis is the single most important thing you can do to improve your credit rating. Be sure to pay at least the minimum amount required by the date it is due. The faster you start paying your bills on time, the quicker your credit rating will improve.
Minimize Your DebtPay down high credit card balances. Don’t charge to your credit limits. The closer you charge to your credit limits, the lower your credit rating will be.
Apply for New Credit CautiouslyDon’t apply for loans or credit cards unnecessarily. The more you apply for new credit, the more you may appear to be taking on more debt than you can handle, and the lower your credit rating may be. Limit your department store cards and finance company loans (such as car loans). The more department store cards or finance company loans you have, the lower your credit rating may be.
Pay off and close accounts you don’t use on a regular basis or don’t really need, but note that closing an account doesn’t make it go away. A closed account will
still show up on your credit report and it may show the payment history, although it will be noted as closed and paid. Also be aware that an account that was turned over to a collection agency will stay on your report for seven years regardless of when you paid it off.
You Need Credit to Get CreditOn the other hand, having a very limited credit history can have a negative effect on a credit rating. If you don’t have a credit history, consider opening an account and using it responsibly, making at least the minimum monthly payments.
Don’t Spread Your Credit Shopping Too FarWhen you decide to shop for a mortgage lender, do so within a focused period of time. Credit model scores distinguish between a search for a single loan and a search for many new credit lines in part by the length of time over which credit inquiries occur. Note that it’s OK to request and check your own credit report. This won’t affect your score as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.
ABOUT CREDIT REPORTS
Review and protect your credit records. Before applying for new credit, such as a mortgage, be sure your credit records are accurate. Check your report at all three major credit companies — Equifax, Experian and TransUnion — annually. If you’ve been denied credit, you can always get a free credit report (regardless of whether you’ve already received your annual free report). If any of your credit reports contain 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.
The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) are responsible for enforcing the FCRA. The FTC and CFPB also publish information on their web sites that contain additional information on credit reports. These materials are available online at:
