Credit 101 - Part 2 (Truths and Myths)
Credit Score Truths & Myths
Nearly every time I run someone’s credit, I get asked
questions like “will running my credit HURT my credit
score? or “How can I fix my credit?”
Your credit score is the single biggest factor in
getting a new home loan. If your score is above 720,
you can possibly qualify for a $1 million home with
very little money down. If you score is below 500 and
you have $1 million in the bank, you may have trouble
qualifying for this exact same home. Your interest rate
will certainly be different.
Credit Scores are central to the loan process.
Nearly every lender uses them. The better your credit,
the lower the risk to the bank, the lower your interest
rate. Most lenders use your FICO score to determine
whether or not you qualify for a home. It’s such an
important issue that you and your clients should understand
the basics of the credit reporting system and the
many myths surrounding it.
Credit scores give lenders a fast, objective and
impartial snapshot of a person’s credit risk based
on their credit history. That’s why lenders use FICO
credit scores when making credit decisions. The
higher the individual’s score, the lower the risk to lenders
when extending new credit to that person. It’s fast,
easy and usually effective.
WHAT IS A GOOD CREDIT SCORE?
Credit scores generally range from the mid-300's to a perfect
score of 850. The following will give you a general idea
of what your score tells lenders, but remember there are
no set rules. Different products and lenders use different
guidelines for what is an acceptable score. Also, there will
usually be differences in the scores calculated by each of
the three credit bureaus. As stated, lenders will often use
the middle of your three scores.
720+ Excellent credit. You should have no
problems as most loan programs will be
available to you.
680 - 719 Good credit. You should have few
problems depending on what product you
620 - 679 Lender has to take a closer look at your file
but should be able to qualify you for a loan.
Some products may not be available.
570 - 619 Higher risk; you will not be eligible for the
best rates and products. Products will be
Below 570 Very high risk. Products will be limited and
other factors will need to be considered.
The average person in the U.S. has a credit score around
675. As you can see on the list above, the average
borrower's file needs a "closer look" and is not a
HOW DOES MY SCORE AFFECT MY INTEREST RATE?
The better your score, the lower the risk to the lender, the
lower your interest rate. Let's say that John Doe is buying
a new house for $300,000. He is employed, can document
his income through his tax returns, and has enough funds
verified in the bank to put 20% down on the purchase of
his new $300,000 home. He wants a 30-year fixed mortgage.
Below you will find an example of how Mr. Doe's
interest rate may fluctuate based on his credit score.
MID-FICO: INTEREST RATE:
This is a primary example of why when you ask your
lender, "what is the rate today?" the answer is not simple
unless they know the credit score and financial profile of
the borrower. Rates change based primarily on credit
scores, use (owner-occupied vs. investment), income
documentation, down payment, and availability of funds.
Factors NOT Considered in Credit Scores
. National origin
. Receipt of public assistance
. Inquiries made by companies for
promotional or account monitoring
purposes (credit card companies,
where you have accounts, often run
your credit to make sure your
situation has not dramatically changed)
WHAT FACTORS MAKE UP MY SCORE?
Some of the factors considered in credit scores:
• Recent or serious derogatory public record or
• Past due balances
• Limited information
• Account payment or credit history not long
• Lack of recent information on accounts
• Insufficient number of satisfactory accounts
• Date of last credit too recent
• Too few or no recent balances on revolving
accounts (e.g. credit cards)
Factors correlated with higher risk:
• Excessive amount owed on accounts
• Proportion of loan balances on installment
• Too many new or existing accounts
• Too many recent credit checks
• Proportion of revolving balances to revolving
credit limits is too high
(e.g. credit card balance vs. limit)
DOES MY CREDIT SCORE GO DOWN EVERY TIME
IT IS CHECKED?
If you do all your shopping around in a short period, and
it is focused on just getting a new home loan, then the
answer is "no", Credit inquiries are a negative factor in
determining credit scores. That's because statistical
studies show that multiple inquiries are associated with
high risk of default. Distressed borrowers often contact
many lenders hoping to find one who will approve them.
Multiple inquiries can also result from applicants shopping
for the best deal. The credit bureaus understand
this and do not penalize you for it. Credit scorers usually
ignore inquiries, from a same industry, that occur within
30 days of a score date.
Suppose I shopped a lender on May 30, for example,
and the lender has my credit scored that day. Even if I
had shopped 50 other lenders in May and they had all
checked my credit, none of those inquiries would affect
my credit score on May 30. Now, if you are also shopping
for a new car, a new big screen TV, and applying
for new credit cards during this same period, yes, that
will create negativity on your credit report.
Remember, this score is assessing the "risk" in giving you a new
loan. If you are contacting may different types of lenders
for many different products, you are giving the appearance
of extending your credit our further and that
makes you more risky. You may also damage your
credit if you spread your shopping over many months.
