Everyone Should Check on Their Credit at Least Once a Year

December 22, 2012 by · Leave a Comment 

It is important to know what is on your credit report. Be sure to check it from time to time and at least once a year. You have the right to obtain one free copy of your credit report from each of the three major credit bureaus each year. An easy way to do this is via www.annualcreditreport.com.

If there are any errors on your report, it is always best to contact the credit report agencies directly. Here is how to reach them:

Equifax: 800-685-1111 / equifax.com

Experian: 888-397-3742 / experian.com

TransUnion: 800-888-4213 / transunion.com

Credit Corner: Be sure to check FICO scores before starting home search

December 17, 2012 by · Leave a Comment 

It is important that consumers know and understand their credit scores. In fact, the very first step in the home-buying procsess should be a check of the consumer’s FICO credit scores. With this in mind, it is important to make sure that the actual “FICO” score is the score being pulled. Free online credit reports DO NOT give actual FICO scores, but rather simulated scores. Although these scores are often similar to actual FICO scores, they are not exactly the same and can give scewed results. Also, it is important to check the score at each of the three credit bureaus. Lenders always throw out the highest and lowest of the three scores using the middle FICO score. Pulling just one score could lead to a false sense of security that the credit score is OK if in fact the other two scores are less. Free online credit reports are useful and serve their purpose, but when it comes time to prequalify for a mortgage, the best practice is to have a full-service, local lender pull a three-bureau, merged credit report that gives all three FICO scores.

From myFICO’s “Understanding Your FICO Score” booklet

 

Credit Corner: Reason Codes

December 10, 2012 by · Leave a Comment 

At the top of each Residential Mortgage Credit Report just underneath the credit scores are a list of reasons why the borrower’s credit score is not higher. Typically, four “Reason Codes” are listed underneath each credit score. These scores are extremely useful in letting a borrower know what he/she can do to improve their score. For example, if a credit card is maxed out, the reason code will indicate the balance of the the revolving account is what is limiting the score. The lower the score, the more helpful the Reason Codes will be. Likewise, the higher the score, the less impact the codes will have. Understanding the reasons given in the Reason Code section is the first step to improving one’s credit score!

How Credit Report Inquiries Affect a Credit Score

November 19, 2012 by · Leave a Comment 

When a creditor pulls a credit report, this is called an “inquiry.” Inquiries lower credit scores because research has shown that a search for new credit can mean greater credit risk. Here are a few good tips to know about inquiries:

  • Inquiries usually have a small impact. For most people, one additional credit inquiry will take less than five points off of their FICO score.
  • Inquiries have a greater impact if one has only a few accounts or a short credit history.
  • A large number of inquiries equals greater risk. People with six or more recent inquiries are up to eight times more likely to declare bankruptcy than people with no recent inquiries on their reports.
  • Many kinds of inquiries are ignored and don’t deduct points off of a score. Someone ordering their own credit report, an employer ordering a report, or a creditor pre-approving an existing customer are all examples.
  • The score allows for “rate shopping” as the model distinguishes between autonomous inquiries and like-kind inquiries. All inquiries from the same industry count as only one inquiry for 45 days. Thus, someone shopping for a car or a mortgage does not have to worry about multiple creditors pulling credit reports during this window.

From myFICO’s “Understanding Your FICO Score” booklet

Know Your Credit Utilization Ratio

November 13, 2012 by · Leave a Comment 

Before closing out a credit card, you should know your “Credit Utilization Ratio.” This is simply a measurement of all of your credit cards balances divided by the credit card limits. To maximize your credit score, this ratio should be 30% or less. When closing out a credit card, the scoring model looks closely at this ratio. If your Credit Utilization Ratio is less than 30%, then closing the credit card will not impact your credit score very much at all. However, if the Credit Utilization Ratio is over 30%, your score will be adversely affected by closing out a credit card. One reason why is that your credit card capacity is lower than before, and the model does not like this. So, be sure to know your credit card balances, limits, and Credit Utilization Ratio. Then, keep this ratio under 30% if you can and only close out a credit card when it is.

Establishing Credit Card Gaps

October 10, 2012 by · Leave a Comment 

Credit scoring models put a lot of emphasis on how credit cards are handled. The main thing the scoring model wants to see in this area is a “gap” between the balance owed on a credit card and the credit limit. The scoring model will take serious points off if a balance is over 70% of the card’s limit. Likewise, the model will add major points if the balance is under 30%. Keep credit card gaps as low as possible to boost a credit score.

Also, when paying down credit card debt, one should always start with the accounts that are closest to limits to get the maximum boost to the credit score. Also, don’t ever ask a creditor to lower a limit on an account. The higher the limit, the better for the score. Lastly, carrying smaller balances on several cards is generally better than having one large balance on one card.

Experian Now Reporting Rent Payment History

September 25, 2012 by · Leave a Comment 

Experian has become the first credit bureau to begin reporting a consumer’s rent payment history on credit reports. Doing so will help Experian identify risky potential renters, reduce bad checks, and minimize property damage. In addition, the reporting of this information will help those with limited credit but a favorable rent payment history be able to more easily qualify for a mortgage as it will add another key account on their credit bureau.

