My Credit Score isn’t the same? Why?

When your lender ‘pulls your credit’ they get a Tri-Merged credit report.  That translates to, the single credit report they receive is a compilation of all 3 of the main credit bureaus reports.   The lender will use your Mid-Score.  That is not the average of your 3 scores, but the middle of the 3 scores.

Why do I have 3 different scores?  Shouldn’t they all be the same?

It seems like all the scores should be the same, but each bureau does its own computations; coming up with their own numbers.  Also, some companies only report to one credit agency, not like your mortgage that reports to all 3; So some of the credit agencies have different information to base your credit score on.

The lender will only use your mid-score to determine what type of loan you will qualify for.  So if they do need to do any credit repair, they will just work with the one credit bureau reporting your mid score.

Correcting my Credit – what’s that all about?

There are many services out there that charge quite a bit to clean up your credit score.  If you are considering purchasing a home, I would suggest first contacting a good mortgage banker and see what could be done quickly, or will it be a process that takes time.

If you sit down with your mortgage person (ask me for a couple of very good ones) you can see what is on your credit.  Sometimes, there are a few things that just haven’t been updated.  If you can provide a statement (an online statement is perfect) that shows you have paid off the balance, or reduced the balance on an account.  That could be enough to bring your score up a few points.

If there are any accounts that are old and unpaid, it could hurt your credit to pay them off.  (I never said that determining credit made sense… )  In this case it may be possible to pay it off as part of your closing, and possibly even settle the debt for less money than owed.

Rescoring your credit can be costly; it runs $30 per account per credit bureau.  With several accounts to update quickly, the costs can add up fast.

Managing your credit repair can be tricky.  If you have the time, (you’re not looking to purchase a home or car right away) you can do it yourself.  Choose any of the services that you can get your credit report from, and check it out yourself.  If there are discrepancies;  get it corrected yourself.  Be sure to DOCUMENT, DOCUMENT, and DOCUMENT as you go with certified letters to confirm receipt, copies of everything and be diligent.

What goes into creating your FICO Score?

Most people (74%) believe your credit score is based on your income.  Not True!

• 35% is payment history
  • The most important factor in your credit score is your payment history. Making payments on time is key in keeping and getting your score as high as possible.
• 30% is the amount owed
  • Keep your credit card balances low, at the most have 30% owed and 70% available credit.
• 15% is the history of your credit
  • How long have you had credit established? If you have all new credit, this could hurt you.
• 10% is new credit (less than 6 months old)
  • Getting new credit can help someone with little or no credit, if all of your credit is established, not to worry
• 10% type of credit
  • Diversity is best, a car loan, home loan, and a couple of credit cards.

Great credit requires a delicate balance.  Not too much on credit cards, not only a home loan;  But a balance, on time payments and the time to prove you are credit worthy.

All credit reports are not created equaly

I discovered a few new things at a class on Credit recently.

I had always thought a credit report is a credit report. That is not true. A consumer credit report and a lender credit report are two different critters. If you go to any of the credit reporting services, the score you get today, and the score your loan officer will get on the same day will not likely be the same. The lenders score will be lower.

Why? Well it has to do with the purpose for getting your credit scoring in the first place. For your personal information, for qualifying for insurance, and other smaller concerns, your score will be higher. If you are applying for a loan, especially a loan to purchase or refinance a home, the factors they take into consideration are weighted differently.

If you have excellent credit a few points either way won’t make a difference. With mediocre credit, a few points either way could increase your payment, or keep you from purchasing a home all together.

That darn FICO & changing mortgage requirements

If you don’t know already the Mortgage world is in an upset.  With requirements for loans having gone so wild, where all you needed was a pulse to get into a home… they have now swung back hard the other way.  The ‘golden rule’ was 20% down and you get the best pricing, no Mortgage Insurance.  That was what every buyer really wanted.  It is what created the 80/20 loan combo as well as the 80/10/10 and many more variations for people with less than 20% down. 

The Mortgage world has created a new ‘gold standard’.  30% down and 70% loan.  Ouch! 

Let me explain what this means.  First when you apply for a conventional loan there are many things that go into determining the interest rate you will be paying.  You credit score, or FICO is first and foremost the biggest contributing factor.  Then the amount of the loan, for example, if your loan amount is less than 100k, you get a little bump in the rate you pay.  Then the % of the loan to the value of the property or purchase price.  Where 20% down was the magic number, now it is 30% down if your credit is anything less than perfect.  The difference between someone with a 720 credit score or higher and someone with a 620 credit score is 2.75%.  So if the interest rate was 6% for the A+ credit of 720 or higher, the same loan would be at 8.75% for the person with a 620 credit score. 

The moral of the story, keep your credit score up!  If your credit score is low, put as much down as possible (your goal is 30%) .  Or purchase a home using an FHA loan (in Maricopa county till the end of 2008 that is a purchase price of about 350k). 

Understanding Credit

How a credit score is calculated is a mystery to many people.  Here are a few basics on understanding credit, and how your score is calculated.

Payment history is responsible for about 35% of your score. Make on time payments.

Outstanding balances are responsible for about 30% of your score.  Meaning how you manage your debt.  How much debt do you have in relationship to how much credit is already available to you?  If you have a credit card with a $1000 credit limit, it is best to have no more than 50% balance or $500 on that account. It is even better if you only have 40% or $400 on that account. 

Types of credit for a good balance;  The ideal is a mortgage, credit card and car payment.  You want to have at least one year of payment history with each of your accounts or credit lines.  If you have all brand new accounts, they will need on time payments, over time to bring your score up. 

Another 10% of your score is based on inquiries.  Each time you apply for a credit card, cell phone, or any other business that requires your social security number, they are all checking your credit.  Too many times and your score could be impacted by as much as 2 -50 points.

As for the rest, well there are still a few mysteries in the world.  Make your payments on time, don’t max out your accounts and don’t have too many accounts (that can hurt worse than too few).