Credit Score and Credit History
Your credit score is extremely important when applying for a mortgage. Financial institutions rely less on personal ratios and other reports as they had in the past. In general, the higher your credit score, the quicker a mortgage may be approved. It is important to check your credit history and score before inquiring about a mortgage or refinancing. There could be errors on your credit report that may delay approval of a mortgage or cause denial of a loan.
A credit score uses a point system to "grade" a person on their credit worthiness. A score in the high 700s is a great score, while a score in the 500s is poor. People with high scores are offered favorable (low) interest rates, while people with low scores receive unfavorable (high) rates or are rejected for credit. Using a car loan as an example, 700s could achieve a 3% to 5% interest rate, while the 500s could receive a 29% to 33% rate.
Missing a payment, being late for a payment, not having enough debt, having too much debt, applying to several credit card companies at the same time, not having any credit history, co-signing for loans, etc. are factors that affect your credit score.
Related, identity theft is a huge problem in today's society. Banks buy mailing lists of potential credit card customers, rank them by credit score to assess risk, and then mail out applications to these individuals. Due to multiple mailing lists, it is not uncommon to receive multiple applications at the same time from the same company. Mail is often stolen, and criminals change addresses to post office boxes or add suffixes to names, and then open up accounts without the true person being aware of such activity. ID theft is also common from more traditional methods such as photographing credit cards at retail locations to attain personal credit card information.
At the bottom of this page is a list of the three major credit bureaus. They offer credit monitoring services to alert you if someone applies for credit using your name, or if someone has viewed your credit score or history. Each person in the U.S. is allowed ONE FREE copy of their credit report (credit history) annually from EACH bureau, but this does not include your credit score. You'll have to pay a nominal fee to find out your credit score, or subscribe to a monitoring service. Credit reports are viewed online via secure connections, and can be printed at home.
The following is from the Federal Trade Commission web site concerning credit scoring:
What is credit scoring? Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points—a credit score—helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
Why is credit scoring used? Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
What can I do to improve my score? Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change—but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application. Nevertheless, scoring models generally evaluate the following types of information in your credit report: Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score. Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well such as your occupation, length of employment, or whether you own a home.
Federal Law Free Annual Report: