Understanding Your Credit Score | Total Mortgage Services

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Understanding your credit is an essential skill in modern American life. Credit is a tool you can use to facilitate and enhance your life and lifestyle. It can be a positive aspect of your life, but if not handled appropriately, the impact can be quite negative. Today many people are interested in your credit: mortgage and auto lenders, banks, utility companies, prospective employers, and many more. The purpose of this guide is to explain the fundamental concepts related to consumer credit: credit reports, credit scores, credit bureaus, building credit and repairing credit.

Getting Your Credit Report

What is a Credit Report?

A credit report is a compilation of data regarding your credit history. Information in your credit report includes:

Personally identifying information

  • Your name
  • Address
  • Social Security Number (full or partial)
  • Date of birth
  • Employment information

Listing of existing credit

This is an itemized list of your open credit accounts including credit card accounts, mortgages, car loans, consumer loans, and student loans. Typically, it will also include the terms of each credit contract (amount borrowed, term and interest rate), the outstanding balance owed, and your payment history (number and severity of late payments).

Public records

These include documentation of court judgments, tax liens filed against your property, or bankruptcy filings.

Inquiries

This is a list of companies or individuals who have recently received a copy of your report.

At the end of this guide we have included a sample credit report for your reference. The report was provided by Avantus.

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Getting Your Credit Report

What is a Credit Report?

A credit report is a compilation of data regarding your credit history. Information in your credit report includes:

Personally identifying information

  • Your name
  • Address
  • Social Security Number (full or partial)
  • Date of birth
  • Employment information

Listing of existing credit

This is an itemized list of your open credit accounts including credit card accounts, mortgages, car loans, consumer loans, and student loans. Typically, it will also include the terms of each credit contract (amount borrowed, term and interest rate), the outstanding balance owed, and your payment history (number and severity of late payments).

Public records

These include documentation of court judgments, tax liens filed against your property, or bankruptcy filings.

Inquiries

This is a list of companies or individuals who have recently received a copy of your report.

At the end of this guide we have included a sample credit report for your reference. The report was provided by Avantus.

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Why is a Credit Report Important?

Credit reports are very important because lenders, insurers, employers, and others may use it to evaluate how you handle financial matters. As an example, a lender may use your credit report to determine your qualification for a loan and to set the terms of the loan (i.e., interest rate). Similarly, insurance companies also use credit reports to assess eligibility and cost for policies, while employers may use them to evaluate your worthiness to be hired. Even utility companies use credit reports to determine the size of deposit they will require you to make before you can open an account. Finally, landlords may use credit reports to determine whether or not to rent an apartment to you.

Credit bureaus are private companies that collect and sell data regarding the use of credit by consumers. They do not make credit decisions, but rather provide data to those who make credit decisions. There are three major credit bureaus: Equifax, Experian, and TransUnion. These credit bureaus collect data from providers of credit, compile it into databases and then provide credit reports to their customers (other credit providers) for a fee.

Credit Report Data Collection

Credit bureaus get information about you from your creditors—lenders, landlords, credit card companies and the like. They also search public databases for public records, including property and court records. Each credit bureau has its own sources of data and this explains why the information in your credit report may differ depending on the specific credit bureau.

How to Get a Free Credit Report

You are entitled by law to receive one free credit report every twelve months from each of the major credit bureaus--Equifax, Experian, and TransUnion. To order your reports, visit www.annualcreditreport.com or call (877) 322-8228.

In order to complete your request you will need to provide personally identifying information such as your name, address, Social Security Number, and date of birth.

Now you need to decide whether to order all three reports at once or to spread your requests throughout the year. It can be helpful the first time you review your reports to order all three at the same time. By doing this you can more easily spot errors by comparing the information in all the reports. The second year you can spread your reports out, ordering one from each of the three credit bureaus every four months. This will help you stay up to date with the general status of your credit throughout the year and generally give you the best opportunity to quickly address any issues discovered.

Who is Permitted to Obtain my Credit Report?