Circumstances can cause a consumer to shop, drop out
of the market, and return later when conditions are more
favorable. You minimize the adverse effect by concentrating
each shopping episode to as short a window as
WILL CLOSING SOME OF MY ACCOUNTS HELP MY
Usually not. Closing accounts will not usually help your
credit score, and may actually hurt it. Too many open
accounts can hurt your score. But once you've opened
the accounts, you've done the damage. You can't repair
it by shutting the account, and you may actually make
things worse. The credit score looks at the difference
between your available credit and what you're using.
Shut down accounts, and your total available credit
shrinks, making your balances loom larger, which typically
hurts your score. The score also tracks the length
of your credit history. Shutting older accounts can also
make your credit history look younger than it actually is,
which can hurt your score. Rather than closing accounts,
pay down your credit card debt. That's something
that actually can and usually will improve your
score. If you must close accounts, transfer the balances
from newer accounts to older ones and close the ones
you have opened most recently.
HOW OFTEN DOES MY SCORE CHANGE?
Your credit report is continually updated with new information
from your creditors. The FICO score is calculated
based on the latest snapshot of information contained
in your credit report at the time the score is requested.
Your FICO score from a month ago is probably
not the same score a lender would get from the consumer
reporting agency today. Fluctuations of a few
points from month to month are quite common.
IF MY CREDIT REPORT HAS SOMETHING WRONG
ON IT, WHAT CAN I DO?
The first thing you must do is get a copy of your report.
For the best and quickest response, get a copy of
your report from each of the three major bureaus. The
easiest and most effective way is to request this
online. Each of the bureaus will charge you a small fee
but you will get online access and better response
times. Here is the contact information for each:
P.O. Box 740241
Atlanta, GA 30374
P.O. Box 2104
Allen, Texas 75013-2104
Consumer Disclosure Center
2 Baldwin Place
P.O. Box 1000
Chester, PA 19022
Once you get your report, review it very carefully. If
there is an item on your credit report that you feel is inaccurate,
and there likely will be, you should challenge
it. Details on how to challenge will be sent you with
your credit report. The credit bureau is required to begin
investigating the issue within 5 business days.
They are held to this action by an Act of Congress and
they will move fast. They will contact the creditor on
your behalf. You can also contact the creditor yourself
but be prepared to experience complete and utter
frustration at its highest level. Do not only contact the
creditor. The bureau is absolutely your best bet!
Within about 30 days, you should have an answer to
your complaint. If, at that time, the original grantor of
credit has not responded to the disputed item, it will be
removed from your credit report. However, if the creditor
responds and challenges your claims, you may have
more work to do.
I COMPLETELY PAID OFF ALL OF MY DEBT,
WHY IS IT STILL ON MY CREDIT REPORT?
A credit report shows your entire credit history, including
paid off debts. Judgments and liens will remain in
your history for up to 10 years. A bankruptcy may stay
on your credit report for 10 years as well.
Just because you paid it off, does not mean it did not
exist. If you look at this report as the financial story of
your life, this existed and although it is now paid, it tells
a story about a time when the debt, for whatever reason,
went without being paid.
If you were late on your MasterCard five times in six
years, just because you paid it off does not mean it is
now a positive reflection on your credit report vs. the
negative reflection it was before, which some people
automatically assume. It simply shows that you were
late at times but then paid it off. Don't expect a huge
increase in your score as a result of this action. Keep in
mind, the score is based on your credit history , not just
how you are today.
HOW CAN I IMPROVE MY SCORE?
• Pay your bills on time. Late payments and collections
can have a serious impact on your score.
• Keep balances low on credit cards. Do not "maxout"
your cards. Most experts say keeping your
balances below 60% is the most effective. For example,
if you have a Visa with a limit of $2000, it is
best to keep the balance at $1200 or less.
• Limit your credit accounts to what you really need.
Accounts that are no longer needed should be formally
cancelled since zero balance accounts can
still count against you. However, remember, if you
are closing accounts, transfer the balances to the
oldest accounts and cancel the newer ones.
• Do not apply for credit frequently. Having a large
number of inquiries on your credit report can worsen
• Check that your credit report information is accurate.
• Be conservative in applying for credit and make
sure that your credit is only checked when necessary.
• If you have limited credit, obtain additional
credit. Not having sufficient credit can negatively
impact your score.
HOW LONG DOES IT TAKE TO
SEE MY SCORES GO UP?
It is possible for people who
have aggressively corrected
their reports, to raise their scores
as much as 50 to 75 points in
less than 60 days, but don’t
count on that. Your credit score
is based on your history and that
cannot be corrected overnight.
Review your report, correct it,
and then, if you really care
about keeping it clean, pay your
bills on time, don't over extend
yourself and don't max your cards out.
There is rarely enough time in the period between the
day you make an offer until the day you close to correct
your credit report in such a manner that will make a substantial
difference in your score. Planning ahead can
result in cleaning your report, raising your score, and
saving you $10,000's in interest through the years.