What Makes Up a Credit Score??

How Is Credit Calculated

 

A credit score is an extremely important financial tool. It provides access to the financing you need in order to buy a car, a home, or pay for college tuition, among other things. Since higher scores result in lower costs, it’s vital to understand the factors involved in calculating your score. Here are the five elements that make up a credit score, in order of importance:

Payment History: 35% impact. Paying debt on time has a positive impact. Late payments, judgments, and charge-offs have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.

When applying for a mortgage, every point in your credit score can make a big difference. So don’t make any major financial or credit decisions – even paying off an old debt or delinquency – without first discussing it with your mortgage professional.

Outstanding Credit Balances: 30% impact. This factor marks the ratio between the outstanding balance and available credit. Ideally, consumers should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when planning to enter into a loan transaction within 3-6 months.

Credit History: 15% impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.

Mix of Credit Types: 10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards alone.

Inquiries: 10% impact. This quantifies the number of inquiries (or requests for credit) that have been made on a consumer’s credit history within a 6-12 month period. Each individual inquiry – up to 10 – can hurt your credit score by as much as 5 to 30 points. Any additional inquiries thereafter will not affect your credit score.

In other words, don’t start the loan process until you’re ready to act. Otherwise each individual credit inquiry could cost you. However, scoring models have now been adjusted to count multiple “hard” inquiries within a 45-day period as a single request. So, when you’re ready, your credit will be too.

Cindy Hallas Website Banners AFI 1170x400

What does disputing a tradeline do to your Credit Score?

credit scores

Your credit score will open doors for you when you are in the need to borrow money and your score will determine the cost of that money.

So protecting it is extremely important.

Our topic of discussion today is to review Disputing Credit and how it affects your score and your ability to move forward in purchasing a home.

In the past, disputing a debt on a credit report was used to by-pass a negative reporting.  When you dispute a debt on your credit report, the algorithms skip over that debt and does not include the history of that debt into your actual credit score.

This was discovered and now in many cases, disputes on a credit report must be removed in order for underwriting to discover the actual credit score as the history of that debt must be included in the overall evaluation of the loan applicant.

There is a systematic way of getting this information corrected:

1.)   Get the dispute resolved by working with the creditor and obtain a letter from them proving that the derogatory information should be removed.

2.)  In many instances, debtors will not remove the dispute and as a consumer wanting to obtain a loan, you need to take steps to remove the dispute, even if you still don’t agree with the decision of the creditor.

Here is some information provided to us by a Credit Report company called Cisco Credit.  They were  assisting us in directing a consumer of what steps to take to remove a dispute from his file that his creditor refused to remove.  This borrower wanted to obtain a home loan and could not proceed due to the dispute filed on his credit report:

Here’s what I recommend: have your borrower go to www.annualcreditreport.com and pull their credit from each of the 3 bureaus (it’s free once per year)…once they do this they can request that the dispute comments be removed from those creditor tradelines…they will be given a unique report/ID number from each bureau…have them save this as it will allow them to call each of the bureaus at a number they will provide to check progress. At the same time they will also need to contact each of the creditors showing a dispute to be removed and tell them they no longer wish to dispute the account(s). 

Please note if any of the disputes are with a collection agency or an account that has been charged off, the creditor might not remove the dispute unless it is first paid off.

In today’s economic enviroment, it is really important for you to prepare for your home purchase with a plan of action.  Choose your lender carefully and ensure that they are able to guide you to your plan.

Cindy Hallas Website Banners AFI 1170x400

Validating a Collection Debt

Andorra Credit Repair shares some great information on Validating a Collection Debt on your Credit Report:

debt-collter-usa

You find a Collection Debt on your credit report and you just don’t remember it….what do you do?

Ask for a validation notice. A debt collector must send you a validation notice within five days that explains how much you owe and to whom you owe the debt.  Document when you make this request. If the collection agency cannot validate the debt then they probably don’t have a legal right to collect the debt.

Once you have the validation notice, make sure that this is truly your debt. Sometimes, debts are created in your name such as in cases of identity theft. You’ll want to check your credit report. Your credit report should include evidence of the debt. You can get your FREE credit reports at www.AnnualCreditReport.com.

A tactic that scavenger debt collectors use is to purchase debt that has passed the “statute of limitations” for pennies on the dollar and then try to use scare tactics to collect the debt from unsuspecting people who have no idea that this debt is no longer collectible.

Need more information?  Any Credit Repair company can assist in education you, however since Andorra Credit Repair shared this information, why not reach out to them.

Cindy Hallas Website Banners AFI 1170x400

Why is a Consumer Credit Score Different from a Mortgage Credit Score?

credit-scores

Scoring models are formulas or algorithms that assigns points based on known information to predict and unknown future outcome.  The Credit Monitoring Services and Nationwide Credit reporting agencies sell credit reports to consumers.  The scores that are sold to consumers are educational credit scores to prepare for loans, managing debts and to check for fraud/identity theft and to ensure information is being reported accurately.

