What is a credit score?

A credit score is a numerical rating based on relevant factors measuring a borrower's willingness to repay a loan. Your credit score is calculated from the information in your credit profile which is a record of your credit activities over time. This score predicts your credit performance. The higher the score, the better credit risk you are.

The FICO score is the most popular credit scoring system developed. You may obtain your FICO score from any of the three main credit reporting agencies (it is advisable to monitor all three to ensure current and accurate data ):

•  Equifax (800) 685-1111

•  Experian (888) EXPERIAN (397-3742)

•  Trans Union (800) 916-8800

or through the website: www.myFICO.com .

Since the credit score is derived from a credit history, there must be a minimum history in order to get an accurate score. Before a credit report can be obtained, you must have a minimum of one account that has been open for at least six months, and current activity within the most recent six months.

You would have to develop a credit history to be eligible to apply for a mortgage. If your score is too low, there are ways to raise your credit score . However, it is almost impossible to improve it in a short time period. It is important to employ credit habits that will ensure a high credit score at the time you most need it.

How do lenders evaluate their credit risk?

A lender evaluates their credit risk based off of two main factors: your ability to repay the loan and your willingness to repay the loan. The outcome of this analysis will determine whether they will make the loan and under what terms they will offer it.

The criteria used to judge a borrower's ability to pay back a loan is their debt-to-income ratio . This ratio considers the portion of your gross monthly income that is spent on debt, including on-going property-related fees and monthly consumer debt. A debt load that does not leave enough money to pay the mortgage would signify a high credit risk. An income that is high enough to cover the current debt load plus the intended mortgage would indicate an ability to repay the loan and thus a lower credit risk.

To evaluate willingness to repay the loan, a lender uses the borrower's credit score. The credit score is created by weighted points assigned to different aspects of your credit profile, such as payment performance, age, type and balances of your credit. The most common scoring system is the FICO model. A low-end FICO score (300) indicates a low willingness to pay back the loan, and thus a higher credit risk. A high-end FICO score (850) demonstrates a high willingness to repay, thus a lower credit risk.

How can I ensure accuracy on my credit report?

Your credit report is a history of your credit activities such as timeliness of payments, current debt balances, length of credit history, types of credit available to you, the number of credit inquiries and any legal action taken against you for non-payment (such as bankruptcy or a lawsuit.) The credit scoring systems use your credit report to generate your credit score .

The credit report is one of the most important factors considered when determining loan qualification . An annual check on your credit report can help monitor whether the information is up-to-date and accurate. The federal Fair Credit Reporting Act (FCRA) has instituted a phase-in requirement (state-by-state, completed by September 1, 2005) that credit reporting companies must provide a free copy of your credit report once a year. You may request your annual free credit report at:

http://www.annualcreditreport.com .

The FCRA, enforced by the Federal Trade Commission (FTC), is aimed at both the credit reporting agencies (CRA) and the creditors supplying the information to the CRA. The objective is to protect the consumer by ensuring privacy and accuracy of information. You can help with this goal by monitoring the credit reports from each of the three main credit reporting agencies. They work independently and may have differing information. Since you never know from which agency your lender will order your credit report, it is advisable to check all three periodically. You may access these at:

•  Equifax: http://www.equifax.com

•  Experian: http://www.experian.com

•  TransUnion: http://www.transunion.com

Errors on your credit report can have a negative impact on obtaining future credit. Consumers have a right to review their files and contest any errors or missing information. The credit reporting agency has the obligation to investigate, respond, correct the discrepancies and notify any recipients (within the past six months) of the credit report.

If you discover an error on your credit report it is important to:

• dispute the error in writing 
  
•  provide specific information (name, address and social security #; each item of dispute along with request for deletion or correction; and copies of support documents proving the error)
  
• keep copies of your letter of dispute and supporting documents
  
• transmit by certified mail, return receipt requested (to prove receipt date, as the CRA is mandated to timely investigate timely (within 30 days), notify the creditor with dispute information, review the results of the creditor investigation, and provide written results of the investigation along with a free copy of your changed report)
  
• submit a dispute letter on each specific item to the corresponding creditor, as the creditor, if an error is verified, must notify all CRA's nationwide so that they can make appropriate corrections to your file (information in question, that cannot be verified, must be deleted from your file)

   

• What causes credit report errors?

   

  Your credit report is a history of your credit activity. There are three major credit reporting agencies:

   

  • Equifax: http://www.equifax.com
  • Experian: http://www.experian.com
  • TransUnion: http://www.transunion.com

   

  These agencies independently track credit information that comes from a broad range of creditors. Lenders use your credit report to evaluate their credit risk when considering your loan application. Errors on your credit report can have a negative impact on obtaining future credit. It is possible for errors to be made by both the credit reporting agency and the creditor. Checking each of these credit reports is important in order to maintain current and accurate information .

   

  Some causes for credit report errors are:

  • Human error – massive amounts of data are entered to update credit reports monthly; this allows for numerous errors from faulty information to clerical errors in reading or inputting information
  • An individual applying for credit under several names that differ enough to cause confusion
  • Two identical names, sometimes even in the same general area
  • An inaccurate or misread identification number (such as a social security # or driver's license #)
  • Debt payments applied to the wrong account and the consequent erroneous report to the credit agencies
  • Credit accounts that change hands, increasing the possibility for errors
  • Negative credit items, settled with the creditor, but not updated with the credit agencies
  • Intentional errors