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1st Reverse Financial Services continues wholesale expansion with two new regional correspondent directors

National Mortgage Professional
Aug 19, 2008

Credit 101: Understanding and improving credit scoresSherene Costanzocredit, credit scores, credit reporting, TransUnion, Experian, Equifax A credit report is a report produced by one of the three major credit bureaus, Equifax, TransUnion or Experian. These bureaus compile information from creditors about an individual's credit history and then sell the information to lenders. The information from each of the three bureaus is not necessarily identical, since they do not share information and creditors do not have to report to all three bureaus. There are also credit reporting companies that compile information from the three major credit bureaus and then sell a merged report to lenders and creditors, which shows all three major credit bureaus in one report. Most creditors and lenders will review all three bureaus when analyzing a borrower; however, there are some creditors that will only use one report from one of the major credit bureaus. For this reason, it is extremely important for borrowers to understand what makes up a credit report and how to obtain the best possible score. Credit reports contain personal identification information that does not affect a credit score. This includes information such as a person's name, Social Security number, current and previous addresses and place of employment. Credit reports also contain information that is used in determining credit scores. This information includes the following: Public records These include foreclosures, liens, bankruptcies, garnishments, lawsuits and judgments. These items remain on the report for seven to 10 years. Collections Collection agencies will report any past due debts that creditors have turned over to them. These items remain on the report for seven years. Creditor accounts These are accounts such credit cards, mortgage loans and auto loans. They report the types of accounts, dates opened, current statuses, balances due, credit limits and payment histories, including any late payments. These items remain on the report for seven years. Credit inquiries These list any companies that have requested the individual's credit report within the last two years. Hard inquires are authorized by the borrower and affect the credit score. Soft inquiries are when creditors review one's credit in order to solicit offers to a consumer, and have no effect on the credit score. The credit score A credit score is a crucial part of the loan application. It provides creditors with a detailed picture of an individual's credit history and measures the risk of the account to the lender. Each of the three major credit bureaus is a separate entity and does not share any information. Creditors may report to one bureau or all three, which could cause each of your three reports to contain different information. Each of these three bureaus offers a credit score based on one's credit report with that bureau. This means that each individual has three credit files and three credit scores available. Most lenders and creditors will use the middle score. The higher the score, the better the chance is of being approved and obtaining lower interest rates. There are several factors that determine a credit score. These include late payments, collection accounts, outstanding debt and credit inquiries. Consumers should review their credit reports from all three bureaus at least once a year to be sure that their credit histories are accurate. Consumers are entitled to one free credit report from all three major credit bureaus at least once a year. These free reports, however, do not include the consumer's credit scores. All three credit bureaus offer the score for a few dollars. The credit scores range from about 300-850. A score of 740 would give a consumer the best terms on a loan. Anyone with a score below 720 could benefit from credit improvement. Credit improvement techniques Practicing responsible credit behaviors will help improve one's credit scores over time. Good credit behaviors include paying bills on time, having a variety of accounts established and keeping balances below 40 percent of credit limits. Also, limiting the number of inquiries is important for maintaining higher credit scores. There are actions, however, which may help speed up the time it takes to see increases in credit scores. Credit education Most importantly, the consumer must understand his credit reports and scores. Consumers are entitled to one free credit report from all three major credit bureaus at least once a year. You may want to keep a Credit 101 sheet handy for your clients. You may also want to refer your clients to a reputable credit restoration company to assist them with their score improvement and credit education. Many of these companies can provide this service to them for an extremely low fee and can save them the time and aggravation of trying to improve their credit scores on their own. In turn, you will be able to finance them now and maybe refinance them once their scores are improved. It beats tossing them to your dead files! Maybe you will gain a few extra loans just by referring them to a credit restoration company and pointing them in the right direction to improve their credit scores. Keep credit utilization ratios to a minimum Revolving credit accounts should never be used to the maximum credit limit. Creditors associate high balances with being overextended and unable to repay or take on new debt. Keep balances below 40 percent of your credit limits. For example, if you have a $5,000 credit limit, it is best to keep your average balance below $2,000. You may even want to request a credit limit increase, rather than pay down the balance, but only take that route if you are extremely disciplined and won't charge the balance any higher. Do not open several new cards; the inquiries will hurt the credit scores. Also, remember that even if you are paying your balance in full every month, your credit card company still reports your balance as of your closing date. To avoid this high balance being reported, you may want to pay your balance before the statement closing date. Pay down balances on credit cards before installment loans. It may also help to pay down your installment loans, such as mortgages, auto loans and student loans, though paying down your revolving accounts will have a more significant impact on your credit score. Let's not forget, however, the importance of being on time with your monthly payments on all of your accounts! Use old credit cards Credit history has a major impact on credit scores. It is important to keep at least one of your oldest credit cards open and in use. If credit cards are not being used, your creditor most likely stops reporting the account to the credit bureaus. When the account is in use, they send updates to the credit bureaus, which give the older account more weight toward your credit score. Also, instead of applying for new cards, try to negotiate for better terms with your old credit card company. Request courtesy removals of late payments A good customer with decent credit will have the best luck with this tactic. It does not hurt for a consumer to ask his creditor for a courtesy adjustment to his account. Whether a consumer had a period of distress or just one accidental delinquency, the creditor may be willing to remove it from the account in question. Removing delinquencies should improve your credit score. This is most successful if done in writing, and you must get the response in writing as well. This way, you may forward your response to the credit bureaus in order for them to correct your credit report. Many credit restoration companies can assist you with this technique. Dispute old negative accounts Creditors and credit reporting agencies make mistakes, and errors can be reported. However, consumers are protected. Under the Fair Credit Reporting Act, every consumer has the right to challenge any information on his credit report. If an account in question is not verified by the creditor within 30 days, the account must be removed from the credit report. This process can significantly improve one's credit score. It also works great for older accounts. You may also want to consider using a credit restoration company to do this process. Again, credit restoration companies can save the consumer the time and aggravation of doing it themselves. Correct inaccuracies Errors that falsely indicate negative credit behaviors and lack of responsibility, such as late payments, will affect the credit score. Errors that do not involve credit behaviors, such as name spelling, addresses and employers, will not affect the score. Check for inaccuracies at least once a year or a few months before any major purchases, such a home or a car. Inaccuracies can cost a consumer thousands of dollars in interest on large loan amounts. Sherene Costanzo is vice president of Credit Consultants Inc. She may be reached at (888) 522-7007 or e-mail [email protected]
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