If you have been denied credit, the credit bureau
involved may automatically provide you with a free copy of your credit report, but
if not, you should request it. Visit
AnnualCreditReport.com to get a free copy of your credit report from
each of the nationwide credit reporting companies. You can receive a free
credit report from each reporting company once every 12 months. You can
also order your free credit report:
By phone: Call (877) 322-8228
By mail: Download and complete the
Annual Credit Report Request Form and mail it to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
Although virtually all creditors have different means of evaluating
loan applicants, many of them use "credit scoring" during some
stage of the process. Discrimination lawsuits across the country
have increased the use of credit scoring. What is it? Quite
simply, its a process whereby the applicant is awarded points for various
credit characteristics. The characteristics will vary depending upon
the lender, but some of the most common are:
You may receive a higher score if you are in an age group which (based
on the lender's own files) has a better payment history.
Length of Residence
It helps your credit score if you have lived in the same location for
more than two years. Lending agencies vary a lot with this variable
however depending upon their location and personal criteria.
Type of Residence
Do not list post office boxes, mail drops or commercial offices as your
address. Owning your home is generally a very favorable factor.
Credit Card History
Your history with credit cards can be critical. These unsecured
"signature" loans will demonstrate that other lending agencies
have trusted you in the past.
You will generally score higher if you maintain checking and savings
accounts - especially with the lending agency itself.
An account that has been turned over to a collection agency or
"charged off" is an extremely negative mark on your credit
This may be the single most important reason to periodically check your
credit reports. Paying off an account or maintaining a zero balance
does not necessarily "close" the account and credit agencies
will score against you if you maintain "too much" available
credit or maintain too many accounts. If you have credit accounts with no balance, close them.
Recent late payments, especially those on mortgages and credit cards, are
tremendous negatives if they have occurred within the past year. The more
recent the occurrence, the more damaging to your ability to get credit.
Length Of Credit History
Having little to no credit history will count against your credit
score. Generally, the lender will take your age into consideration,
but most will want to see at least a year of making timely payments.
If you're just starting out, it generally pays to open a department store
account and make monthly charges and payments just to build your credit
A bankruptcy on your credit record will generally ensure
disqualification. You should never use bankruptcy to escape credit
problems unless it is a very last resort. A bankruptcy will stay on your
report for 10 years.
Just as it is with your residence, stability pays. Being with the
same employer for more than two years will benefit you when you apply for
a loan. Since many of our clients are self-employed, we need to
point out that self-employment is often a negative factor when trying to
obtain credit. There is no "independent source" like an
employer to verify income, so lenders often require reviewed financial
statements, bank records and other data from an outside agency.
As mentioned previously, having too much available credit can count
against you even if it is unused. Lenders will often calculate your
estimated debt load based on you using all of your available credit.
Also, how close you are to the credit limit with various other lenders
will also have a negative impact.
Mortgage lenders and many other creditors will generally examine your debt/income ratio
to determine whether you
qualify for additional credit. Your debt/income ratio is computed by
totaling up your monthly payments on all bills (excluding your mortgage
medical bills and any other accounts
that do not appear on your credit report) and dividing that amount by your monthly gross (before tax)
income. If your debt/income ratio exceeds 28%, you may have trouble
securing additional credit (especially a mortgage) although some credit
card companies may go as high as 40%.
Most mortgage companies report all of their
mortgages to the credit bureaus. If a mortgage is past due by 90
days or more, they are required to report it. It goes without saying
that your mortgage payment should probably be the first item on your
monthly bill paying list.
Many people are shocked to learn that the appearance
of a finance company on your credit report can actually count against you
in a scoring system. The reason? Many lenders consider finance
companies a "lender of last resort." They will take it as
a sign that you could not obtain financing elsewhere when the loan was
Inquiries will generally appear at the end of your credit
report and they tell the creditor who else has requested copies of your
report. If you have had too many inquiries (the number varies by
lender), they will score against you on your report. Lenders
generally consider numerous inquiries as a sign that you are applying for
too much credit or are getting turned down elsewhere. If you plan to
pursue a major loan in the coming months, you will probably want to avoid
having your credit report "pulled" for a minor borrowing
transaction. For example, if you are shopping for a new car, make
certain that you DO NOT give several dealerships permission to examine
your credit file until you are sure of the final purchase.
Needless to say, if creditors don't want to
see recent inquiries into your account, they obviously don't want to
see recent borrowings either. That could indicate a
"distressed" financial situation on your part.
Okay, let's say you have obtained copies of your
credit report, examined all of the factors listed above and (quite likely)
have discovered numerous errors on your report. What do you do?
Under the Fair Credit Reporting Act (FCRA),
the credit bureaus are required to investigate and correct any
errors in your file. There will be information included with
the report which instructs you on the procedure necessary to file a
correction. Please bear in mind that the bureau will not
remove negative information from your file if it is, in fact,
If you dispute information in your credit
report that you feel is inaccurate, and the credit bureau cannot
resolve the problem, you are entitled to file a brief statement
explaining the nature of the dispute as you see it. That
statement will remain in your credit report as long as the negative
information is reported. The bureaus may (but are not required
to) allow you to place a statement in your file which explains a
situation that led to a negative report. Examples of this
would be a layoff or extended illness.
Credit reports can be quite confusing even to
people in the credit industry. If there is something on your
report that you do not understand, please don't hesitate to contact
the bureau issuing the report. They are required under the
FCRA to assist you in understanding every aspect of their
report. Too many times we have assisted clients in preparing
financial projections for that new business or home only to see them
get "broad-sided" at the bank by a poor credit
report. If you haven't taken a look at yours recently, there
could be trouble on your horizon.