YOUR CREDIT

 

YOU AND YOUR CREDIT

About Credit Scoring
How Credit Scores Are Used
Credit Score Guidelines
Protect Your Identity

 

 

Credit Scoring

Credit scores and your mortgage approval
A credit score essentially is a numerical “score” based on one’s ability to pay credit/debt over time. It is used by lenders to assist them in determining which loan program and interest rate can be made available to you.

The mortgage industry started utilizing "scoring models" in the early 1990’s. The use of scoring models in the mortgage industry came about as the major secondary market players known as Fannie Mae and Freddie Mac developed new automated underwriting systems. Those systems compare payment histories from literally millions of similar loans coupled with the credit score of the applicant.

The early creators of the automated underwriting systems believed that, if someone could go to a Mercedes dealership at 10 am and drive off the showroom floor an hour later with a $100,000 car (a depreciating asset), they ought to be able to obtain a home loan (an appreciating asset) the same way. The mortgage industry has been slow to adapt, but finally scoring models now figure prominently in the future of how people obtain home mortgages.

There are three major repositories of credit and background information: Equifax, Experian and TransUnion. When a consumer obtains credit, the creditor reports the payment history to these repositories. This is generally done monthly. 

These repositories simply accept the information as it comes in electronically. This is very important to remember, they DO NOT check the accuracy of the information.

We have lots of information in this unveiling of credit mysteries; we hope it proves helpful to you. Help yourself to the information provided.

AZG Capital L.L.C. has the best loan programs available anywhere. We hope you will think of us when you, your friends or relatives are shopping for a loan.

 

 

How Credit Scores Are Used

When you apply for a mortgage, your lender will request a tri-merge (all 3 bureaus) credit report from a credit reporting company. This company pulls together a credit report electronically. 

Along with the information, the credit reporting company receives a numerical score. The score represents a composite of your credit history, employment, ability to save, and so on. The most well known of these scores is known as the FICO score, which was a model developed by the Fair-Isaacs Company. Scores can change literally daily, depending on the information received at the repositories.

The Fair-Isaacs Company and the other major credit repositories do not divulge how the scoring model works. Congress is pressuring the credit repositories to be more accountable for the accuracy of the information they report AND to divulge what goes into the scoring models, to help people better understand how to improve their scores.

Why is this important?
The lending industry is moving toward "risk-based" pricing. This means that the higher one's credit scores, the less paper they will have to provide to prove that they are creditworthy AND the interest rate and/or fees a borrower pays will be based on the level of their scores.

This system, while perhaps unfair to some, will be fantastic for those who maintain excellent credit. It's one way that good credit risks can be rewarded. 


Important Hints:

·         Pay all your payments on time.

·         Don’t apply for any new credit unnecessarily. Every time you sign and return a new credit card offering, or open an account at a store, an inquiry will be generated and that can reduce your score.

·         If you must maintain credit card balances, try to keep them at a level that is 40% - 50% of the maximum credit limit. In other words, if the credit limit is $5,000, try to keep your running balance below $2,000.

·         Consolidating all your credit cards can hurt your score as well.

·         If you get into a dispute and it isn't a huge amount, pay it and move on. Having one or more collections, even if they are small amounts, can really hurt your score.

There are many more tidbits, but I will save them for the next sections, when I will also discuss how to correct erroneous credit information.

If you have recently obtained your credit report and you are not happy with what was reported, you can take steps to correct the erroneous information on it. There are also proactive things you can do to improve your scores, if you are anticipating applying for a mortgage anytime soon.

