Credit Reporting - What you should know

By
Mortgage and Lending with First Option Mortgage 269761

Let's cover Credit Score basics. A credit report is a document that lists information collected by credit bureau companies. The 3 most common are Equifax, TransUnion and Experian. Scores range from 300 to 850 with 300 being the worst and 850 being the best. A person can also have a zero score. Each company offers a score based on information collected from creditors (also called Traditional Credit) that a person uses. Some creditors only report to 1 bureau which is why one bureau may have a different score from another:

  • A person with a zero score can use non-traditional credit instead of traditional credit
  • Non-traditional credit can be 12 months of car, rental or health insurance payments, cell phone, utility payments, cable or streaming channel payments, personal loan payments, car payments not reporting to the bureau (although the payment will count considerably against the income), rent, life insurance not payroll deducted, school tuition, medical bill payments, child care payments
  • If a person with no credit file has collections, judgments etc, then non-traditional credit cannot be used
  • The minimum score for a FHA loan is 0. The minimum score for Fannie Mae and Freddie Mac is 620
  • For FHA loans, Lenders set the standard for minimum score requirements and they all differ
  • Payment History (paying on time) accounts for 35% of the score
  • Within Payment History is Recency: How recent were you late making a payment. The older the late payment becomes, the faster the recovery on the credit score
  • Within Payment History is Frequency: How often are you late making payments
  • Within Payment History is Severity: How severe are the late payments (30 days, 120 days)
  • Debt Balance vs Credit Limit accounts for 30% of the score
  • Scores do not increase if you leave a balance on the account
  • If you cannot afford to pay off the card, try to keep the balance at less than 50% of the limit. Even better at 33% of the limit
  • Failure to use the account every 6 months may cause inactivity which may lower the score
  • Mortgage companies require that at least 1 credit card is active within the last 6 months
  • Length of Credit History accounts for 15% of the score
  • When a person consolidates student loans and pays off the old accounts, scores will drop
  • Failure to keep accounts active may cause the creditor to close the account and scores will drop
  • Paying off a car, student or mortgage loan will cause the scores to drop. This is why it is important to open at least 3 credit cards
  • The older the credit card, the higher the scores go
  • Types of Trades (credit card, mortgage, car, student loans) account for 10% of the score
  • Using Finance Companies (companies that extend credit to people with bad credit) lowers the score
  • Having a mix of trades like student loans, car loan, department or major credit cards etc can have a positive impact on scores
  • Inquires account for 10% of the score
  • Too many inquiries can destroy a score. Each inquiry can deduct as much as 7 points
  • When buying a home, credit may be pulled several times within a 30 day window and only impacting the score 1 time.  As long as the credit is pulled every 29 days, the credit score will not be affected
  • An Authorized user's social security number is not used when adding him/her to the card and therefore it does not report to the bureau
  • A co-signer's social security number is used and is therefore reported to the credit bureau
  • Make sure that if you co-sign with someone, do not rely on that person to make the payments on time
  • Even if the Judge states that you are not responsible for a credit payment in cases of divorce, you are still required to make sure the payments are being made until you remove yourself from the account
  • If you have a collection, judgment or tax lien over 1 year old and you pay it off, the scores will drop because you will now have a brand new collection, judgment or tax lien with a zero balance. When home buying, ask the loan officer if it is okay to pay this off at closing
  • If the car stopped working, you are still responsbile for payment of the debt
  • If you move, you are still responsible for making payments to the creditor (call them)
  • If you move out of your apartment and don't pay your rent as agreed, it will negatively affect your score
  • If you bought a cell phone and then canceled the service, you are still responsible for the balance and it will negatively affect your score
  • If you buy 12 cases of wine at Disney World and fail to pay the bill, it will negatively affect your credit score
  • If you fail to pay your medical bills, it will negatively affect your score. 
  • If you write several bad checks against your bank, some banks report the information to the credit bureau
  • If you fail to pay child support or alimony, it will negatively affect your credit score
  • If you file chapter 7 bankruptcy, your credit score will be affected until after 1 year after the discharge date
  • If you file chapter 13 bankruptcy, your credit score will be affected during the repayment history and then until 1 year after the discharge date
  • If you foreclose, have a short sale or deed in lieu of foreclosure or if you go through a home assistance program to keep your home, your credit will be affected until after 1 year of the foreclosure date, sale date, deed in lieu date or until you have been making payments on time for 1 year respectively
  • If you use credit counseling services, your credit score will be affected until 1 year after the last payment was made
  • If you have tax liens, collections, judgments, charge offs or child support/alimony past due payments, your score will be negatively affected until 1 year after the last reporting date of the creditor (for home buying all the above except collections under $2000 must be paid off for FHA)
  • Disputing an account erases negative information against the score. Most creditors require a dispute be removed to show the actual score
  • For Fannie Mae loans, credit lines not reporting a monthly payment will automatically use 5% of the balance as the monthly payment
  • It's important to make sure your creditors are reporting correctly on the credit report
  • On-line credit companies do not accurately report information

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