Understanding Your Credit Report         

Almost everyone has faced it.  You go into a lending agency to buy a new car or purchase a home only to have questions arise about items on your credit report.   It has become much more common since the credit crisis.

  

Whether it ultimately affected your ability to get the loan or not, its still aggravating to get blindsided by a discrepancy on your record you may not have known about.  This article will examine ways you can improve your credit report and guard against nasty little surprises when you apply for that mortgage.

Each of the bureaus is required by law to provide you a free copy of the report once every 12 months.  

 

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:

Age

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.

Bank Accounts

You will generally score higher if you maintain checking and savings accounts - especially with the lending agency itself.

Collection Accounts

An account that has been turned over to a collection agency or "charged off" is an extremely negative mark on your credit history.

Inactive Accounts

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.

Late Payments

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 history.

Bankruptcy

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.

Employment

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. 

Credit Limit

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.

Debt/Income Ratios

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 payment, utilities, 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%.

Mortgages

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.

Finance Companies

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 made.

Inquiries

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.

Recent Activity

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.


CORRECTING ERRORS

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, correct.

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.

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