Why is credit important? As you research your mortgage loan options you’ll see the terms credit report and credit score, and may wonder why credit matters. Credit is a central part of the loan application process and a credit history and credit score are the factors that lenders use to determine a borrower’s ability to repay a loan. These are summarized in the credit report, which is documented by several agencies, referred to as credit bureaus, which compile this information. While other criteria, such as income and debt, play a role in the lending process, your credit is directly linked to your eligibility to borrow and even plays a role in the interest rate you’ll pay on a loan.
Your credit payment history is recorded in a file or report. It also indicates whether you have been sued, arrested, or have filed for bankruptcy. These files or reports are maintained and sold by Consumer Reporting Agencies (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your income, debts, and credit payment history.
Yes, if you ask for it. The CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year-two years for employment related requests. To get copies of your report, contact the three major credit reporting agencies:
Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
(These agencies may charge you up to $9.00 for your credit report.)
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested here.
Credit bureaus collect and sell four basic types of information:
Your name, birth date, Social Security number, employer, and spouse’s name are routinely noted. The CRA also may provide information about your employment history, home ownership, income, and previous address, if a creditor requests this type of information.
Your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time.
Related events, such as referral of an overdue account to a collection agency, may also be noted.
CRAs must maintain a record of all creditors who have asked for your credit history within the past year, and a record of those persons or businesses requesting your credit history for employment purposes for the past two years.
Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.
Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor which helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is you will repay a loan and make the payments when due. The most widely use credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will fall between 350 (high risk) and 850 (low risk). Because a credit report is an important part of many credit scoring systems, it is very important to make sure it’s accurate before you submit a credit application.
Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change — but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.
Nevertheless, scoring models generally evaluate the following types of information in your credit report:
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It will take time to improve your credit score.
The Fair Credit Reporting Act (FCRA) is designed to help ensure that CRAs furnish correct and complete information to businesses to use when evaluating your application.
Your rights under the Fair Credit Reporting Act:
If you’ve been denied credit or didn’t get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and how to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information.
If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected. You have the right to be provided with the reasons if you ask within 60 days of being turned down. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: “Your income was low” or “You haven’t been employed long enough.” Unacceptable reasons include: “You didn’t meet our minimum standards” or “You didn’t receive enough points on our credit scoring system.”
If a creditor says you were denied credit because you are too near your credit limits on your credit cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and can change over time.
Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act (FRCA) requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what’s in your report, but only the creditor can tell you why your application was denied.
Elevate Home Loans is not a Credit Repair Company. You should consult with a Credit Repair Company to determine what may be best for your individual needs.