Lesson 2: How Your Credit History Affects You
Jewell: Hello. My name is Jewell DiDucca, and welcome to American Consumer Credit Counseling's presentation on home buying. Our home buying workshop is a 9 lesson series focused on the essentials of owning your own home. Today we'll be discussing lesson 2, how your credit history affects you. Let's get started.
As we discussed in lesson 1, you'll be highly examined by a lender prior to being approved for a loan. Among the items a lender is most concerned with are, number 1, your income. They want to know how much money you make. Number 2, your debt, how much money you owe and the amount of your monthly payments. Number 3, your payment history. Your payment history is vital because it will show a lender a pattern of how you pay back the money that you owe. If you have any occurrences of late or missed payments, you should be prepared to explain to the lender what caused them and prove that you've taken measures to prevent this from occurring again.
The most important tool used by a lender to determine your payment history is your credit report. A credit report is a record of your credit payment history. Its primary purpose is to help the lender determine if they're willing to extend credit to you and at what interest rate. There are 3 national credit reporting agencies, number 1, TransUnion, number 2, Equifax, and number 3, Experian. These organizations compile information sent to them from your credit lenders and generate a detailed list of your credit payment history. Each organization may or may not report all of your credit information. As a result, oftentimes a lender will pull a credit report from 1, 2, or all 3 reporting agencies in order to get a complete picture of your credit history.
When a lender pulls your credit report, there's a variety of detailed information they can review. Among the 4 types of information on a credit report are, number 1, your identifying information. This includes your name, your current and previous addresses, your social security number, date of birth, current and previous employers, and your spouse's name, as well as other personal data. Lenders will also be able to review your credit information. In this section, a lender will be able to see all of the credit accounts that you have that have been reported to the credit reporting agency, your payment history for each account, and your current balances.
It's important to note that positive information will remain on your credit report for an indefinite time period, and negative information will be removed after 7 years. Furthermore, if you've declared a bankruptcy, it will remain on your credit report for 10 years. A credit report will also display your public record information. This section will list all information that's a matter of public record within a courthouse. They could include bankruptcies, tax liens, monetary judgments, or overdue child support.
The last major classification of information on a credit report includes inquiries. An inquiry will be listed any time someone accesses your credit report for review, covering the most current 2 year period. If you've applied for credit, odds are that your credit report has been looked at. Individuals or organizations that will commonly review your credit report include lenders, employers, landlords, and insurance companies.
With all of this detailed information available, many consumers often ask, "Who has access to my credit report?" The answer to this question is simple. If you fill out a credit application, you're permitting that representative organization to investigate your credit history. In doing so, this company or individual is allowed to access your credit report. The only other instance in which an outside party can review your credit report is if they are a landlord, an employer, or through a court order. TransUnion, Experian, and Equifax maintain strict guidelines to ensure that your credit report has not and will not be compromised. It's also important to note that many items will not be listed on your credit report. These items include your race, religion, medical history, lifestyle, political views, criminal record, and savings, checking, and investment accounts.
As you can see, your credit report is a vital tool in being approved for a home loan. With this in mind, it's important for you to review your credit report on a regular basis. You can do so by contacting 1 of the 3 credit reporting agencies, and by supplying them with your full name, your current and previous address, your date of birth, and your social security number. As mentioned, the 3 credit reporting agencies are TransUnion, Experian, and Equifax. It's suggested that you contact all 3 of the credit reporting agencies in order to get a complete picture of your credit history. You can obtain a copy of your credit report any time you want to see it, and you may also be able to obtain it free of charge, depending upon your state guidelines, or if you've been turned down for credit within the past 60 days.
Now that we've discussed what a credit report is and how important it is to the home buying process, let's discuss how a lender evaluates this information. When a lender reviews your credit report, they want to see that, 1, you've paid your bills on time, 2, that none of your payments have been more than 30 days late, and 3, that your accounts have been active for at least a year. A lender will also look to see if you've had any accounts sent to collections, or if you've received any judgments for outstanding bills that you haven't paid.
Oftentimes an account that's been sent to collections will have to be paid in full before you get approved for your mortgage. You may also have to wait 1 full year after paying off the account before applying for another mortgage. If by chance you've filed for a bankruptcy, you usually have to wait 2 to 4 years from the date of the discharge before applying for a mortgage. In general, a lender is not willing to give you a new loan when you have not lived up to the terms of your existing loans. That's why it's very important to stay on top of your current obligations and to make sure you clear your negative history prior to applying for a mortgage.