The availability of credit reports is limited by both federal and states laws due to the sensitivity of personal information that they contain. Generally, credit bureaus can provide credit reports only to:

  • Lenders from whom you are seeking credit
  • Lenders who have granted you credit
  • Utility companies (including phone and cell phone providers) that may provide services to you
  • Your employer or prospective employer, but only if you agree
  • Insurance companies that have issued or may issue an insurance policy for you
  • Government agencies reviewing your financial status for government benefits
  • Anyone else with a legitimate business need for the information, such as a potential landlord or a bank at which you are opening a checking account
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Negative Credit Information

When you miss payments or fail to pay a debt obligation according to the terms you agreed to, that information stays in the credit bureaus’ databases and on your credit reports for seven years. Personal bankruptcy has a 10-year duration on your credit report. Unpaid judgments or lawsuits against you remain on your credit report for seven years or until the end of the statute of limitations period. Criminal convictions can remain in your credit file indefinitely.

Credit-Based Denials

People are denied credit, services or employment every day due to information contained in their credit reports. Likewise, people receive less favorable credit terms every day for the same reason. If any negative action is taken against you based on your credit report, including the lowering of a credit limit on an existing account, the lender, insurance company, or employer must notify you and provide you with the name, address, and phone number of the credit bureau that provided the credit report used to make the decision. You are then entitled to a free credit report from this credit bureau within 60 days from your receipt of the notice. This free report does not count as your annual free report.

If, based on information in your credit report, a lender offers you terms not as good (higher interest rate) than those offered to consumers with better credit histories, the lender may give you a notice with credit bureau contact information. Similar to the denial example above, you can then request a free credit report from the credit bureau within 60 days after receiving the notice.

How to Get Your Credit Score

When you apply for a loan, often the lender will inform you of your credit score during the qualification and interest rate determination process. You may also purchase your credit score from any of the credit bureaus by calling them or visiting their websites.

Credit Bureaus

  • Equifax: 800-685-1111 or equifax.com
  • Experian: 888-397-3742 or experian.com
  • TransUnion: 800-493-2392 or transunion.com

Credit Score

A credit score is a number that is calculated based on the information in your credit report. A credit score is a simplified measurement of the level of credit risk you represent.

Each credit bureau has its own proprietary formula used in its credit scoring methodology. They may also use credit scoring methodologies created by third parties. Two of the best known are the FICO© and the VantageScore©. Generally however, the following components are included:

    ,
  • The number and type of accounts you have (credit cards, auto loans, mortgages, etc.)
  • Whether youpay your bills on time
  • How much of your available credit you are currently using
  • Whether you have any collection actions against you
  • The amountof your outstanding debt
  • The age of your accounts

Credit scores can change when the information in your credit report changes. Every month, your creditors likely report the payment result for each of their customers to one or more of the credit bureaus. If you made your scheduled payment in the correct amount at the correct time, your payment will be noted as “paid according to terms provided.” This will reflect positively on your credit score. If you were late, made a short payment or no payment at all this will be noted as “not paid according to terms provided” and will reflect negatively on your credit score.

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Credit Score Ranges

Credit scores and the formulas that determine them are constantly re-evaluated to better address risk. New methodologies and even new scales have been and are being developed. However, all three major credit bureaus still offer a similar 300 to 850-point credit score that measures risks according to similar criteria.

700 and Up: Very Good to Excellent

Credit scores of 700 and up are considered to be very good. A score above 800 would be excellent. If you have a score in this range, it means you are making your payments on time and have a good mix of account types and reasonable credit limits for your financial situation. You should be able to qualify for loans and credit cards and get preferred rates.

660 to 699: Good

A credit score between 660 and 699 is considered good. You should be able to obtain credit cards, and a mortgage, but you most likely not receive the best terms.

600 to 659: Fair

Credit scores between 600 and 659, are considered to be fair scores. You will have some lenders unwilling to extend credit to you. Those who will extend credit will likely do so at significantly higher interest rates than preferred borrowers receive. You will have difficulty obtaining a mortgage other than one insured by the FHA.

599 and Below: Poor

A credit score of 599 or below is poor. You will have trouble obtaining credit. You will likely require a co-signer to obtain a loan. You are not likely to be able to obtain a mortgage loan from a traditional lender.

How to Improve your Credit Score

By understanding how your credit score is determined, you will be able to improve it over time. Your credit score is usually based on the answers to these questions:

Do you pay your bills on time?

