Understanding Your Credit Score

Understanding Your Credit Score

Lenders want to make you a loan, but also they want to diminish their risk at the same time. The simplest way to reduce their risk is by using your credit scores for them to make a lending decision.

Credit scores are separately compiled by three reporting agencies of consumer credit -- Experian, Equifax, and Trans Union. These credit reporting agencies uniquely calculate credit scores, based upon their own criteria's and formulas.

  • Experian Fair Isaac V2: credit scores run from 320 through 844.
  • Equifax Beacon 5.0 Facta: credit scores run from 334 through 818.
  • Trans Union FICO Risk credit score Classic 04: range from 309 through 839.
Your credit score is reduced to a number which reflects information on your credit report which is based upon the amount you owe creditors, whether you pay monthly your bills when they are due, derogatory information like late payments, accounts which have been paid off,, unpaid bills, liens and judgments. It also comprises of inquiries into your account from l landlords, employers and lenders..

When you make an application for a mortgage, your application includes allowing your lender to "pull your credit report" and decide whether they want to make you a loan and their rate of interest based upon the information available in your credit score. The higher your score, the better the terms the lender will give you.

After your credit scores have been reviewed by your real estate lender, you will receive a computer-based credit report of their findings, but it will not be a copy of your credit report in it's entirety. It might include any key factors which adversely affect your scores. Some examples could include:

  • Time since the most recent account was opened is too soon
  • Too many inquiries over the past 12 months
  • Too many accounts containing balances
  • Revolving accounts amounts are too high
  • Ratio of your loan balances to existing loan amounts is excessive
What if the lender declines the loan, or the mortgage lender asks to charge a greater rate of interest than you had expected? What can you do?

Talk to the lender and ask them for their help in correcting or repairing your scores. For example, you might have done something innocently which generated a negative credit score, like closing an existing line of credit. Or, you maybe you didn't realize that one late payment would lower your score as low as it did. The lender will advise you precisely what you must do to increase your scores.

The federal law gives you rights to obtain a copy of your consumer credit report without charge from any national consumer credit reporting companies. Click on FreeAnnualReport.com.

If you discover an error -- an account which shows a wrong balance, derogatory data which does not belong to you, simply show your lender the release of lien, canceled check, or other proof showing your credit report is incorrect.

You'll also need to separately correct the information in writing on your own with each credit agency. It could take several weeks for the information to be updated by the agencies.

In the meantime, continue work with the lender and to do what they tell you to obtain the best rate, which could include making more than the minimum payment, paying by the due dates, and by making sure your income-to-debt ratios are well inside your capability to repay your loans. 

New Article Nov 10, 2014

Buying Real Estate