Credit reports are changing and when you apply for a loan, whether for a car or home mortgage you will be hearing more about something called your credit score.
Credit scoring has actually been used since the 1950s, but became widely available in the 1980s. Credit scores have been most often used for the bank card and auto lending. Now mortgage lenders are using credit scores more extensively.
Even with increasing focus, credit scores are only one of many factors used to determine qualification for a loan. Credit scores range from 375 to 900 points and measure the following:
Payment History
Outstanding Debt
Credit History
Pursuit of New Credit
Types of Credit in Use.
The score is based on all information in the credit report; not just negative information such as missed payments and bankruptcies. Only the information held by a given credit bureau is used, so credit scores may fluctuate from one bureau to the next. Each bureau may hold slightly different information.
The three major credit reporting agencies using credit scores are Equifax, Trans Union and Experian.
A credit score can be improved over time as a borrower makes payments on time and uses credit wisely. A late payment from four years ago is not counted as heavily as one just months old.
The Fair Credit Reporting Act allows credit reporting agencies "a reasonable period of time" to investigate consumer disputes. If you wish to dispute information on your credit report call the following:
Equifax: 800-685-1111
Experian: 800-831-5614
Trans Union: 800-634-8440
Removing erroneous credit information may not have a significant effect on the credit score. Neither may paying off credit, since the mix of available credit may counteract the amount paid off. (Debt ratios used by lenders are independent of credit scores.)
Few lenders maintain an absolute stance about minimum credit scores. Instead, most lenders use credit scores as part of the underwriting analysis along with income and job history, available assets (including down payment and savings reserves), and the appraisal of the property.
Statistically 1:8 borrowers with credit scores below 600 can be expected to default on their loans. The ratio drops to 1:123 for scores between 700-719 and to 1:1,292 for loans with scores above 800.
On its own, a credit score will have little meaning if you are declined for a loan. The Fair Credit Reporting Act requires the credit agencies to provide reasons when a loan is declined because of factors within the credit report. These reasons may include such issues as delinquencies on accounts; account balances which are too high, too many accounts opened within the past 12 months, and too few accounts currently paid as agreed.
Understanding the reasons for a low credit score allows a consumer to work on improving his or her history.
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