 

 

 

Credit Score Guidelines

As a key component in evaluating you as a credit risk, lenders use this information to see if you have missed payments, carry high balances, or are in other ways over extending yourself financially. The following categories are a general guideline to borrower creditworthiness (these are general guidelines only - other factors may be included in your credit evaluation and the approval process):

Excellent Credit
Credit scores of 720 and above

  • 5 trade credit lines (credit cards, auto loans, mortgages) each having been open for at least 24 months
  • All accounts have been paid as agreed
  • No public records of bankruptcy, foreclosure, serious past due accounts, or collections within the last 10 years
  • Low current credit balance relative to maximum available credit limit
  • Minimum number of credit inquiries

Very Good Credit
Credit scores between 680-719

  • 5 trade credit lines (credit cards, auto loans, mortgages) have each been open for at least 24 months
  • All accounts have been paid as agreed
  • No public records of bankruptcy, foreclosure, serious past due accounts, or collections within the last 7 years
  • Low current credit balance relative to maximum available credit limit
  • Minimum number of credit inquiries

Good Credit
Credit scores between 620-679

  • 5 trade credit lines (credit cards, auto loans, mortgages) have each been open for at least 24 months
  • Most accounts have been paid as agreed, with only occasional late payments
  • No public records of bankruptcy, foreclosure, serious past due accounts, or collections within the last 10 years
  • May have significant current credit balance relative to maximum available credit limit
  • Several recent credit inquiries

Fair Credit
Credit scores between 580-619

  • 3 trade credit lines (credit cards, auto loans, mortgages) have each been open for at least 24 months
  • Most accounts have been paid as agreed, with only occasional late payments
  • No public record of bankruptcy, foreclosure, serious past due accounts, or collections within the last few years
  • May have significant credit balance relative to maximum available credit limit
  • Several recent credit inquiries

Poor Credit 
Credit scores 579 and below

  • One or more accounts have not been paid as agreed
  • May have had a bankruptcy, foreclosure, serious past due accounts or collections
  • High number of recent credit inquiries
  • Proportion of revolving balances to revolving credit limits is too high

  

Protect Your Identity

The Identity Theft Assumptions Deterrence Act, passed in 1998 closes vital gaps against identity theft. This law offers the strongest protection ever against this type of crime. It also redefines the theft of personal information as a crime.

In the past. consumers were left to repair damaged credit reports and the credit card companies were considered the victims of identity theft. This law allows victims of idenity theft to seek compensation for "identifiable losses" as well as expenses related to clearing their name and credit history. Unlike previous federal legislation, this identity theft law allows law enforcement officials to prosecute criminals who steal personal information.

"The Identity Theft and Associations Deterrence Act" includes the following measures to protect you and other consumers:

·         Making identity theft across state lines a crime with a punishment of a fine and imprisonment of up to 15 years.

·         Allowing restitution to the victim.

·         Increasing levels of jail time, depending on how many victims the criminal defrauds.

·         Requiring the U.S. Secret Service to keep statistics on the identity theft cases they handle and which are reported to them by state and local authorities, and by financial institutions.

If you have been a victim of identity theft, you can contact the Federal Trade Commission's complaint center by calling (202) FTC-HELP or sending an email from their website at http://www.ftc.gov/ftc/complaint.htm. Or, you can write to: Consumer Response Center, Federal Trade Commission, CRC-240, Washington, D.C. 20580.

Protecting your identity

·         Monitor your credit. Check your credit report regularly. Obtain your Social Security Earnings and Benefits statement once a-year to ensure that no one is using your social security number for employment. Social Security Administration (800) 772-1203.

·         Check your bills. Carefully study your credit card statements, phone and utility bills and cancelled checks for unauthorized use.

·         Carry only what you need. Try to leave your social security card and extra credit cards in a safe place. Protect your records. Keep a list of all your bank accounts, credit cards, account numbers, and customer service numbers in a secure place.

·         Choose proper passwords. When creating personal identification numbers (PIN) avoid using anything easy to figure out, and change them regularly.

·         Keep your Social Security number secret. Don't give it out. It's only necessary for certain items such as tax forms, employment records, banking, and property transactions.

·         Shred any documents that have any personal information or credit account numbers on them before discarding.

·         Cover the screen or keypad when using an ATM or public phone so thieves can't read your personal identification number (PIN).

·         Mail Strategically. Always drop your mail in the U.S. Postal blue boxes or at the post office, don't leave it in your mailbox at home.