Understanding Credit

 

WHAT’S IN YOUR SCORE?

A credit score or FICO (Fair, Isaac and Company) is a numerical evaluation assessing your credit worthiness based on credit history and current credit accounts. This score, along with your existing debt, income and employment status is a factor of your mortgage approval.

 

PAYMENT HISTORY: 35%
This is one of the most important factors in a FICO® Score. It determines whether or not you’ve consistently paid your past bills and credit accounts on time.

 

AMOUNTS OWED: 30%
This is based on the outstanding debt you have in comparison to your credit limits. For best results, keep your card balances at 25% or less of their limits.

 

CREDIT HISTORY: 15%

This comprises accounts opened, specific types of accounts and time since account activity.

 

NEW CREDIT: 10%

This is the number of recently opened accounts and credit inquiries, the time since recent account opening and reestablishment of positive credit history following past payment problems.

 

CREDIT TYPES: 10%

This is the number of various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance, etc.) on your report.

 

 

HOW DO YOU IMPROVE YOUR SCORE?

It can take time to repair your credit score. In fact, quick fix efforts may backfire. The best plan is to manage your credit responsibly over time.

 

Pay your bills on time.

Be aware that paying off a collection does not remove it from your credit report. If you are having trouble making ends meet, contact your creditors or meet with a legitimate credit counselor.

 

Keep balances low on credit cards.

Pay off debt instead of moving it around. Don’t close unused credit cards as a short term strategy to raise your score. Don’t open a number of unnecessary credit lines just to increase your available credit.

 

If you’ve been managing credit for a short time, don’t open several new accounts.

New accounts will lower your average account age and can appear risky for new credit users.

 

Do your rate shopping for a given loan within a focused period of time.

If you make casual inquiries, it will look as though you’re searching for numerous credit lines, rather than researching one line.

 

Open new credit accounts only as needed.

Manage credit cards responsibly. Note that closing an account doesn’t remove it from your credit report.

 

 

Credit Management

All lenders pull credit reports from three major national credit repositories: Equifax, Experian and TransUnion. Review the following credit factors to better understand how your score is determined:

 

New Credit

When rate shopping for a home loan, do your research within a focused period of time. Making casual inquiries appears to credit reporting agencies as if you’re seeking multiple credit lines – instead of searching for a mortgage.

 

Account Management

Manage your credit cards and other loans responsibly. Only apply for and open new accounts as needed.

 

Balance

Credit reporting agencies retain information regarding your current balances for all liens and debts. It’s always best to pay off existing credit card debt instead of moving it to other similar creditors.

 

Payment History

If you’ve missed payments for your mortgage, credit card, student loan, or car get current and stay current. Once you’ve paid off an existing debt or collection, these items remain on your credit report.

 

Credit History

If you’ve been managing credit for a short period of time, don’t rush to open new accounts. Numerous accounts opened too quickly can lower your average account age. For the same reason, don’t cancel accounts once they’ve been paid.

If you’ve recently pulled your credit report and would like to “clean-up” or address any errors, call PERL to discuss ways to maintain and improve your score. You can also contact credit bureaus directly:

 

Experian

PO Box 2002

Allen, TX 75013

888.397.3742

www.experian.com

 

Equifax

PO Box 740241

Atlanta, GA 30348

800.685.1111

www.equifax.com

 

TransUnion

PO Box 1000

Chester, PA 19022

800.888.4213

www.transunion.com

 

CREDIT SCORE QUICK GUIDE

 

720+

Excellent. Leads to premium rates and programs.

 

650 – 720

Very good. Creates ease in obtaining new credit.

 

620 – 650

Good. Can suggest a second look from some lenders, and may require additional documentation.

 

620 and below

Challenging. May prevent a borrower from receiving the best interest rates.