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Understanding
Credit Report Score

The term credit report score actually refers to your credit score which in turn usually refers to your FICO credit score, a number based on a formula developed by the Fair Isaac Corporation, which looks at a summary of all your credit accounts and payment history.

Your FICO (credit report) score determines your access to and cost of credit. Most lenders use it as the main basis for loan or credit approvals, so the higher the better and the lower the more problems.

Your FICO credit report score ranges from 300-850, and Fair Isaac calculates them for each of the three big credit-reporting agencies: Trans Union, Equifax, and Experian.

More information is available at: myfico.com

Here's How Your Credit Report Score is Determined:

• 35% is determined by your payment history. Do you regularly pay your bills on time to any creditor that submits your information to the credit bureau? Overdue medical bills, utility bills and other bills may appear here.

• 30% is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you or the total loan amount you took out (debt to equity ratio). If you're maxing out your credit cards, your score may suffer. It appears that the ideal is keep your balances below 30% of your maximum credit line.

• 15% is based on the length of your credit history, both how long you've had each account and how long it's been since you had any activity on those accounts. The fewer and older the accounts, the better (assuming you've made timely payments).

• 10% is based on how many accounts you've recently opened compared with the total number of your accounts, as well as the number of recent inquiries on your report made by lenders to whom you've applied for credit. Your score can drop if it looks as if you're seeking several new sources of credit, a sign that you may be in financial trouble. (If a lender initiates an inquiry about your credit report without your knowledge, though, it should not affect your score.)

  Shopping around for an auto loan or mortgage shouldn't hurt, if you keep your search to six weeks or less. But every inquiry you trigger when you apply for a credit card can affect your score. So be selective.

• 10% - The types of credit used determine the final 10%. Having installment debt like a mortgage, in which you pay a fixed amount each month, demonstrates that you can manage a large loan. But how you handle revolving debt, like credit cards, tends to carry more weight since it's seen as more predictive of future behavior. (You can pay off the balance each month or just the minimum, for example, charge to the limit of your cards or rarely use them)

What's Not in Your FICO Credit Score

So What Can You Do to Get and Keep a Higher Score?

• First, never have any late payments.
• Second, don’t have a sudden surge of credit activity and credit inquiries.
• Third, don’t “tap out” your credit usage. Using more than 30% of a credit line seems to negatively impact a credit score.

Why Do Mortgage Lenders Pay So Much Attention to These Scores?

While there is a 1 in 1,300 chance that a borrower with a score above 800 will have similar problems.

It is therefore easy to see that lenders will put a lot of reliance on such credit evaluation systems.

When Should You Check Your Credit Reports and Credit Scores?

Many times home buyers wait until they have a property under contract or until they apply for a mortgage to have their credit reports pulled. If any errors or problems arise, sometimes great delays and heartaches result.

It can take 4 to 6 months sometimes to get inaccurate information removed from your credit reports and even longer to get your credit scores (the importance of credit scores is discussed below) to readjust and increase to where you can qualify for a mortgage. In the meantime the seller probably isn't going to wait, you may have already spent money on inspections, and you are back to square one.

Credit Reports Riddled With Errors!

"One in four credit reports contains errors serious enough to cause consumers to be denied credit, a loan, an apartment or home loan or even a job, according to a new survey released by U.S. PIRG.

'The big credit bureaus and big business tolerate big mistakes in credit reports,' said Ed Mierzwinski, U.S. PIRG Consumer Program Director. 'But those mistakes ruin the financial reputations of hardworking Americans.'

Three national credit bureaus, Equifax, Experian, and Trans Union, collect and compile information about consumer creditworthiness from banks, creditors and from public records such as lawsuits, tax liens and bankruptcy filings. The so-called "Big Three" each maintains a file on nearly every adult American. The resulting credit report amounts to a consumer's financial résumé. The credit score calculated from this report is a consumer's financial SAT.

Over the last decade, the state PIRGs and other consumer organizations have issued numerous reports showing that sloppy credit bureau practices are at fault for errors in consumer credit reports.

'It is outrageous that inaccurate credit reports could damage 1 in 4 consumer's ability to buy a home, rent an apartment, obtain credit, open a bank account, or even get a job,' said Mierzwinski.

