As interest rates continue to plummet millions of Americans will flock to their lender to refinance and many of those will find that their credit scores prevent them from taking any real advantage of those new low rates. Borrowers that financed when rates were low previously, and their credit scores higher, were able to get a decent rate then. Now that they’ve missed a few payments and lowered that score, they would likely get the same rate offered to them years ago, or worse. Let’s take a look at what’s in a credit report and your [tag]FICO[/tag] score (The software used to calculate a great number of [tag]credit scores[/tag] was created by the Fair Isaac Corporation–FICO).
Typically, four types of information are reflected:
- Personal information. This includes your name, spouse’s name, social security number, current and previous addresses, birth date and current and previous employers. This data is culled from your past credit applications, so its accuracy is dependent upon how completely and honestly you fill out forms each time you apply for [tag]credit[/tag].
- Credit information. Included is information regarding each of your accounts with banks, retailers, credit card issuers and/or other lenders. Credit limits as well as loan amounts and balances are detailed, along with payment patterns going back a few years.
- Public information. This includes bankruptcies, tax liens and monetary judgments, and, in some states, overdue child support.
- Inquiries. Included are the names of those who requested and obtained copies of your credit report.
Now not all of this information remains on your credit report permanently
Positive credit information will remain on your report indefinitely, although information about an account will fall off your report if nothing new is reported for seven years.
Negative credit information remains on your report for up to seven years after the date of the original delinquency.
The length of time for which a bankruptcy will affect your credit depends on the type of bankruptcy that you file. Chapters 7, 11 and 12 remain on your credit report for 10 years. Chapter 13 bankruptcy (under which all or part of all debts owed are repaid under a court-approved payment plan), will be deleted from your report after seven years. All other public record information is typically removed after seven years.
Inquiries are cycled off your report after one to two years, depending on the type of inquiry. There is of course some personal information that your credit report does not reveal. It doesn’t reflect information about your race, religious preference, medical history, personal lifestyle, personal background, political preference or criminal record.
I’ll shed some light on how lenders evaluate your report
How are credit scores calculated?
Credit scores are generated by inputting the data from your credit report into software that analyzes it and equates a number. The three major credit reporting agencies don’t necessarily use the same scoring software, so often the credit scores they generate for you are different.
Which parts of a credit history are most important?
The breakdown below shows the approximate value that each aspect of your credit report adds to a credit score calculation. Use these percentages as a guide:
35% – Your Payment History
30% – Amounts You Owe
15% – Length of Your Credit History
10% – Types of Credit Used
10% – New Credit
Your Payment History Includes:
- Number of accounts paid as agreed
- Negative public records or collections
- Delinquent accounts:
- total number of past due items
- how long you’ve been past due
- how long it’s been since you had a past due payment
What You Owe:
- How much you owe on accounts and the types of accounts with balances.
- How much of your revolving credit lines you’ve used (looking for red-flags you are over-extended).
- Amounts you owe on installment loan accounts vs. their original balances. (to make sure you are you paying them down consistently-which means negative ARM loans can hurt your credit).
- Number of zero balance accounts.
Length of Credit History:
- Total length of time tracked by your credit report.
- Lengths of time since accounts were opened.
- Time that’s passed since the last activity.
- The longer your good history the better your scores.
Types of Credit:
- Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
- A mixture of account types (referred to as Trade-lines) usually generates better scores than reports with only numerous revolving accounts (credit cards)
Your New Credit:
- Number of accounts you’ve recently opened and the proportion of new accounts to total accounts.
- Number of recent credit inquiries.
- The time that’s passed since recent inquiries or newly-opened accounts.
- If you’ve re-established a positive credit history after encountering payment problems.
- In general, checking to make sure you aren’t attempting to open numerous new accounts.
Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren’t included in the report; such as income, employment history and the type of credit you are seeking.
What’s a Good Credit Score?
Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline. Borrowers with a credit score over 700 are typically offered more financing options and better interest rates.
Multiple Credit Scores
Your bank will pull credit reports and scores from all three major credit reporting agencies: TransUnion, Equifax, and Experian. They’ll probably use the middle score (mid-score) to work your loan application. You lender will want a copy of your credit report as part of the pre-qualifying process for a mortgage; you’ll be asked to sign a form authorizing them to acquire the reports. The purpose is to see how your credit looks and to clear up any errors that might be in it.
There are three major credit-reporting agencies in the United States: Experian, TransUnion and Equifax. You may wish to order a copy of your credit report to review. Thanks to a federal law you are entitled to one free credit report from each of the main credit reporting agencies per year, though the reports are not automatically sent out. You may go to annualcreditreport.com to access their annual credit report online for free; call (877) 322-8228 or you may complete the form on the back of the Annual Credit Report Request brochure, and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA, 30348-5281If you want to review your credit reports more frequently, you can order directly from the credit reporting agencies via their Web sites, by phone or mail. Costs vary from state to state, in most states, it will cost about $9.95 to get your report.
[tag]TransUnion[/tag], [tag]Equifax[/tag] and [tag]Experian[/tag] all allow you to review your report online free for 30 days; you will not however see your score. The reports will have different information because it’s a voluntary system, and creditors subscribe to whichever agency they prefer.
So if you want to score big in the interest rate game, you must maintain your score and understand the system. You must always protect it against identity thieves and mistaken negative reporting. In the end, maintaining your score will save thousands in interest on your home, auto, and credit cards; making you the clear winner in the credit game!