Credit scoring is a way of determining how likely a borrower is to pay back their loan. Scores range from around 300 to 850 points and are available from three national credit bureaus: Equifax, Trans Union and Experian. The scores are often referred to as FICO scores.

The score is a statistical analysis based on the information available in the loan applicant’s credit report and is designed to measure the amount of risk the borrower represents to the lender. The credit score does not measure your income, assets or bank account (though these may still be taken in to account independent of the score).

The score is calculated using a system of scorecards that have been developed using credit data on millions of consumers. The bureau takes this data and analyzes credit patterns to predict risk and forecast credit performance. The types of information used include:

Your credit score is a very important component of your mortgage qualification. Within defined limits, the higher your credit score is, the lower your mortgage rate will be. Many loan programs have cut-offs that set the lowest credit score for which a loan can be approved, so it is very important to know your score early in the mortgage process.

Through Cornerstone’s free, no obligation mortgage pre-qualification we will review your credit with you. You will receive a copy of your credit report and your scores will be provided to you.

In the current market, a score over 740 is considered excellent and will earn you the lowest rates. In general, for every 20 points below 740 your rate quote could be impacted.

The score used when determining your mortgage rate is the middle score of three. For each borrower the high score and low score are discarded and the score in the middle is the one considered. In the case of co-borrowers, the lower of the two middle scores is used.

Example scores: 725, 733, 710
The middle score, 725, would be used when considering your loan application.

If you pull your own credit report through one of the bureaus, it does not count in any way against your credit score; however, the report you pull cannot be used as a part of the loan approval process. It can only be used to get an idea of your current score.

If a credit card company or mortgage lender pulls your credit report, it does count against your score. Your score is also lowered every time you apply for any sort of financing, housing, insurance, employment, etc. that requires your credit report to be pulled. How much is your score affected? Each credit inquiry can lower your score as much as five points.

The scoring system counts multiple inquiries made in a 14 day period as just one inquiry, and all inquiries made within 30 days of the credit score being calculated are ignored.

A credit report is essentially a record of your financial past. It includes information on:

Credit reports allow lenders to see how long your accounts have been open, how much credit you have used, whether or not you are seeking new sources of credit, and whether or not you have paid your bills on time.

In short, credit reports give a broad view of your credit history, which is needed in order to make a decision regarding loans.

A credit score can give us a vague idea as to what your repayment history looks like, but no details. A credit report will show us the frequency of delinquent payments, how much they were for, how recently they occurred, and how long it took you to pay. A credit score takes all of this into account, but does not tell us the specifics. We will pay special attention to any housing items on your report; we want to know if you have reliably paid your rent or mortgage in the past.

A longer history of credit shows that you have experience with credit. Your credit score alone will not tell us how old your accounts are.

Credit reports also allow us to look at how effectively you are utilizing your credit – that is, the proportion of credit that you’re using against a credit limit, or the unpaid proportion of a loan amount.

Credit scores do not tell us the types of credit you have been using. Credit reports tell us the types of credit you have used or are using, as well as their balances, payments, and dates of recent activity.

Credit reports show us who has requested your credit report recently, allowing us to see if you are trying to open several lines of credit at once; doing so can be viewed as risky, as you are at risk for overextending yourself.

A low credit score will alert us that something in your history is off, but it will not tell us exactly what that might be. A credit report allows us to examine the details, enabling us to work with you in light of whatever your circumstances may be.

It’s important to remember that the credit report you have access to online may be different from the one we pull as a mortgage lender. A car finance company or credit card company will obtain a different score as they have different scoring methods.

Credit scores are constantly fluctuating based on late and on-time payments, balances, new credit and other factors. Credit bureaus may also change their formulas on which scores are based. Because of these changes, a credit report is generally only valid for 90 days.

1. Give it time. Missed payments can appear on your credit report for up to seven years; bankruptcies can appear for up to ten years. Anything that goes to collections will take longer to clear off of your report, as will single payments that are late multiple times. Lawsuits and unpaid judgments against you can appear for up to seven years or until the statute of limitations expires, whichever is longer. Criminal convictions, information reported in response to an application for a job that pays more than $75,000 a year, and information reported if you apply for over $150,000 worth of life insurance or credit can remain on the report indefinitely. Tip: Having a longer history of credit is a good thing. An account that has remained open for a long time is viewed as a positive, since you have proven to pay your bills consistently and on time.

2. Check your report periodically for inaccuracies, and fix any current ones. The Fair Credit Reporting Act (FCRA) requires each of the three major credit bureaus to provide you with a copy of your credit report, upon request, once every twelve months. It is recommended that you space out your three requests each year in order to keep tabs on what information is appearing on your report. This will potentially make it easier to dispute inaccuracies, as you will be able to catch and report them quickly. Note: Your free credit report does not automatically include your score, although you can request that it be added to each report for an additional fee, usually around $20.

3. Do not open any new lines of credit; instead, focus on the ones you currently have. Avoid filling out every credit application you get in the mail. These will generate “hard inquiries” on your credit; a large number of these in a short period of time will hurt your credit score.

4. Pay your bills, and pay them on time. A full 35% of your credit score is dictated by your payment history, so paying late is detrimental.

5. Keep existing account balances low.

6. Do not make any unnecessary or big purchases. These can lower your credit score and will raise your credit utilization ratio, which should ideally be 30% or less. Anything above 50% will severely damage your credit score. Tip: You can calculate your credit utilization ratio by dividing the amount of your current debts by the amount of your current limits.

7. Consider a secured credit card. A secured credit card works exactly like a typical credit card, but you have to put down collateral, typically up to $500, in order to open it. This helps ensure that you are not spending more than you can pay, and that you will pay your bills on time. A secured card can help boost your credit. They typically have higher interest rates than “normal” credit cards, though, so it is not a great idea to keep a secured card longer than necessary. Note: Not all secured card issuers report to the major credit bureaus. If you want to use a secured card to help re-establish or build your credit, make sure you are using an issuer who will report your information to the credit bureaus; otherwise, opening a secured card won’t help your credit score.

8. Seek help from a credit counselor. Credit counselors will analyze your exact situation and help you come up with a plan for managing your debt. They can assist you with negotiations with credit card companies if you need to lower your interest rates or monthly payments, and they’ll help you stick with your plan, usually by collecting one monthly payment from you and dispersing it to credit card companies for you for a fee. This is a good option if you need to close several accounts, as entering credit counseling does effectively just that – the accounts involved in credit counseling are closed, and a plan is made to pay them off.

You have a right to dispute any inaccurate information in your credit report. To do so, contact the consumer reporting agency.

Equifax Information Services
www.equifax.com
P.O. Box 740241
Atlanta, GA 30374-0241
800-685-1111

Experian
www.experian.com
701 Experian Parkway
Allen, TX 75013
888-397-3742

TransUnion Consumer Relations
www.transunion.com/myoptions
2 Baldwin Place
P.O. Box 1000
Chester, PA 19022
800-888-4213

Under federal law, you have the right to obtain a free copy of your credit report from each of the three major credit bureaus once per year. To order your free report…

By telephone:
Call toll-free: 1-877-322-8228

On the web:
Visit www.annualcreditreport.com

By mail:
Mail a completed Annual Credit Report Request Form (available at http://www.ftc.gov/bcp/conline/include/requestformfinal.pdf) to: Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281