What it is. What it means. |
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You
may have heard of credit scores and wonder what they are. How do
they affect your ability to get a loan? How do they affect the interest
rate and the points you have to pay? You may wonder whether your
credit score is accurate. Here we will explain credit scores
and how you can improve your score. Choose a topic below:
When lenders evaluate your loan application, they use a process called underwriting - they try to evaluate your ability and willingness to repay your loan. They judge your ability to repay by looking at the amount of your income and how stable your past earnings have been. This helps them to determine if you can afford the loan payments. They judge your willingness to repay by looking at your past credit history. Generally speaking, someone who has made payments on time in the past will probably do so in the future. Lenders want their evaluation to be as accurate, objective and consistent as possible. In an effort to achieve these goals, mortgage lenders recently began using credit scores to help in the underwriting process. Credit scores are numerical values that rank individual's according to their credit history at a given point in time. Your score is based on your past payment history, the amount of credit you have outstanding, the amount of credit you have available, and other factors. According to Fannie Mae and Freddie Mac, two of the largest purchasers of home loans from lenders, credit scores have proven to be very good predictors of whether a borrower will repay his or her loan. Many lenders use credit scores to help evaluate loan applications. However, a credit score is just one of many factors considered in the underwriting process. Lenders look at the entire picture. Even when a credit score is low, lenders try to find other factors that could overcome the negative credit issues and satisfy their underwriting criteria. The decision to approve or deny a loan may be made based on sound, flexible underwriting guidelines. Top What Is A FICO Score? "FICO" scores are a type of credit score developed by a Fair Isaac & Company. FICO scores use credit bureau information to obtain a score which indicates how likely someone is to make their loan payments on time. Millions of consumers' credit bureau records were used to develop the scorecards, and all of the consumer data - not just negative information - was included to develop the system. FICO scores range from approximately 350 to 900. The higher the score the more likely someone is to make their payments. Similarly, the lower the score the more likely someone is not to make their payments. Top How Can Credit Scores Affect The Price Of A Loan? Just as credit scores are one factor in determining if you qualify for a loan, they may also be a factor in determining the price of your loan. The price of a loan means the interest rate and the points charged by the lender and/or a mortgage broker. The price charged for a loan will be higher or lower depending on various factors. Credit scores are used in determining the price of a loan because they are believed to be good predictors of the borrowers ability and willingness to repay a loan. Many mortgage loans are sold to investors, and investors will pay a more favorable price for loans they feel have a low risk of default. Fannie Mae and Freddie Mac use credit scores as their analysis when pricing loans they buy from lenders because of this very reason. Thus, applicants with lower credit scores may pay higher prices for their loans because of the higher risk of default and loss. There are many other factors relating to an individual borrowers situation that may also affect the price of a loan, often even more so than credit scores. These include: the type of property securing the loan (detached single family residence, duplex, etc.); the amount of the borrower's equity in the property; the lenders costs to make the loan; and the type of loan selected. For example, a loan secured by a single family residence may have a lower price than a loan secured by a duplex because duplexes are more difficult to sell than single family residences. Similarly, the price of a loan where the borrower has made a 20% down payment may be less than a loan where the borrower has made a 5% down payment because the first borrower has more equity in the property and, thus, the greater incentive to make the payments on the loan. Top How To Improve Your Credit Score: Because each borrower's credit score is a reflection of his or her unique credit profile, it is not possible to quantify in advance exactly how each item in your credit history numerically impacts upon your ultimate credit score. No one can tell you, for example, how much your credit score will be affected if you pay off a delinquent account or cancel a credit card. We do know, however, that there are things you can do to improve your credit profile. Some of the factors which may impact your credit scores include:
How To Correct Mistakes On Your Credit Report: Because credit scores are based upon your credit record, it is very important that you obtained a copy of your credit report from time to time to make certain the information is accurate. If the information is not accurate (for example, someone else with the same name as yours may have their credit mixed up with yours), you should immediately take steps to get it corrected. No one can do this but you. Lenders, credit card issuers and other credit providers send regular reports about their accounts to the major credit bureaus. This is where the information on your credit report comes from. There are three major credit bureaus; you should contact each one because not all credit providers report to each bureau. Also, if you have a joint credit (for example, if you are married and have joint accounts with your spouse), it is a good idea to get the credit report for each of you because there may be information on one report that does not appear on the other. If you ask for a copy of your credit report to check your credit history, it will not affect your credit score. You can reach the 3 major credit bureaus at the following phone numbers: |
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| Equifax: | 800-685-1111 | |
| TransUnion: | 610-690-4949 | |
| Experian (TRW): | 800-682-7654 | |
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In most cases, there is a small charge to obtain a copy of your credit report. If you find errors on your credit report, follow the directions included with your credit report regarding disputes or errors. Generally, you must write the credit bureau and advise them of the error or dispute. You may need to provide proof that the bill was paid or other information about the claim or dispute. The credit bureau will then contact the provider of credit who reported the information, and the provider will have 30 days to respond. If the provider of credit agrees that there is an error, it will instruct the credit bureau to delete the item from your credit report. You should allow at least 30 days after you have notified a credit bureau of an error in your credit report for that error to be investigated and resolved. It may take longer depending upon the nature of the error and the investigation to be done. Top |
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