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CREDIT? all you wanted to know
What is a Credit Report?
It is a report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
What do the credit bureaus include on the credit reports?
Identifying Information - Items such as your name, any aliases, current and previous addresses, social security number, possibly marital status.Court records, collections, merchant trade lines, inquiries for credit report and others.
What's Not Included:
Your credit report will not include information about your race, salary history, religion, checking or savings accounts, stocks and bonds, medical history, personal assets, criminal record or personal background and lifestyle.
What are credit scores?
When you apply for a mortgage, your lender will request a credit report from a credit reporting company. It usually comes from one or more of the major repositories, but it can come from several sources.
Along with the information, the local credit reporting company receives a numerical score. The score represents a composite of the borrower's credit history, employment, ability to save, and so on.
Credit Scores assess an individual's credit worthiness. They are calculated by comparing your current credit history and current credit accounts to statistical models. This score is then used as a risk indicator by credit grantors to determine whether or not to offer you credit.
What most people don't know is that, with information streaming into their credit file almost everyday, the scores can change daily. That is why someone can apply for a mortgage with one company today and have a score of, say, 717, and apply with another lender a week later and that score can be higher or lower, depending on the information received at the repositories in the interim.
What constitutes good vs bad scores?
Building a solid credit history takes many years.
Credit scores range from 350 to 850. Although lenders set their own guidelines, you are likely to be a better credit risk if your credit score is high.
Generally speaking, any score higher than 660 indicates a good credit risk. If your score falls between 620 and 660, it's usually still not bad. A score below 620 still leaves a chance for obtaining credit, but your chances are much slimmer.
A credit score is categorized in five basic areas. These are listed below in order of importance.
Payment History – Does your credit report show frequent late payments, judgements or bankruptcy? Are there derogatory notes such as charge-offs? Have accounts been turned over to collections?
Outstanding Debt – How many outstanding balances appear on your credit report?
What is the average balance? What is the ratio of total balances to total
credit limits on revolving debt (i.e. credit cards)?
Credit History – How long have you had your oldest account?
Pursuit of new credit – How many inquiries and new accounts does your report show, and how recent are they?
How long has it been since the most recent inquiry?
Types of credit in use – How many accounts are reported in the different credit card categories such as bank cards, travel and entertainment cards, department store cards, installment loans and so on.
When each credit score is generated, the credit bureau also creates a list of the most significant reasons why the score was not better.
Those reasons can include:
Account payment history is too new to rate
Amount owed on accounts is too high
Amount past due on accounts
Date of last inquiry too recent
Delinquency on accounts
Lack of recent bank revolving information
Lack of recent installment loan information
Length of credit history is too short
Length of revolving credit history is too short
No recent bankcard balances.
No recent non-mortgage balance information.
No recent revolving balances
Number of accounts with delinquency
Number of established accounts
Proportion of balances to credit limits is too high
Proportion of loan balances to loan amounts is too high
Serious delinquency, derogatory public record, or collection
Time since delinquency is too recent or unknown
Time since derogatory public record or collection is too recent
Time since most recent account opened is too short.
Too few accounts currently paid as agreed
Too few accounts with recent payment information
Too few bank revolving accounts
Too many accounts opened in last 12 months
Too many accounts with balances (consumer finance accounts)
Too many bank or national revolving accounts with balances
Too many recent inquiries in last 12 months
How to establish and maintain good credit?
The first is the most obvious. Pay all your payments on time.
The second is, don't apply for any new credit unnecessarily. Every time you sign and return a new credit card offering, or open that second account at a department store because you get a 15% discount, an inquiry will be generated and that will reduce your score.
The third is that if you must maintain credit card balances, try to keep them at a level that is 35% - 40% of the maximum credit limit. In other words, if the credit limit is $1,000, try to keep your running balance below $400. Believe it or not, consolidating all your credit cards onto one can hurt you, if the balance is at the credit limit.
The fourth is, if you get into a dispute with the phone company and it isn't a huge amount, pay it and move on. Having one or more collections, even if they are small amounts, can really hurt your score.
What hurts your credit?
Bankruptcies, judgments, divorces, liens, satisfied judgments or liens are all considered court records and show up on your credit report as negative listings.
Any time a creditor turns a delinquent account or bad check over to a collection agency, it shows up on your credit report and is considered to be a very negative listing. This shows up on your credit report as Collection Account, and can appear as a paid or unpaid account.
Regular credit lines, department store cards, auto loans, mortgages and credit cards are all under the heading of Merchant Trade Lines. Credit grantors consider these listings negative if they:
- Have a history of late payments
- Have been included in a bankruptcy
- Have been charged off
- Put into repossession
If credit grantors observe excessive credit inquiries on your credit report, it may sometimes result in your being turned down for a loan. Whenever a lender takes a look at your credit report, it will show up on at least one of the credit bureau reports.
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