Understanding Your Credit Score
The subject of credit scoring has become an increasingly hot topic, and for good reason. For many years, the general public only associated the concept of credit scoring with the need to purchase high-ticket items such as a new car or a home. Today, credit scoring goes much further. Your credit score can affect your ability to get a good rate on commodities such as car insurance, cell phones, or even determine whether or not you get the job that you want. Indeed, the financial snapshot provided by the credit score has also become a gauge for many employers, especially those who seek to place employees in a position of financial responsibility.
The History of Credit Scoring
The credit score system used today has evolved since the 1960s. It was originally designed to provide lenders with financial profiles on consumers who wished to borrow money. The lenders' biggest concern was whether or not an individual had the ability to repay a loan, and establish what percentage of risk might be involved.
Congress passed the Fair Credit Reporting Act in 1971 to establish guidelines for fair practices in regard to the use of credit scoring. This law was designed to promote accuracy in reporting and protect the privacy of consumers. In light of the increased use of credit scoring and a growing fear of identity theft, recent legislation has been passed to further protect Americans and improve consumer awareness.
The Fair and Accurate Credit Transactions Act of 2003 (sometimes referred to as The FACT ACT or FACTA) was signed by President George W. Bush on December 4, 2003. This amends the Fair Credit Reporting Act, and provides each American the ability to obtain one free credit report every 12 months from each of the three main credit reporting agencies (CRAs); Equifax, Experian and TransUnion. Those bureaus have created a central web site, www.annualcreditreport.com, to accommodate Americans who wish to obtain copies of their credit report.*
* Phase in of access to free credit reports from West Coast to East Coast nationwide will be completed as of September 1st, 2005. See www.annualcreditreport.com for a zoning map.
DO CALL YOUR LOAN CONSULTANT – If you receive notification from a collection agency or creditor that could potentially have an adverse effect on your credit score, call us so we can try to direct you to the right resources and prevent any derogatory reporting to credit bureaus.
Credit Remediation
If you feel you would prefer to work with a credit repair service rather than try to tackle credit repair issues on your own, please give us a call so we can help you sort through your options. We will do our best to refer you to a reputable credit remediation service and guide you in the right direction once we have the opportunity to review your credit report with you. The Federal Trade Commission (FTC) regulates credit repair services and provides free information to help consumers spot, stop and avoid doing business with credit repair companies that are not reputable. Their web site is located at http://www.ftc.gov. You can also write to the FTC to request a copy of their free brochure titled Credit Repair: Self Help May Be Best, which includes information about credit clinics. The address to write to is: Federal Trade Commission Sixth and Pennsylvania Avenues, NW Washington, DC 20004 If you have any complaints regarding your credit report or credit remediation services that you wish to report to the FTC, contact them at: Federal Trade Commission Consumer Response Center, Room 130 600 Pennsylvania Avenue, NW Washington, DC 20580.
DON’T CLOSE CREDIT CARD ACCOUNTS – If you close a credit card account, it can affect your ratio of debt to available credit which has a 30% impact on your credit score. If you really want to close an account, do it after you close your mortgage loan.
DON’T MAX OUT OR OVER CHARGE EXISTING CREDIT CARDS - Running up your credit cards is the fastest way to bring your score down, and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit cards below 30 percent of the available credit limit.
DON'T CONSOLIDATE DEBT TO ONE OR TWO CARDS - Once again, we don't want you to change your ratio of debt to available credit. Likewise, you want to keep beneficial credit history on the books.
DON'T RAISE RED FLAGS TO THE UNDERWRITER - Don't co-sign on another person's loan, or change your name and address. The less activity that occurs while your loan is in process, the better it is for you.
DO JOIN A CREDIT WATCH PROGRAM – Your bank, credit union or credit card company may be able to provide you with a free credit watch program that can alert you to any changes in your credit report. This can be a safeguard to help you intervene before the underwriter sees a problem.
DO STAY CURRENT ON EXISTING ACCOUNTS - Late payments on your existing mortgage, car payment, or anything else that can be reported to a CRA can cost you dearly. One 30 day late payment can cost anywhere from 30 to 75 points on your credit score.
DO CONTINUE TO USE YOUR CREDIT AS YOU NORMALLY WOULD - Red flags are easily raised within the scoring system. If it appears you are diverting from your normal spending patterns, it could cause your score to go down. For example, if you’ve had a monthly service for Internet access billed to the same credit card for the past three years, there's really no reason to drop it now. Again, make your changes after the loan funds.
Your credit score is a very important component of the loan process, and we can help you to maximize your profile and to work with a lender that will provide you with the best possible loan. By following the information listed above as well as additional steps we will present to you as we work through the process of preparing your loan file, you will be in a position to ensure that you receive the loan you are looking for.