Your credit score will reflect late payments, referrals of accounts to collection agencies, and bankruptcies

What is your level of outstanding debt?

Credit scoring methodologies often compare the amount you owe relative to the total amount of credit available to you. When your total debt is close to the total amount of credit available, this can lower your score.

How long is your credit history?

If you have a relatively short credit history, it can cause hurt your credit score. However, the length of credit history is not nearly as important as the actual credit experience.

Have you applied for new credit recently?

Creditors want to know if you are seeking other loans at the same time you are requesting credit from them because it may mean an increased risk. Consequently, when applying for a mortgage for example, it is a good idea to put-off the purchase of a new car, boat, or furniture.

How many credit accounts and what types of credit accounts do you have?

Most credit scoring methodologies assign negative weight to having more than a certain number of credit accounts, as it may indicate too great of a dependence on credit. Also, the type of credit accounts matters as well. A mix of installment loans and credit cards is considered beneficial to your score, while having too many finance company accounts or credit cards is considered negative for your credit score.

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Beware of Credit Report Scams

There are many credit repair scams taking place in the US. Many of them seek fees upfront for “representing” you with your creditors. Some promise to fix errors, others to remove negative information and still others to reduce balances owed or to settle collection actions. It is wise to check out any firm offering services with the State Attorney General in your state and the state in which they are based. Also, check with the local Better Business Bureaus for complaints that may have been filed. Remember however that scam artists are often smart enough to stay one-step ahead of complaints by changing names for their business and moving office locations. It has even been reported that many scams are being run from outside the United States.

The most important thing to remember is that no firm can do anything for you that you can’t do yourself. The Federal Trade Commission has prepared a guide to assist you: Credit Repair: How to Help Yourself. You can access this guide at: www.ftc.gov

Not only does it explain how you can improve your credit but it also lists low-cost or no-cost providers of help.

Fixing Credit Report Errors

If you believe or know that there are errors in your credit report, you are entitled to dispute that information and request that it be corrected or removed. You have two choices regarding whom to contact: either the credit bureau that provided the report with the incorrect information or the creditor that reported the incorrect information. To contact the credit bureau, call the toll-free number on your credit report or visit their website.

To contact the company that provided the incorrect information to the credit bureau, review an account statement or their website to find out their process for inquiries. The basic process to follow when disputing items on your credit report is as follows:

  • Provide personally identifying information, including your name, address, date of birth, and Social Security Number
  • Identify specific details about the disputed information and provide a basis of your dispute
  • Provide a copy ofthe creditreport containing the disputed information.
  • Provide supporting documentation, such as a copy of the relevant portion of the consumer report, a police report, a fraud or identity theft affidavit, or account statements

Disputed information in credit reports must be investigated and a decision reached on whether to make a change to the credit report within 30 days. Occasionally, an extension of 15 days will be necessary to complete the investigation. Following the completion of the investigation, the party with whom you filed your dispute must provide you their findings in writing.

If their investigation supports your claim of an error being made they must correct the information and notify all three primary credit bureaus so they can correct the information in their files as well. You are entitled to an additional free credit report from each primary credit bureau at this time to ensure the changes have been made. You may also request that a copy of your corrected report be sent to anyone who has inquired about your credit for a consumer service over the past six months or to any employment-related requesters for the previous two years.

If the investigation does not result in the outcome you seek, you can request that your statement of the dispute be included in your future credit reports. You also can ask the credit bureau to provide your statement to anyone who recently received a copy of your report, although they may charge an administrative fee for this service.

The following is an example of a credit report dispute letter:

Date
Your Name
Your Address
City, State, Zip

Credit Bureau
Bureau Address
City, State Zip

Dear Credit Bureau,

This letter is a formal notice of my complaint regarding inaccurate credit information you are disseminating about me.

I have recently been denied credit for (insert the specific type of credit). This unwarranted denial was based on the inaccurate information contained in my credit profile. This has caused me embarrassment and has negatively affected my lifestyle.

