10 Tips to Understanding Credit

1 year and 1 quarter

You should review your credit report at least once a year.  Review your report from all three bureaus for accuracy.   If there is any erroneous information, dispute it with the bureaus or contact the creditor(s) immediately for a formal correction.  Go to www.annualcreditreport.com for your free copy.

At least 90 days prior to your desired moving or closing date, you should meet with your mortgage lender to go through a full review of your credit and other pre-qualifying criteria to determine your mortgage readiness or financial fitness.   Your lender should analyze the following information at no-cost and provide you with free counsel on what you need to do to put the “finishing touches” on preparing for homeownership:

Ø      Credit

Ø      Employment history

Ø      Calbulate your income

Ø      What loan options you qualify for / interest rates

Ø      Determine how much down payment will be required

Ø      Determine if any post-closing reserves or savings will be required after closing

Ø      Do you qualify for any down payment assistance programs?

Ø      Determine an estimated monthly housing payment

Ø      Determin an estimated $$$ amount needed for closing costs

Being Defined By Your Credit

The fast-paced world today has forced us to classify consumers into categories in order to deliver products and services to them quickly through the use of technology.   Therefore, credit scoring becomes an important tool by which creditors can quickly determine a borrower’s “willingness and ability” to repay a debt or obligation.   Credit scores show defined patterns or “history” and then those trends are represented as a score.  That score is then used in combination with other factors (down payment, debt to income ratios, assets or reserves) and then translated into an underwriting decision.

Middle of the Road

FICO, Fair Isaac, Beacon.  Words to confuse an already confusing process. Each of the three major bureaus, Transunion, Equifax (or CSC) and Experian, has their own credit-scoring model.   So, three models mean three different credit scores.   For the purposes of obtaining financing for a home, your lender will use the middle score.   There are some alternative loan products that will use only ONE specific bureau or even the HIGHER of the three scores.   Consult with your mortgage professional on those options that are available based on your specific situation.

Making the Grade

How well are you “schooled” in the art of credit?   Your credit score can be “graded” out into the following categories: 

Ø      A++                     720 or higher

Ø      A to A+                 660-719

Ø      A minus to A           620-659

Ø      B to B+                 600-619

Ø      B minus to B           580-599

Ø      C to C+                 560-579

Ø      C minus to C          550-559

Ø      Under 550             Be Prepared to Prepare

Just because you may not rate on the ”high end” of the credit spectrum, you should still research your financing options or get counsel on what you need to do to become “credit ready” so you can buy a home.

Pieces of the Credit Pie

To understand your credit better, it would be helpful to understand the components of credit scoring.  Those factors are:

Ø      35% - previous credit performance (tied to payment history)

Ø      30% - current level of indebtedness (what is owed vs. available high credit)

Ø      15% - time credit has been in use (when was the account opened)

Ø      10% - types of credit available (installment, revolving, secured, unsecured)

Ø      10% - number of inquiries

Opposites Attract

High means low and low means high.   A higher credit score will allow you to obtain the most aggressive rates, terms and conditions for financing.  Typically, a median credit score of 680 or higher will allow you to tap into the best interest rates as well as the number of available products that you can access when it comes time to get a loan.   Your credit score will have a direct effect on other important loan factors such as:

Ø  Rate

Ø  Down payment

Ø  Term

Ø  Amortization type (fixed, ARM, Interest only, etc.)

Ø Documentation type

Ø  Prepayment penalty

Credit Score Isn’t Everything, But It Is Important

The concern over credit scores is “level orange” today.   But, concern about your credit score can often be offset with a combination of compensating factors such as:

Ø      Larger down payment

Ø      Reserves / savings AFTER closing

Ø      Shorter loan term

Ø      Minimal payment shock

Ø      Co-signer

Ø      Low or moderate debt-to-income

Ø      Mortgage Insurance

The Burden of Proof

If you note errors on your credit report, you can dispute the information under your consumer rights as outlined in the Fair Credit Reporting Act.    Upon such a request, the credit bureau will investigate the account within a reasonable time (generally 30 days) by contacting the original creditor for verification.  If the credit agency cannot verify a disputed item, it must be deleted from your credit history.   If the creditor confirms the information, then the bureau will notify you in writing, but the item will remain on your report.   Ultimately, it is your responsibility to dispute inaccurate information on your report. Often, a better first step would be to contact the creditor directly, obtain a written letter from the creditor stating that the item in question will be corrected, and then forward that information to all three credit bureaus.

 The “B” Side  - Alternative Credit

Every record has a “B” side and often there is a great song on the “B” side, but it just don’t get as much attention as the featured song on the “A” side.   Well, credit has an “alternative” or “B” side, too, and many consumers are not aware of how great it can be – especially if you don’t have a formally established credit history.   Certain loan programs will consider the use of “alternative” credit to prove “credit worthiness.”  Some possible sources of alternative credit include:

Ø      Rental history

Ø      Utility payments

Ø      Cell phone, cable, and other household payments

Ø      Childcare provider

Ø      Locak bank or credit union

Ø      Auto dealership

Ø      Medical provider

Ø      Loan from a private individual (typically need cancelled checks for proof of payment history)

Don’t eliminate these options when considering purchasing a home.  However, it’s important to understand that the use of alternative credit may not offset other recent delinquencies on your credit report.

 Don’t Procrastinate

Don’t delay in attempting to establish positive credit so you can start a new chapter in your credit history.   Some options are to: 

Ø      Open a checking or savings account so yo can start managing your finances.

Ø      Apply for a secured credit card.

Ø      Fina a family member with good credit who will co-sign on a loan or agree to add you as an authorized user to a credit card that he/she has already established.

If you’ve had credit challenges in the past, you need to incorporate one or both of these ideas into your money management plan so you can become “bankable” and “verifiable” for your creditors.   The best way to overcome past credit challenges is to establish and maintain new, positive credit.

For more information on your home loan, please contact a LegacyCare loan consultant at 817-860-3232 or you may email us at info@legacyfinancial.com.