Your credit can have a big influence on whether or not you can get a mortgage, as well as the terms of the loan and the interest rate. If you have good credit, you will have a wider range of options. That is why it is important to understand what affects your credit and to monitor your credit reports regularly.
Your credit report should accurately represent your credit history. From the moment you first apply for a loan or a credit card, you likely have a credit history.
Credit-related transactions appear on your credit report, including your current debts, paid debts, and payment histories. Your credit report is compiled by three private companies: Equifax , Experian , and TransUnion . These companies sell your credit report to banks and other creditors so they can review your past credit history.
Your credit report includes:
A list of debts and a history of how you've paid them. This can include credit cards, car loans, and student loans.
Any bills referred to a collection agency. This can include phone and medical bills.
Public record information. This can include tax liens and bankruptcies.
Inquiries made about your creditworthiness. An inquiry is made when you apply for credit. Your credit report can also show if you were given credit based on the inquiry.
Adverse or derogatory credit information in your credit report is required to be deleted after 7 years (bankruptcy-related information and federal tax liens are required to be deleted after 10 years). Your credit report is continuously updated, which is why you should always know what it looks like.
Additionally, regular monitoring of your credit can help you spot and put a stop to identity theft early before your credit is seriously harmed.
Understanding the difference between your credit history, credit report, and credit score:
Credit History: A record of credit use comprised of a list of individual consumer debts and a record of whether or not these debts were paid on time or "as agreed." Credit institutions have created a detailed document of your credit history called a credit report.
Credit Report: A document used by the credit industry to examine your use of credit. It provides information on money that you've borrowed from credit institutions and your payment history.
Credit Score: A computer-generated number that summarizes your credit profile and predicts the likelihood that you'll repay future debts.
What Are The Facts About Credit Reports?
You might have heard stories about credit and how credit reports work. There is a lot of good information and just as much bad information out there. It's important to separate fact from fiction. Here are some common myths about credit – and the facts:
Myth: You must give permission for your credit report to be issued.
Fact: Any credit grantor with a permissible purpose may access credit reports without the consumer's permission. Examples of those who can access your credit files are credit grantors, collection agencies, insurance companies, and employers.
Myth: The credit repository or reporting company can deny a credit application.
Fact: Credit repositories and credit reporting companies have no power to accept or deny credit. They only collect and report information.
Myth: After you pay off a debt, it disappears from your credit report.
Fact: A credit report shows the whole credit history on any debt that is reported- all debts – even if they're paid off. The bad news is that negative credit information can stay on your report for 7 to 10 years. But the good news is that credit grantors weigh new debts more heavily than old ones. So, a six-year-old bad debt will count for less than several recent years of good credit.
Myth: You're not responsible for debts on a joint account if you didn't make the purchases.
Fact: On a joint account, both parties are held completely responsible for payments. If you pay your share but the other person doesn't, each of you gets the same negative credit rating. Co-signers, who guarantee loans, are also at risk if the primary person doesn't pay as agreed. That means, if someone has cosigned a loan for you, be sure to pay as promised to protect your credit and theirs!
Myth: A divorce decree separates joint accounts.
Fact: Divorce does not cause anything to happen automatically in your credit report. To protect your credit rating, pay off and close all joint accounts, then reopen new accounts as a single account holder.
Myth: Risk scores have replaced a credit report review.
Fact: Credit reports are still the number one tool used by creditors to determine your creditworthiness. Some credit grantors use "merged credit," which is the combined score from at least two of the credit depositories.
What are risk scores?
Risk scores are not part of your credit history. They are an interpretation of your credit history. However, they are often provided along with a credit report. The most commonly used risk score is the FICO score .
A credit score is a single number that helps lenders and others decide how likely you are to repay your debts. One kind of credit score is a FICO score (FICO stands for Fair Isaac Corporation Inc., the company that developed a common scoring method). FICO scores range from 300 - 850 points.
When you apply for a mortgage, your credit score is evaluated. Your credit score may also be used to determine the mortgage interest rate.
Your credit score is based on several types of information contained in your credit report:
Your payment history. Late payments will decrease your credit score.
The amount of debt you owe. If your credit cards are at their limits, this can lower your credit score - even if the amount you owe isn't large.
How long you've used credit. Your credit history is important. If you show a pattern of managing your credit wisely, keeping credit card balances low, and paying your bills on time, your credit score will be positively affected.
How often you apply for new credit and take on new debt. If you've applied for several credit cards at the same time, your credit score can go down.
The types of credit you currently use. This includes credit cards, retail accounts, installment loans, finance company accounts, and mortgages.
Your credit score is only one factor in the credit decision. Mortgage lenders also look at your credit report, employment history, income, debt-to-income ratio, and the value of the home you want to buy.
What the Numbers Mean
FICO does not make specific statistics available to the public regarding credit scores. However, they do provide some snapshot numbers that can help you understand how to interpret your credit score:
Credit scores ranging from 770 to 850 are considered very good, and the best credit rates are usually available to borrowers within this
Credit scores above 700 are considered good, according to FICO, and most borrowers' credit scores are within this range. The median credit score is about 725.
When credit scores are below the mid-600s borrowers may experience higher interest rates when looking for a loan.
It is important to remember that credit scores are like snapshots of your credit – they show a "picture" of your credit based on current information. By using credit wisely, you can improve your score over time .
How scores are determined?
According to FICO, they weigh different aspects of credit differently:
35% – punctuality of past payments later than 30 days past due
30% – the amount of revolving debt, expressed as the ratio vs. total available revolving credit (credit limits)
15% – length of credit history
10% – types of credit used (installment, revolving, consumer finance)
10% – recent searches for credit and/or amount of credit obtained recently