Credit Report

The concept of credit, the idea that your reputation or character will allow you to obtain goods or money based on the agreement that you will pay for them sometime in the future, has been around for ages. These days, home buyers are beginning to understand that credit ratings play an integral part in the lender or broker’s decision to approve a borrower’s loan application. As credit ratings also determine the interest rate a lender or broker will offer, it’s important that consumers are more aware than ever of how credit reporting works and what your credit report actually contains. The Loan Page has compiled some credit basics to help you navigate the often confusing world of credit, and to help keep you apprised of the credit industry’s major changes and how they affect you.

A credit score is essentially a number that lenders use to approximate risk when lending to a borrower. Sometimes called a FICO score, for Fair, Isaac and Co., the company that developed the current credit score system, a credit score condenses all the information in your credit report to a number which helps determine your credit worthiness. Past experience has demonstrated to lenders that borrowers with higher scores are less likely to default on a loan, and so lenders use credit report to get a quick, accurate prediction of the borrower’s risk. Scores can range from the 300s to about 900, though most borrowers fall in the 600-700 range. The higher the borrower’s score, the better deemed one’s credit worthiness.

Scores can vary slightly because the three major credit reporting agencies, TransUnion, Equifax, and Experian, use slightly different software. However, there are five significant aspects, each weighted differently, which figure into the final calculation of your credit score. See Credit Score Factors.

Typically, lenders or brokers will take the middle of the three scores from the three credit score agencies. As mentioned above, credit scores can range from 300 to about 900, but lenders may use other factors such as income, employment history, and the type of loan you are seeking in order to make a final decision. For example, an auto lender is more likely to take into account the amount a consumer puts down, employment length and history, debt-to-income ratio, and the borrower’s past performance on similar loan types. On the other hand, mortgage brokers will have very different borrower concerns, giving more or less weight to certain credit factors.

As mentioned earlier, credit scores can vary between 300 and about 900, though the majority of Americans score in the 650-780 range. The average American consumer has a credit rating of 678. Credit scorers over 700 typically receive better mortgage financing options and interest rates from lenders and brokers, while scorers under 620 often have trouble getting options with low interest rates. Here is a breakdown of the U.S. population’s credit scores:

• Up to 499: 1%
• 500 - 549: 5%
• 550 - 599: 7%
• 600 - 649: 11%
• 650 - 699: 16%
• 700 - 749: 20%
• 750 - 799: 29%
• Over 800: 11%

Being aware of your credit score can help you to negotiate the best possible terms with your lender or broker. Waiting to order a credit report can be disastrous, especially if you’ve got the contract for your dream house in hand; discovering at the last moment that your credit score is not as high as originally thought can be a major disappointment and erase many hours of planning and hard work. Give yourself a window of 3-6 months, and order your credit score beforehand to iron out any delinquencies or inaccuracies you may not have been aware of.

Thanks to December 2003 signing into law of the Fair and Accurate Credit Transactions Act, every American is now entitled to one free credit report per year from each of the main credit reporting agencies, Equifax, Experian and TransUnion. Not everyone may access their report just yet, however, but will be able to do so over the coming months.