When a Mortgage Lender pulls a credit report, they are using formulas that are based upon historic information in the mortgage industry. The reasons credit scores differ are due to the different models/formulas/algorithms that are being used.  Auto loans use formulas for the auto industry.  Credit cards use formulas for the credit card industry and mortgages use formulas for the mortgage industry.

Here is an article that comes directly from Equifax.  You can now learn more directly from the source.

 

Cindy Hallas Website Banners AFI 1170x400

Why Do Credit Scores Vary Amongst Credit Bureaus?

Grow Credit Score Pic

One of the main criticisms of credit scoring is the extreme variation between credit scores. Studies have shown scores to vary as much as 100 points between credit bureaus.

 There are several reasons for this:

  1.  The first reason is not all creditors report their information to all three credit bureaus, and if they do, they may not report the same information at the same time to each agency. For instance, let’s say you have a credit card that you have had for the past 10 years and never missed one payment (a positive account). If the credit card company only reports the account to Equifax and Experian, your TransUnion credit score could be disparately low.
  2. The second reason is each credit bureau or reseller uses its own customized version of the FICO credit scoring model. Because each credit reporting agency uses a FICO model developed specifically for that agency and its data, the credit scores it generates will differ.
  3.  The third reason is each credit bureau has its own way of assigning reported information to a given person. This is necessary because lenders are not always able to provide full social security numbers or complete account details. Also, people may have accounts under different names because of marriage or variations in their name or different addresses. The proper information does not always completely follow the individual.

Yet another great reason to check your credit report each year.  If you have a positive account that is not reporting on all 3 agencies, then you can contact them and request that they add.

 

Cindy Hallas Website Banners AFI 1170x400

Multiple Credit Inquires…do they count?

Bank Approval

The media, newspapers, internet are full of information, but sadly, much of the information concerning credit is inaccurate.   Please enjoy this article provided by: 

Sal Bonanno
Prime National, Inc.
Main: 855.278.3578
Direct: 646.283.2783
www.PrimeNational.com

Let’s check out some common credit myths:

Credit Myth: “Multiple credit inquiries will hurt your score, each and every time.”  In older FCRA models, inquiries (sometimes referred to as “pulls”) had a greater effect on your score because they counted every inquiry for automotive and every inquiry for mortgage.  So if you were shopping around for the best deal on an auto loan, or shopping around for the best deal on a mortgage, your credit score got dinged for each one. Anyone can see this is absurd, and only serves to penalize smart shoppers, which is really the last thing the CREDIT industry should want, right?

The FCRA models realized that this was discouraging savvy consumers from getting the best deal, so they adjusted the model to only count automotive and mortgage inquiries that are done within a certain period of time to be counted as one single inquiry. 

Therefore someone can shop as much as they want for a car or for a mortgage within a thirty-day period of time, and it only counts as one inquiry.  Saying that is based on what FCRA has revealed.  However, in practice, we’ve seen things play out a bit differently.  We’ve actually seen some occasions where your score is affected instantly based on multiple automotive scores, but it’s difficult to pinpoint without doing a side-by-side, line-by-line check of exactly when it happened.  But overall, what FCRA has disclosed is that multiple pulls, created by comparison shopping, generally only counts as one inquiry.

 Credit Myth: “It will take you seven years to improve your credit.” This is another widespread misconception you will surely deal with at least once in your first year of business.

 In actuality it’s an ongoing process to improve your credit.  It doesn’t take a certain amount of time.  Most negative items will remain on your credit report for up to seven years, as long as they are accurate, verifiable, and actually occurred within that period of time.  Of course, many items are NOT accurately reported, and are not verifiable, therefore they can be removed.

Regardless of whether or not individual line items can be corrected or deleted, though, you can start to improve your credit by maintaining a positive payment history, maintaining lower balances and low utilization rates on your credit cards, and establishing new accounts to get your new payment history going smoothly again.

 Credit Myth:  “A serious financial crisis like as a foreclosure or bankruptcy permanently hurts your credit score.”  Foreclosures will remain on your credit report for seven years, and this is quite likely the origin behind Credit Myth #9. Bankruptcies can linger for seven to ten years: this is entirely dependent upon how the bankruptcy gets filed. A Chapter 13 will remain for seven years, whereas a Chapter 7 will remain for a decade.  Note, however, that the actual bankruptcy in the public records section will remain there for ten years either way.

 The important take-away point is that although these are certainly long periods of time, it’s not permanent, and there are many things you can do after a financial crisis to reestablish your credit and get your credit back on track.

Reprinted with approval.

Cindy Hallas Website Banners AFI 1170x400