U.S. PIRG collected 200 surveys from adults in 30 states who reviewed their credit reports for accuracy. Key findings include:

• Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit;

• Seventy-nine percent (79%) of the credit reports contained mistakes of some kind;

• Fifty-four percent (54%) of the credit reports contained personal demographic identifying information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;

• Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open."

So, with 79% of credit reports containing mistakes of some kind,
don't you think it makes sense to check your credit
early in the process?

Where Do You Get Your Credit Reports?

• First, you could get them directly from the three Credit Reporting Agencies:

• EQUIFAX - www.equifax.com 800-685-1111

• EXPERIAN (Formerly TRW) - www.experian.com 888-397-3742

• TRANSUNION - www.transunion.com 800-888-4213

These direct reports will cost you $8.00 to $12.00 each plus an additional $7.00 to $11.00 for each credit score.

Caution: the credit scores offered by the credit repositories are called consumer scores and are not the same that a lender receives. If you are applying for a car loan that score is different than the score if you are applying for a mortgage loan, which are different from the consumer score. Each uses a different scoring method to obtain the three digit score.

The FICO score that was discussed earlier is the closest score to what mortgage companies use. If you obtain your free credit reports from www.annualcreditreport.com (discussed below), when you get to Equifax, also ask for the FICO score. It will cost you $7.95 to do so, but it will give you a better idea of where you stand.

• Second, most mortgage companies will obtain your credit reports and credit scores, with information merged from all three credit reporting agencies, at no cost to you as part of a mortgage pre-qualification or pre-approval. This certainly is a quick, easy and less expensive means by which to check out your credit than to buy your credit report and credit score from each credit agency.

• Third, a federal law (The Fair and Accurate Credit Transactions Act of 2003 - the FACT Act) has gone into effect whereby the credit reporting agencies must provide you with one free report per 12 months. The official web site is www.annualcreditreport.com.

  The free reports, however, don’t include your credit score. They will still charge extra for your credit score. Additional information can be found on the Federal Trade Commission's web site

• Forth, you also may be entitled to a free credit report under state law. The following states have laws that make free credit reports available to consumers: Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey and Vermont.

Why Should You Obtain Your Credit Reports From All Three?

Married couples should obtain individual reports rather than joint reports, as it is easier to challenge inaccurate information for each of you.

It is also easier to challenge information on reports obtained from the credit reporting agencies separately rather than from a merged report, which combines information from two or all three agencies. Mortgage companies use merged reports. The reports obtained through www.annualcreditreport.com are separate and thus easier to review and then challenge inaccurate information.

How Do You Correct Inaccurate Information on Your Credit Reports?

"Validate" vs. "Verify:

Most people ask the credit reporting agency to "verify" rather than "validate" the inaccurate information. It is easier for the agencies to meet the legal threshold of "verify" than it is the threshold of "validate". The law requires the agency to "validate". You should ask for the same.

Several attempts may be necessary to obtain an accurate report from each. The credit reporting agencies are good at using delaying tactics. Keep at it. Stick to your guns.

What about negative information, such as bankruptcy, judgments, and collections?

Bankruptcies "must" be removed from your credit report after 10 years and judgments, collections and other negative items after 7 years.

However, nothing in the law requires any negative item to remain for a "minimum" amount of time.

It is generally thought that if you have a bankruptcy on your record or other negative item that you are figuratively in "credit prison" for 7 to 10 years.

The reality, however, is that if there is "inaccurate" information being reported within an item that otherwise is accurate, you can legally challenge it and if the agencies can't validate the item and correct the inaccurate information, they must remove the item from your credit report.

For example, let's say you filed bankruptcy two years ago. It is being reported accurately, except that the assets and debts are being reported as zero. Obviously, if you filed bankruptcy you would have had assets and debts.

Because these items are being reported as zero, the item is inaccurate and must be removed unless they validate the item and include the proper amounts for assets and debts. Any item being reported must be 100% accurate or it must be removed from your report.

For more information about credit repair and improving your credit scores, including a discussion of credit repair organizations and DIY, Do It Yourself, credit repair, go to our web site - www.home-buying-action-guide.com/credit-repair.html.

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