Credit Scoring: Friend or Foe?

Your credit score can save you time, effort and money on your next mortgage loan...or do just the opposite.

A credit score is part of the information provided by the credit bureaus on your credit report. Over the last 1-2 years it has become a significant part of the loan approval process. It is a score between 350 and 900 (the higher the better) intended to reflect how well you use your credit. Credit scoring uses 34 different criteria to electronically evaluate patterns in your credit usage and determine your score. We do know what these 34 criteria are, but how credit scoring assigns points for each is kept confidential by the bureaus in somewhat of a "Black Box".

Contrary to what one might assume, credit scoring does not factor in your income, how long you've been on your job, or how much money you've accumulated in savings and investments. It only looks at patterns in your credit usage and assigns a credit score which determines the credit risk.

On the friendly side, an above average credit score can significantly streamline the loan approval process, save you several hundred dollars on your appraisal and credit report, and in some cases even lower your interest rate. In many cases, credit scoring allows for a 2-4 hour loan approval. For this preferential treatment, most lenders are looking for credit scores of at least 680 to 700.


What Impacts My Credit Score?

Although credit scoring has proven to be a relatively accurate indicator of risk for a large part of the population, it does have its pitfalls... of which catch borrowers by surprise. Just because you pay your bills on time does not always mean you will have a good credit score. Some of the most common things that lower credit scores are late payments, revolving accounts with high balances (anything above the halfway mark of the credit limit will decrease your credit score), too many accounts, collections, judgment and tax liens. "We don't have any of those" you say? Well, maybe you do and don't know it. It is not uncommon at all to find erroneous information on a credit report. Due to commonality of names, multiple credit bureaus and the volume of creditors reporting to those bureaus, the potential for errors is significant.

In many cases these errors can be quickly resolved between you, the creditor and/or the credit bureaus, but your credit score can often take 30 to 90 days to adjust. This delay can be problematic if you need your mortgage loan closed in three weeks. Another problematic scenario is to find collections, judgment or tax liens that borrowers were never aware of, or that have been previously paid but are still reported to the bureaus. Credit scoring doesn't seem to care as much about the amount of the judgment, collection or lien, but rather, how recent the offense or the number of them. For example, a $10 collection or tax lien seems to have the same impact on credit scoring as a $10,000 collection or lien.

Even the most responsible credit users are plagued with things like medical bills that were paid and erroneously went to collections, small tax liens filed by a state or county from which they never received notification, or even debts incurred by an ex-spouse. Frustrating? Definitely. Expensive? Possibly. Any or all of the above can cause your credit score to decrease.

Credit scoring can be a real foe when your score falls beneath the 600 to 620 range. Statistics based on evaluation of the performance of millions of mortgage loans show a sharp increase in default rates on loans with scores in this range and below. Because of increased risk, lenders require larger down payments and/or charge higher rates and fees as credit scores decline from the 600-620 level.

Where to Start?

Many borrowers who have low credit scores are not surprised given they have usually encountered some form of hardship. The whole point of this article, however, is that there is a surprisingly high number of people that pay their bills perfectly on time that have unexpectedly scored very low. The following are a few tips to give your credit scores some upward momentum and help avoid any unpleasant surprises.

First, don't assume you have a great credit score just because you make payments on time. No one is immune from the inaccuracies that can occur in the credit reporting system. Have your credit checked early on in the process if you are looking at any type of financing. Last minute surprises are no fun.

For a complete picture of your credit, be sure to obtain a credit report showing all three credit bureaus and all three scores. This type of report may be obtained for about $25.00.

Deal directly with credit bureaus to be sure any erroneous information is corrected. (Feel free to call my office for an up-to-date listing of credit bureau addresses and phone numbers.)

Finally, check your credit every 1 to 2 years, even if you are not currently in need of financing. Knowing that your credit report is as good as you think it is could save you time and money when you need it most.

All About Credit Bureaus | Top | Home

All About Credit Bureaus

Features of the Fair Credit Reporting Act:

• Banks, retailers and others who furnish information to credit bureaus must clean up their records so errors don't reappear.
  
  
• Credit bureaus must offer toll-free phone numbers.
  
  
• Potential employers can't get a credit report without a job applicant's permission; and, before denying a job based on a credit report, an employer must give the applicant a copy.
  
  
• The big three credit bureaus (Experian, Equifax and Transunion) must share information so consumers can call one company to have their name removed for two years from lists of "prospects for pre-approved" credit offers.
  
  
• Penalties for obtaining credit reports under false pretenses now include big fines and up to two years in jail.

Contact Information
for 3 Major Credit Bureaus

Note: Be sure to include your full name, Social Security number, birth date, and current address in all correspondence. Include any other names you have used or any other recent addresses. If married, include the same information for your spouse.

CBI / Equifax
Credit Information Services
PO Box 740256
Atlanta, GA 30374-0256
1-800-685-1111 or 1-800-405-0081
www.equifax.com

Trans Union
PO Box 390
Springfield, PA 19064-0390
1-800-888-4213
Fax: 1-714-447-6032

On the West Coast:
Trans Union Consumer Relations
1561 E Orangethorpe Ave
Fullerton CA 92831-5207
1-800-916-8800
www.transunion.com

Experian
PO Box 9595
Allen, TX 75013-9595
1-800-EXPERIAN
1-800-682-7654
Fax: 1-972-470-4993
www.EXPERIAN.com

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