When you decide you want to buy a house, what's the first thing you should do? If your answer is ?go house hunting,? that's definitely the wrong answer. The right one? Find out what your credit report says about you. And what your credit score is. The worst possible case is that, without good credit, you may never qualify for a mortgage. A scenario almost as bad is that you could get a mortgage?but the mortgage payments and the interest rates would be outrageously high'so you could well be making your financial situation go from bad to worse.
Let's get down to the basics: what exactly is a credit report and a credit score?
If you want to understand the history of credit reporting, go to a website called howstuffworks.com and you'll get a detailed explanation of how it got started way back when there were old-time general stores. The website will then tell you where it went from there. But if you're interested in how things work today, you only have to go back to the 1980's. That's when credit scores came into wide use. Lenders standardized three basic decision processes by using a point system that scored several factors on a consumer's credit report. Statistical models were then developed that measured the variables in even more detail. So now a system exists that measures your ?credit-worthiness.?
And pretty much everyone?including retailers, credit card companies, and mortgage lenders?uses it. Mortgage lenders, in particular, use your credit report as the first in a list of reasons to qualify or disqualify you as a borrower. It also determines which lending products and programs they are able to provide to a borrower. If you want a more detailed understanding about credit reports and credit scores, another website called www.truecredit.com can be very helpful and informative.
Do we have a totally fair and accurate credit reporting and scoring system?
The answer is both yes and no. Yes, because it takes personal or individual bias out of the decision. And no, because it's based on mathematical models where the variables change every day. For example, there might be too much weight put on a financial event that happened recently?but not enough placed on years of good credit history. And one model, for instance, may conclude that you're a good risk for something like a car loan?but not for a home mortgage. Another thing you need to be aware of is that the accuracy of your credit information might be questionable because the process of checking the information is an imperfect one. So now that you know about the possible pitfalls?and if you're a wise consumer?you'll understand how important it can be to check your credit at least once every year. Because if your credit report is incorrect or incomplete, it's your responsibility to correct it?and that can sometimes be a long and frustrating process. But imperfect though it may be, it's all we've got. So you have to deal with it ?as is.?
There are three national credit bureaus that provide credit reports.
Here's how to contact them:
Experian
1-888-397-3742
www.experian.com
Equifax
1-800-685-1111
www.equifax.com
TransUnion
1-800-916-8800
www.transunion.com
Normally, you will have to pay a fee to get your credit
report. However, once a year, Texans may order a free copy of
their credit reports from these credit bureaus at
www.annualcreditreport.com.
What kind of information about you impacts your credit report and score?
?How many late payments you've made, and how late they were.
?The type, number, and how long you've had the accounts.
?Your total amount of debt.
?How many recent inquiries or applications you've made (to get credit card accounts, for instance.
Here's what is not taken into consideration in your credit report or score:
?Bank account balances.
?Race
?Religion
?Health (unless medical bills show up as debts)
?Criminal records (unless public filings and judgments appear)
?Income
?Driving records
Are you a high or low scorer?
Get your FICO credit score at myfico.com to find out. If yours is below 680 and you're trying to get a mortgage, shop for a mortgage broker that works with a re-scorer. By the way, the fastest way to improve a not-so-hot score is to pay off any large credit card accounts and then ask for a re-score.
What does your score indicate?
The higher it is, the better. Credit scores usually range from 400 on the low end to 800 on the high end. Here's how a mortgage lender would interpret your score:
720 and over?you are a mortgage lender's dream. You'll get the best rates and terms on your mortgage.
700 to 719?you're in excellent shape. You will have no problem getting a mortgage.
680 to 699?you're going to do fine, mortgage-wise.
660 to 679?you're okay.
640 to 659?you're on the borderline. It would help if everything else in your financial picture were strong.
620 to 639?You are in a weak position. The rest of your financial picture must be perfect.
600 to 619?you're in a difficult position. You will probably need to improve your financial situation, or maybe try to find a special program in order to get a mortgage.
Below 600?you're in trouble. You will absolutely have to work on your credit picture.
If you are married, will your credit report and score be the same as that of your spouse?
No. Here's why. You are separate individuals, with separate Social Security numbers. So you will have six credit scores (3 per individual, per major credit bureau.) Which means that if you plan to get a mortgage and buy a home together, and one spouse has a poor or bad credit rating and score, it could definitely affect your chances as a couple of getting a mortgage.
So?now that you know the score, do you think you're a contender? Great! Get ready to go for the gold: the American Dream of home ownership.
A lot of things affect what we pay for house insurance. Most, we expect. If we live in a house balanced on stilts next to an eroding shoreline, we know we're going to be paying more than a suburban home in Ohio. If we file several claims a year, we know our rates will go up. But one area may be causing a significant rise in your rates without you realizing it. I'm speaking of our credit score.
While your credit rating shouldn't have a lot to do with the price we're paying monthly to insure our homes, it does. A bad credit rating tells our insurer that we're irresponsible, that we're high risk, that we have trouble paying back loans.
How are these credit reputations determined? By a process known as credit scoring. Your score is what your credit is at one particular point in time. It may have been higher, it may have been lower, but at the moment your credit report was calculated, your score acts as a snapshot of your financial health. Your credit report is calculated using a complex mathematical formula which weights certain factors like promptness, debt, and consistency. The number that comes out is a three digit number between zero and 999. The lower the number, the worse your credit. It doesn't matter if the low number was the result of identity theft or a bad few months when you were out of work—the number is all financial institutions need to make a judgment about your credit history.
The insurers rely on credit scoring to determine how much risk a potential candidate is. The lower their score, the more likely they are to file a claim, or so the logic goes. There are two main ways insurers use scores. The first is underwriting. Underwriting is when an insurer is deciding whether to issue a new policy, or to renew an old one. They weigh risk against benefit, and credit scores are a good predictor of risk.
The second way insurers use credit scores is in the rating system—and this is what determines your home premiums. Every insurer breaks an individual into uninsurable, high risk, average risk, and low risk. They analyze claims history, credit score, neighborhood demographics, sometimes even physical health, before determining what group to put you in. Those in the lowest tier get the lowest premiums. Those that are too high risk don't get insurance at all, and those in the high risk category get very high premiums. Though many states have now made it illegal for insurers to solely rely on credit scores to determine premiums, it's still a strong factor.
The best way to bring down your premiums is to get that credit score down low. Pay off debt, pay your credit cards on time, take out small loans and immediately pay them back. Do whatever it takes to bump up your credit score, and watch your premiums fall.
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