Your Credit – Know the Score!
When you decide you want to buy a house, what’s the first thing you should do? If your answer is “go house hunting,” that’s definitely the wrong answer. The right one? Find out what your credit report says about you. And what your credit score is. The worst possible case is that, without good credit, you may never qualify for a mortgage. A scenario almost as bad is that you could get a mortgage-but the mortgage payments and the interest rates would be outrageously high-so you could well be making your financial situation go from bad to worse.
Let’s get down to the basics: what exactly is a credit report and a credit score?
If you want to understand the history of credit reporting, go to a website called howstuffworks.com and you’ll get a detailed explanation of how it got started way back when there were old-time general stores. The website will then tell you where it went from there. But if you’re interested in how things work today, you only have to go back to the 1980’s. That’s when credit scores came into wide use. Lenders standardized three basic decision processes by using a point system that scored several factors on a consumer’s credit report. Statistical models were then developed that measured the variables in even more detail. So now a system exists that measures your “credit-worthiness.”
And pretty much everyone-including retailers, credit card companies, and mortgage lenders-uses it. Mortgage lenders, in particular, use your credit report as the first in a list of reasons to qualify or disqualify you as a borrower. It also determines which lending products and programs they are able to provide to a borrower. If you want a more detailed understanding about credit reports and credit scores, another website called truecredit.com can be very helpful and informative.
Do we have a totally fair and accurate credit reporting and scoring system?
The answer is both yes and no. Yes, because it takes personal or individual bias out of the decision. And no, because it’s based on mathematical models where the variables change every day. For example, there might be too much weight put on a financial event that happened recently-but not enough placed on years of good credit history. And one model, for instance, may conclude that you’re a good risk for something like a car loan-but not for a home mortgage. Another thing you need to be aware of is that the accuracy of your credit information might be questionable because the process of checking the information is an imperfect one. So now that you know about the possible pitfalls-and if you’re a wise consumer-you’ll understand how important it can be to check your credit at least once every year. Because if your credit report is incorrect or incomplete, it’s your responsibility to correct it-and that can sometimes be a long and frustrating process. But imperfect though it may be, it’s all we’ve got. So you have to deal with it “as is.”
There are three national credit bureaus that provide credit reports.
Here’s how to contact them:
Experian 1-888-397-3742
Equifax 1-800-685-1111
TransUnion 1-800-916-8800
Normally, you will have to pay a fee to get your credit report. However, once a year, Texans may order a free copy of their credit reports from these credit bureaus at annualcreditreport.com.
What kind of information about you impacts your credit report and score?
o How many late payments you’ve made, and how late they were. o The type, number, and how long you’ve had the accounts. o Your total amount of debt. o How many recent inquiries or applications you’ve made (to get credit card accounts, for instance.)
Here’s what is not taken into consideration in your credit report or score:
o Bank account balances. o Race o Religion o Health (unless medical bills show up as debts) o Criminal records (unless public filings and judgments appear) o Income o Driving records
Are you a high or low scorer?
Get your FICO credit score at myfico.com to find out. If yours is below 680 and you’re trying to get a mortgage, shop for a mortgage broker that works with a re-scorer. By the way, the fastest way to improve a not-so-hot score is to pay off any large credit card accounts and then ask for a re-score.
What does your score indicate?
The higher it is, the better. Credit scores usually range from 400 on the low end to 800 on the high end. Here’s how a mortgage lender would interpret your score:
720 and over-you are a mortgage lender’s dream. You’ll get the best rates and terms on your mortgage.
700 to 719-you’re in excellent shape. You will have no problem getting a mortgage.
680 to 699-you’re going to do fine, mortgage-wise.
660 to 679-you’re okay.
640 to 659-you’re on the borderline. It would help if everything else in your financial picture is strong.
620 to 639-You are in a weak position. The rest of your financial picture must be perfect.
600 to 619-you’re in a difficult position. You will probably need to improve your financial situation, or maybe try to find a special program in order to get a mortgage.
Below 600-you’re in trouble. You will absolutely have to work on your credit picture.
If you are married, will your credit report and score be the same as that of your spouse?
No. Here’s why. You are separate individuals, with separate Social Security numbers. So you will have six credit scores (3 per individual, per major credit bureau.) Which means that if you plan to get a mortgage and buy a home together, and one spouse has a poor or bad credit rating and score, it could definitely affect your chances as a couple of getting a mortgage.
So-now that you know the score, are you ready to aim at a mortgage? Great! Welcome to getting your sights on the American Dream. It’s a really worthy target.
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