Based on my rights within the Fair Credit Reporting Act I am formally requesting your review of the following item(s) on in my credit profile:

  • (List specific accounts and the information in error as indicated in the next bullet)
  • Creditor Name, Account Number
  • Incorrectly indicates that late payments were made on this account (For Example)

I am attaching documentation that proves this notation is in error and demand that it be corrected immediately. I also request that my corrected profiles be sent to anyone who has made a credit inquiry regarding me within the past six months.

I am sure you will agree that this information should be corrected without delay. I look forward to your timely reply.

Sincerely,
Your Signature
Your Name
SSN# 123-45-6789

Attachment included

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Joint Credit Reports

Your credit report will contain only your credit and loan accounts. The exception is joint accounts shared between you and your spouse. Here, the account history will be reported on both your and your spouse's credit report. Similarly, if one spouse is an authorized user on the other spouse's account or one spouse co-signs another's account, the account history will be reported on both credit reports.

Late Payments

Each of the three primary credit bureaus uses a square with the numbers 30, 60, 90, or 120 in it. Accounts that have been paid completely on time will have a 0 (zero). You may see the words "OK" in green, or "status," and the notation "never late."

Charge-offs, Bad Debt, Placed for Collections.

When an account goes longer than 120 to 180 days without a payment from you, the creditor may decide that you are not going to pay. They “write off” your debt and take a tax deduction for it and sell it to a collection agency.

Account Closed by Credit Granter

This means that a creditor is worried that you may default on your debt and wants to keep you from accessing the balance of your credit line. If you have defaulted on one debt, it is likely that other creditors may take this step.

Account Balance

Simply, the amount that is currently owed on the account.

High Balance

This is the original or highest amount you have owed on this account. Potential creditors sometimes look at this to find out if you ever exceeded your credit limit for the account.

Date of Last Activity (DOLA)

This will be noted as "last updated" or "last activity" and is the date of last activity on the account. Often, this is the date of your last payment.

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Risk Factor Codes

Each of the primary credit bureaus uses codes to provide a rationale for negative scoring actions. The chart below summarizes the codes used by each credit bureau.

EQ = Equifax, TU = TransUnion, EX = Experian

Risk Reasons EQ TU EX
Amount owed on accounts is too high 1 1 1
Level of delinquency on accounts 2 2 2
Too few bank revolving accounts 3 N/A 3
Too many accounts with balances 4 N/A 4
Too many consumer finance company accounts 5 5 5
Account payment history is too new to rate 7 7 7
Too many recent inquiries last 12 months 8 8 8
Too many accounts recently opened 9 9 9
Proportion of balances to credit limits is too high on bank revolving or other revolving accounts 10 10 10
Amount owed on revolving accounts is too high 11 11 11
Length oftime revolving accounts have been established 12 12 12
Time since delinquency is too recent or unknown 13 13 13
Length of time accounts have been established 14 14 14
Lack of recent bank revolving information 15 15 15
Lack of recent revolving account information 16 16 16
No recent non-mortgage balance information 17 17 17
Number of accounts with delinquency 18 18 18
Date of last inquiry too recent N/A 19 N/A
Too few accounts currently paid as agreed 19 27 19
Time since derogatory public record or collection is too short 20 20 20
Amount past due on accounts 21 21 21
Serious delinquency, derogatory public record or collection filed 22 22 22
Number of bank or national revolving accounts with balances 23 N/A 23
No recent revolving balances 24 24 24
Length of time installment loans have been established 25 N/A 25
Number of revolving accounts 26 26 26
Number of established accounts 28 28 28
No recent bankcard balances N/A 29 29
Time since most recent account opening too short 30 30 30
Too few accounts with recent payment information 31 N/A 31
Lack of recent installmentloan information 32 4 32
Proportion of loan balances to loan amounts is too high 33 3 33
Amount owed on delinquent accounts 34 31 34
Length of time open installment loans have been established N/A N/A 36
Number of consumer finance company accounts established relative to length of consumer finance history N/A N/A 37
Serious delinquency and public record or collection filed 38 38 38
Serious delinquency 39 39 39
Derogatory public record or collection filed 40 40 40
Payments due on accounts N/A N/A 46
Length of time consumer finance company loans have been established N/A 98 N/A
Lack of recent auto finance loan information 98 N/A N/A
Lack of recent auto loan information N/A 97 98
Lack of recent consumer finance company account information 99 99 99
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