Credit Scores A credit score is a risk based grade assigned to you by the three major credit repositories - Experian, Trans Union and Equifax. Scores could range anywhere from the low to mid 800’s to the low 400’s. These companies take many factors into account when they assign you the score. Some of these factors are: Number of trade lines open Length of time the accounts were open Usage of the trade lines Total available credit  Percentage of what is owed versus maximum line Payment history Dates when late payments occurred Amount of credit inquiries in the last 90 days Collection and charge offs, even if they are medical. Last date the collections/charge offs were reported Judgments, and last date reported Tax liens and last date reported  Bankruptcies, and date discharged Foreclosures and short sales Accounts being paid through credit counseling Accounts settled for less Finally, individual demographics come into effect. A lender will take the middle score of the three repositories for each borrower on the loan, and then use the middle score of the lowest borrower when determining if you are credit worthy. This score will not only affect your eligibility for a certain loan (or financing in general), but it will also affect the terms of the loan. It can affect your rate, your points, and the required down payment. Also, it is quite possible, if you have under 20% down, that your lender will approve you, but the PMI company will not. It is also possible to have a perfect payment history, but still have a lower score, because of the other factors mentioned above.  Generally speaking, a score below 620 is not good. A score above 720 is very good. And a score somewhere in between is OK, but still might effect the terms of your loan. If your score is below 620, look at an FHA loan. Scores below 580 make it difficult ( but not impossible ) for FHA financing.  Increasing your credit scores There are several steps that can be taken to increase your credit scores, but it doesn’t happen overnight. If you are planning to buy a home in the future... more then 3 months out ... it is advisable to get a copy of your credit reports (all 3 ) and try to improve the scores when possible. Remember, even if your scores are good, increasing your score a few points can improve the rate and terms of the loan. Reduce the percentage owed on each line- If you owe more then 60% of the available line of credit on a specific trade line, your scores will be negatively affected. Owe more the 90% , and it is affected even more. You can reduce the percentage in one of three ways: Pay them down. Move some of the balance to another credit card with no balance. Request the credit card company to increase your line. It will take a couple of months to filter down to the report, but your scores will increase. Close out unused cards If you have a lot of charge cards and do not use them, close them out. However, if you have a limited credit profile, this may not be a good idea, since there will be less trade lines to “grade” you on. Have items removed from your report Review your report and challenge all negative credit. By law, if you send a copy of your credit report showing one or more items you deem incorrect to the credit bureau(s) and formally challenge the accounts as misreported, the bureaus have to investigate your claim. There are three repositories, so you will need to challenge it with all repositories reporting it. They will send a letter to the creditor, who will have a set period of time to respond. If they don’t respond, it will be removed. If they do, the report will be adjusted only if the creditor states that the item was reported in error. Quite often creditors do not respond to negative credit older than 24 months. Pay of collection accounts OR DON’T This gets sticky. If a charge off/collection account, is reflected as open but hasn’t been reported for a while, your scores will actually drop by paying it off. If there is a collection account that you paid years ago, and it is still reported as open on the report, but hasn’t been reported in a while, correcting the report or paying off the debt will actually decrease your scores.  Here is the reason why. A collection account/charge off reported to the bureau in the last 6 months can drop your score as much as 50 points. If the item you are challenging hasn’t been reported for over 2 years, it doesn’t have a major impact on your score. The grading system doesn’t decipher between an account having an outstanding balance versus one being paid in full. Most of the weight is placed on the last date reported. When an account is settled the bureaus update the report as a paid collection, and the new date reported is recent, which hurts your scores. So, when contacting a creditor/medical bill that is in collection, negotiate with them to remove the item from your report if you pay it off. Get this in writing before paying it. Most creditors will negotiate a pay off as low as 70% of the balance to settle the account, so negotiate the payoff amount also. This usually works on medical bills, but doesn’t always work on delinquent credit cards. If the creditor will not remove it, do not pay it off yet. Your lender will require it to be paid off, but do it after the lender has pulled your report.  Make bad credit good credit If your credit history puts you into a situation where buying a home right now is not possible, then plan for the future. Contact each collection account and arrange a payment schedule with them. It could be as low as $10 a month, but don’t ignore them. Keep records of the payments, and make sure you make a payment every month. After 12 months, you will be able to document to your lender a positive payment history on a negative account. In effect, a negative account becomes a positive account…..but it won’t increase your scores! No credit scores A lender looks for at least 4 trade lines when they approve your loan. If you do not have this, there are steps you can take. Open up a few secured credit card, but remember that it will take 12 months before this helps you. Do this if you do not intend on buying a home for at least a year.  Another option is to be added onto a parent’s credit card. This can help, but it can also hurt. If the account you have been added onto is not being paid on time, it will actually hurt you, and the payment on the card will affect the amount of a mortgage you can qualify for. A third option is to create alternate credit. It will not give you a credit score, but many loan types accept “alternate credit sources” for applicants that do not have a profile. Supply the lender with 12 months (or 24 months if possible) of rent payments, utility payments, cell phone payments, car insurance letters of good standing, doctor references, and so one. Remember that the lender will accept this, but will scrutinize the payment history. If you do not pay the full amount due each month, it will hurt you. Quite often utility bills aren’t always paid on time, or in full each month. Do not supply a payment history like this to the lender. You will not be approved for the loan.  If you don’t have the time, it is still ok Most lenders have the ability to do a “Quick Correct” on a credit score. Basically, they take supporting documentation from you, like a letter from a creditor stating that an item is being deleted. Send this information to the credit bureau and ask them to delete the item in question and re-score the applicant. (This can get expensive, since there is a per item charge.)  Getting a copy of your credit report You are entitled to a free copy of your credit report once a year from each repository. This can easily be done on line. However, this report is confusing at times and doesn’t always show your credit scores. It just shows the history.  If you have the time, it would make more sense to team up with a mortgage loan officer, have him pull the report and supply you with a copy. Then, when you are ready to buy, he can reorder your report. Again, remember that it might take a couple of month for the items to clear your profile, so meet with your mortgage lender early in the process, well before you find a home.  If you like, we can refer you to a qualified mortgage professional to help you with this. Yes, please refer me