When a lender pulls your credit report for review, they will most likely review a full mortgage credit report. This type of report merges all of the information from 3 different credit bureaus into 1 document. The information in this report provides the lender with the most complete picture of your credit history. In order to approve your loan, lenders will base their decision on 2 criteria. First, they'll look at your whole financial picture as noted in your credit report. They will also take your FICO score into consideration.
A FICO score, named after Fair, Isaac, and Company, is a rating system that takes into account your payment history, your number of open accounts, the amount of credit available, your current balances, how long you've had credit, and the types of credit in use. The FICO score is a scoring system from 1 to 900. Basically the higher your score, the better the risk you are to the lender. 650 and above is generally considered a good credit risk, but if you score too low, you may be denied.
If you're concerned that your FICO score is too low, there are a variety of measures you can take to improve your rating. First, you can reduce the amount of your outstanding balances. You can also pay your bills on time and reduce the number of open accounts. Once you've been approved for a loan, your bank will also use your FICO score to determine the interest rate on your loan. Banks use a grading system similar to that used in schools. Grades will range from A to D. Any A loan is the lowest risk and will receive the best interest rates. A D loan is considered a higher risk and will therefore have higher interest rates.
If you do qualify for a loan, but are quoted a higher than market interest rate for that loan, you are said to have received a sub-prime loan. A sub-prime loan will have higher interest rates, a higher down payment, and higher fees. Sub-prime loans often have prepayment penalties. For instance, let's say your credit has improved 1 to 5 years into your loan. If you then want to refinance, you may incur very costly penalties. As a result, it might be in your best interest to take some additional time to repair your credit and then reapply for a loan, so that you don't have to acquire one that is sub-prime.
Oftentimes a credit report can contain errors, and thus portray a negative image of that consumer. If you find you're not able to obtain a favorable loan, you may want to check your credit report for any of these errors. Under the Fair Credit Reporting Act, a consumer has the right to correct errors on their credit reports. Errors are not uncommon, and a detailed investigation may reveal discrepancies in your file.
If you find an error on your credit report, you should, number 1, immediately call and write the credit bureau as instructed on your credit report. It's important that you mail your letter by certified mail, and always remember to keep a receipt. Once the bureau receives your letter, they will forward your dispute to the source of the information. At that time, the source will have 30 days to respond to the dispute. Ultimately, the credit bureau will let you know of their response. If the credit bureau cannot confirm the information under the dispute, then the law requires them to remove it from your record. Also, the credit bureau must send a corrected report to everyone you specify who has received your report within the past 6 months.
If the credit bureau investigates your claim and stands by its original information, you can continue to disagree with that information by adding a personal statement to your credit report that details your side of the dispute. From this point on, anyone who reviews your credit report will receive a copy of your statement and be able to take your comments into consideration.
Unfortunately disputes in credit reports have led to the emerging industry of credit repair clinics. If you're considering the services of one of these companies, there are a few things you ought to know. First, if negative information on your credit file is inaccurate, you can remove it yourself for free. You don't need to pay a company to do this for you. Secondly, if anyone tells you they can remove negative but accurate information from your file, they're making promises they can't keep. However, if you've been late paying your bills at any time during the past 7 years or you've declared a bankruptcy during the past 10 years, then the law allows credit bureaus to tell creditors about this.
If you find you've been denied credit based on your credit report, the creditor must tell you the name and address of the credit bureau it contacted. If you contact that credit bureau within 60 days to learn what's in your file, they're not allowed to charge you a fee to obtain it. Moreover, if the credit bureau is slow to correct inaccurate information, we encourage you to contact the Federal Trade Commission. If you discover that you do not possess a favorable credit file, we encourage you to contact a nonprofit credit counselor to discuss your particular situation. Your solution could be as simple as developing a repayment plan that will allow you to close outstanding debt and build a positive payment history.
Please remember that credit repair is your responsibility and yours alone. You must see that you pay all of your bills on time in full and with checks that don't bounce. If you really want to buy a home and you're willing to do what it takes, you can realize the dream of home ownership. That concludes lesson 2 of our home buying series. I'm Jewell DiDucca with American Consumer Credit Counseling. Please join us next time for lesson 3 when we discuss getting pre-qualified and credit approved.