Your credit worthiness might be one of the biggest obstacles between you and that Southern Maryland house or condo you want to buy.
And who tells your lender whether you are worthy of getting a mortgage? The credit reporting bureaus (Experian, Trans Union, and Equifax), known collectively as “The Big 3,” are the first to look into how risky lending money to you may be.
Let’s take a look at how that determination is made and why you should be diligent in checking for mistakes along the way.
The Big 3
When you borrow money – whether it’s for a major purchase like a car or home or with revolving credit like a credit card – the lender reports your repayment history to the Big 3.
But that’s just the beginning. These agencies also get information about you from debt collectors, and they purchase information for public records, such as tax liens, judgments, and bankruptcies.
Most, but not all creditors report to all three agencies. Some don’t report to any.
How They Determine Your Credit Worthiness
Each of the three agencies “has its own model for evaluating the information in your credit report and assigning you a credit score,” according to the experts at Equifax. This is why your score may be different with each agency.
A big chunk of your credit score is determined by the types of credit accounts you have and how many you have. Equifax, for example, bases 15 percent of its determination on these factors.
Payment history, however, is the most important factor.
The Big 3 are Only Part of the Story
The three credit reporting agencies report to credit scoring companies, such as FICO®, which is short for Fair Isaac Corporation. About 90 percent of lenders in the country use a borrower’s FICO® Score when determining whether to approve a loan.
FICO® examines each credit report, looking for the following:
- Payment history – Accounts for 35 percent of the credit score
- Amount of money owed – Makes up 30 percent of the credit score
- Length of credit history – 15 percent of the credit score
- New credit and credit mix – Each make up 10 percent of the borrower’s credit score
The company then assigns you a credit risk score, from 300 (considered poor) to 850. Borrowers with credit scores of 740 or higher qualifiy for the lowest mortgage interest rates from the majority of lenders.
Those with scores lower than 620 will find it challenging to obtain a loan and, if they do manage to get approved, will typically pay much higher interest rates.
Everybody Makes Mistakes
Your credit score is only as good as the information given to the credit reporting agencies. Errors are common.
“As many as 42 million Americans have errors on their credit reports,” according to CNN Money.
Some of these mistakes are bad enough to ding the consumers’ credit scores. When you’re getting your finances in order to go after that loan preapproval letter, check your credit reports from all three agencies carefully.
Some of the most common errors, according to the Federal Trade Commission, include:
- Identity information – Ensure that your name, address and social security number are accurate. “Mixed files,” those that contain information from two consumers with similar names, are common.
- Accounts – Check each account to ensure that it is truly yours. Identity theft is another common reason for errors in a credit report.
- Status – Check that the status of each account (open or closed) is listed correctly.
- Delinquent accounts – Verify that an account listed as delinquent is actually delinquent.
- Dates – Each account should list when the account was opened, closed, and the date of the last payment. Ensure these dates are correct.
- Double entries – Dispute any debt that is listed more than once, even if they have different account names or different creditor names.
- Corrected information – If you’ve received a correction to a previous dispute, ensure that the information in the current report remains corrected.
- Balances and limits – Check all the outstanding balances and credit limits to ensure they’re correct.
How to Correct Errors in Your Credit Reports
Each credit report includes information on how to dispute information contained in it.
- Equifax – Handles all its disputes online. Learn more here.
- Equifax – Also handles all disputes online. Go to equifax.com to get the details.
- TransUnion – Dispute your credit report online, by mail, or by phone.
The dispute process takes time, so start it as soon as you’ve decided to purchase a home.
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