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Learning Center |
>> Credit Facts |
 When you apply for a mortgage, your lender will request a credit report from a credit reporting company. This is usually a local or regional company. This company pulls together a credit report electronically. It usually comes from one or more of the major repositories, but it can come from several sources. Along with the information, the local credit reporting company receives a numerical score. The score represents a composite of the borrower's credit history, employment, ability to save, and so on. The most famous of these scores is known as the FICO score, which was a model developed by the Fair-Isaacs company a number of years ago.
With information streaming into credit files almost everyday, these scores can change daily. That is why someone can apply for a mortgage with one company today and have a FICO score of, say, 717, and apply with another lender a week later and that score can be higher or lower, depending on the information received at the repositories in the interim. The lending industry is moving toward "risk-based" pricing. In plain English, this means that the higher one's credit scores, the less paper they will have to provide to prove that they are creditworthy AND the interest rate and/or fees a borrower pays will be based on the level of their scores.
This system, while perhaps unfair to some, will be great for those who maintain impeccable credit. It's one way that good credit risks can be rewarded. In the past year, we in the industry have already seen a dramatic reduction in paperwork requirements and "risk-based" pricing (rates and fees) has become commonplace.
If you have recently obtained your credit report and you are not happy with what was reported, you can take steps to correct the erroneous information on it. There are also proactive things you can do to improve your scores, if you are anticipating applying for a mortgage anytime soon.
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Insider Tip #1
Don't apply for any new credit unnecessarily
Everytime you sign and return a new credit card offering, or open that second account at a department store because you get a 15% discount, an inquiry will be generated and that will reduce your score.
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Insider Tip #2
Try to keep your credit cards at a level that is 35% - 40% of the maximum credit limit limit
For example: if the credit limit is $1,000, try to keep your running balance below $400. Believe it or not, consolidating all your credit cards into one account can hurt your credit rating, if the new balance is at the max credit limit.
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Insider Tip#3
Know When to Give In
If you get into a dispute with a creditor and it isn't a huge amount, pay it and move on. Having one or more collections, even if they are small amounts, can really hurt your credit score.
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