 Experian is having success getting the larger property management companies to report this info and we are starting to see these accounts show up on credit reports. There really isn’t a system in place at this time to enable smaller landlords to report rent information, but there is no reason that a landlord could not report directly to the credit bureau if asked. The bottom line is that Experian collecting and reporting rent history information will help more people gain the great American dream of home ownership and, hopefully, Equifax and TransUnion will soon follow suit!

58% of Consumers Have Good Credit!

September 11, 2012 by · Leave a Comment 

FICO scores range from 300 to 850 and a score over 700 is considered good and a score over 750 is considered great.  Surprisingly though, 58% of all consumers have a FICO score over 700?  Yes, 58% of all consumers have a score considered good to excellent!  In fact, the exact breakdown is 18% of all scores are in the 700-749 range, 27% are in the 750-799 range, and 13% are over 800.

 In addition, 15% of FICO scores are in the 650-699 range leaving only 27% of all scores less than 650, which is a range where it is difficult to get a mortgage.  Of the scores less than 650, 12% are in the 600-649 range, 8% are in the 550-599 range, 5% are in the 500-549 range, and only 2% are less than 500.

 In short, roughly 75% of all consumers have a credit score high enough to help them qualify for a mortgage.  This is great news for home buyers and lenders alike!

 Stats from myFICO’s “Understanding Your FICO Score” booklet

Disputed Credit Items Must Be Cleared up Before Loan Approval

February 28, 2011 by · 2 Comments 

The latest threat to stopping your next closing is the word “dispute” showing up on your buyer’s credit report.  Disputed accounts are not new but the emphasis that mortgage investors are placing on them is.  In 2011, there are more mechanisms in place that enable a consumer or creditor to file a dispute with one or all of the credit bureaus.  As a result, the word “dispute” is showing up on more and more credit reports, and many investors are now requiring all disputes to be settled before the loan is approved.  Unfortunately, clearing up a disputed item can take a lot of time and effort.  So, what should a buyer do when a “dispute” shows up on their credit report?  I suggest that they follow the following five steps:

Step 1: Know what each of the three credit bureaus are reporting.  This means reviewing credit reports from Equifax, Experian, and TransUnion.  A consumer can obtain a free copy of their report once a year from an online service such as annualcreditreport.com.  Of course, a mortgage credit report includes reports from all of the bureaus into one easy to read report.  Be aware that the bureaus do not report all of the same information, so it is imperative to review reports from all three bureaus.

Step 2: Contact the creditor to discuss the disputed item.  The disputed item is not as much of a priority to the creditor as it is to the consumer.  Thus, it can be hard to get the creditor’s full cooperation.  If the consumer is the one who initiated the dispute, then it is much easier to resolve the dispute.  If the consumer no longer wishes to dispute the account, they can simply write a letter to the credit bureau asking for the dispute to be removed.  The letter must be signed and dated and refer to both the specific disputed account as well as the account number.

Step 3: Get a letter in writing confirming that the item is no longer disputed.  The credit bureaus have different requirements for how the letter must read.  Equifax is the strictest and requires that the letter be specifically worded as follows: “We have instructed the bureaus to delete the account in dispute notation.”  The letter has to be in past tense and it has to state “account in dispute.”  The letter also has to be dated within 30 days, on company letter head, reference at least 4 digits of the account number, and include the borrower’s name.  Getting a letter that fits these exact specifications can be easier said than done.  It might entail making several calls or even demanding to speak with a senior manager.  Through perseverance, such a letter can be normally obtained though.   

Step 4: Send the letter to each of the three credit bureaus.  It is critical to not stop at Step 3 but to also get the letter in writing and send it to each of the credit bureaus.  Be aware that the bureaus are allowed 30 days to resolve direct consumer disputes, so again this process can drag out.   

Step 5: Follow up and make sure the dispute removed.  The credit reporting industry is sloppy and following up to make sure they are now reporting accurately is an important step.   

In summary, it can take some time to complete all five of these steps.  If a mortgage closing is at stake, technology known as Rapid Rescore is in place that can speed up Steps 4 and 5 into a matter of a few days.  With a letter from the creditor, the cost of this rescore is $30 per account, per bureau, per person.  Without the letter, the bureaus can sometimes still verify this information verbally over the phone, but the cost increases to $50 per trade, per bureau, per person.  The rescore can be expensive but it might be the only way to get your deal closed by next week!

Minimizing the Credit Card Balance Ratio to Maximize Your Credit Score

January 24, 2011 by · Leave a Comment 

Most people today understand the importance of having a good credit score, however, few understand how much credit card balances and limits affect their score.  The credit scoring model places a lot of emphasis on the ratio of a credit card’s balance to it’s limit.  The lower this ratio the better and the optimal ratio is less than 30%.  A high ratio lowers a score and, if combined with other maxed out credit cards, can do so significantly.  To maximize your credit score, increase the limit on your cards as high as possible and then decrease your balances to no more than 30% of the limit.  Use additional credit cards if you need to, but keep your credit card balance ratio as low as possible.  If you would like to know your credit scores, just let me know as I would be happy to pull your credit report for you.

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