If you have ever heard of FICO or credit scores you may have wondered exactly what they are. These are the scores that will affect whether you are able to get a loan, how much interest you will be required to pay. Some of you may have also wondered how accurate your credit score actually is. The following will explain everything you need to know and how to improve your own score.
When your loan application is evaluated by lender they use something called “underwriting” this mean they look at your ability to repay your loans. They do this by looking at your income and how stable your past earnings have been. This will help them to decide whether you have the ability to pay back the loan. Normally, someone who has a good past history of paying back a loan will continue to do so in the future.
Lenders will want their evaluation of you to be objective, consistent and accurate and to do this they use credit scores to help in this process. A credit score is a numerical value that will rank each person according to their historical credit at any point in time. This score is based on any credit you have outstanding, how you have paid in the past, how much credit you still have available and some other factors. Most lenders will use this score to help decide on the outcome of your application, but the credit score is just one of many factors they use when they make their decision. They look at an overall picture and even if you have a low score they will try to find other factors to satisfy their criteria to get you the loan. There are certain guidelines they use to either approve or deny your loan application.
This is a type of score for credit that was developed by Fair Isaac & Company. FICO use credit bureau information to get your score that will help them decide how likely someone is to repay a loan. The credit bureau records of millions of consumers were used to make these scorecards and contain both negative and positive information on consumers. Someone with a good history of paying back loans will have a high score.
Not only will a credit score determine whether you qualify for a loan, it could also determine the price of your loan. This means the interest and the points that will be charger by the lender. The credit score is used for this as they are known to be a good indicator of whether a person will be able to pay back the loan. Many of the mortgage loans on offer are sold to investors and the investor will then pay a more favourable price for loans if they have a lower risk of default. An applicant who has a lower score will generally pay a higher price for their loan because of the higher risk of loss to the lender.
Each individual will have different factors that could affect the price of their loan. Some of these factors are:
Because your credit score is a direct reflection of your unique credit profile it is impossible to know in advance exactly how each item on your credit history will impact your future score. However, there are some things that you can do to improve your credit score.
Always make your payments on time, this is the easiest way of increasing your score. Any bankruptcies, foreclosures, delinquencies and judgments will lower your score.
The numbers of credit lines you already have. These are known as Trade Lines and the more you have will affect your score. This is because the more credit you have may affect your ability to pay back all the loans with your current income. If you have credit cards you don’t use, you would be better to cancel them voluntarily as this won’t affect your score. However, you are better to have some Trade Lines than none as this proves you can have credit and use it wisely.
Avoid High Credit Limits if they are not necessary as lenders will look at your limits and if they are too high relative to your income this could affect your score.
If you have lower amounts outstanding the more likely it will be that your score will be higher.
Do not apply for credit if you don’t need it. The lender will get your credit report from one or more of the three different credit bureaus. Each inquiry stays on the record and will affect your future credit score. Even if you change your mind about the credit or are denied the loan this will also affect your credit score. However, don’t let this stop you from shopping around for the best deal. Generally most bureaus recognise that inquiries for the same loan detail in 14 days as just the one inquiry. Also if you ask for a copy of your credit report, this will not show up on your record as an inquiry.
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Because your credit score is based on your credit record it is most important that you obtain a copy of your own report on occasion to make certain that the information contained in it is accurate. If there is any mistakes in your credit report such as a person with the same name as you may have their credit information mixed up in yours you must immediately get it corrected. There is no one who can get this corrected but yourself. Any lender send out regular reports about each of their account to one of three major credit bureaus and this is where your credit information comes from for the reports. You must contact all three bureaus as the information is not always sent to all three. You can contact the three major credit bureaus on the following numbers:
Experian (TRW): 800-682-7654
There is usually some small charge for you to get a copy of your credit report. If you do find any errors within your report you should follow the directions included in your credit report about any disputes or errors. Generally, the directions will tell you to write to the credit bureau to advise them of the disputes or errors and you may need some proof that you have paid the bill or that is not your bill. If the credit provider agrees that there is an error they will have 30 days to reply and instruct the credit bureau to delete that error from your report.
You will have to wait at least 30 days from the time you notify the credit bureau of the error to give them time to investigate and resolve the issue. Sometimes this can take longer depending on the error and the nature of the investigation.
Unfortunately not everyone does have a perfect credit score and that’s where we can help. Whether you have had foreclosures, tax liens or other problems, we have many loan programs available to you.