There are three primary categories for considering a credit rating: Mortgage Credit, Consumer Credit, Public Records
The more serious the credit problems, the further the grade decreases. As the grade on the loan decreases, lenders generally assess higher rates and fees.
Debt Ratio
Lenders calculate the debt ratio by dividing the total monthly debts (the housing expenses for the proposed loan plus the borrower’s other monthly credit obligations) by the total monthly income. If a borrower has a low debt ratio, the credit-scoring grade will be higher. Conversely, if a borrower has a high debt ratio, the grade will be lower.
Maximum LTV
Loan-to-Value Ratio, or LTV as it is commonly referred to, is the ratio of loan amount to the appraised value (or the sales price, whichever is less) of a property.
If the credit history, debt ratio, and loan to value ratio are unsatisfactory, the quality of the loan may be downgraded to an A-, B, C or D. “D Paper” loans refer to loans known as hard money loans that are mostly based on the equity in the home and not on the borrower’s credit. A lender who is making an A-, B, C or D paper loan is taking a higher risk since there is an increased likelihood of the loan defaulting. Additionally, these loans are not insured or guaranteed. The lender is compensated for higher risk by charging the borrower a higher interest rate:
If current interest rates were 7%, and the borrower is considered a prime borrower, the loan would be granted by a prime lender at 7%. However, if the borrower is not a prime borrower, he may seek financing elsewhere and be charged a higher rate of interest.
The interest rates quoted for A-, B, C or D paper loans vary among lenders. An example follows:
A-paper could have rates 1% - 1.75% higher than A paper
B paper could have rates 0.25% - 0.75% higher than A- paper
C paper could have rates 0.75% - 1.5% higher than B paper
D paper could have rates 1% - 1.75% higher than C paper
Using the higher end of the scale above for each rating, and starting with a 7% interest rate, the following chart is an example of the interest rate a borrower may pay:
A- 8.75%
B 9.50%
C 11.00%
D 12.75%
Look at those numbers and see how your credit rating matters , a potential 4% difference
Credit score Calculation
The three credit bureaus - Equifax, Transunion and Experian – use a special type of software that uses the information in your credit report to generate a numerical score. Credit scores are sometimes called “FICO scores” because the first credit score software was produced and distributed by Fair Isaac Corporation—FICO.
Credit scores are calculated using the following information:
35% Payment History
30% Amount Owed
15% Length of Credit History
10% Types of Credit Utilized
10% New Credit Obtained
Credit scores are calculated using the following information:
35% Payment History
30% Amount Owed
15% Length of Credit History
10% Types of Credit Utilized
10% New Credit Obtained
Credit Report Questions and Answers
Credit Report Questions and Answers
It is a written report (stored in computers comprised of the following information about your personal credit worthiness and debt repayment history.
•Identification by name, address, spouse's name, date of birth, Social Security number, telephone number, place of employment, mother's maiden name, etc.
•Credit inquiries - every time a subscriber (credit provider) runs a credit report on a consumer, a record of the file inquiry is made. It will remain on the file in most states for one or two years. This is of interest to creditors because it reveals recent credit activity.
•Information in public records and collection accounts are also collected by (or reported) to these agencies. Public records include courthouse records, bankruptcies, judgments, law suits, criminal records, etc.
•Credit history - which includes the name and ID number of each subscriber who makes a report and your credit/debt repayment history. Also included is the date an account was opened, credit limits, current balance, monthly payment amount and payment frequency for the last 12-24 months. Records are dated with each request of entry. Other information includes, but is not limited to, consumer disputes, criminal convictions, individual liability or joint liability of accounts, co-maker or guarantor of payment on a certain account, secured accounts and charge offs (when a creditor has reported an unpaid balance as a loss).
•Consumer statements - a statement, not to exceed 100 words, regarding any account(s) an individual may wish to more accurately and completely explain, often very helpful to credit decisions.
When is a credit file created?
Usually when you make application for a loan or credit card or when a party who extended credit makes a report to their credit reporting service on your debt repayment.
Who can legally look at my credit report?
Credit reporting agency subscribers comprised of banks, other lenders, merchants extending credit, life insurance companies, companies on employment applications, rental leasing, security clearance, etc. may not access an individual's credit record unless disclosure is made that a credit report will be requested and in many instances must receive authorization from the consumer. This authorization is standard procedure when you sign an application in any of the above transactions. Read the fine print on the applications for more details.
How often should I look at my credit report?
If you are actively using credit, using one or more credit cards with monthly or bimonthly charge activity, have installment loans(s), vehicle lease, etc. review your credit file every nine to twelve months, otherwise every 15 months is adequate.
What if I need help?
Avoid any type of credit repair firm or service. Do it yourself instead. It is easy and inexpensive.
It is a written report (stored in computers comprised of the following information about your personal credit worthiness and debt repayment history.
•Identification by name, address, spouse's name, date of birth, Social Security number, telephone number, place of employment, mother's maiden name, etc.
•Credit inquiries - every time a subscriber (credit provider) runs a credit report on a consumer, a record of the file inquiry is made. It will remain on the file in most states for one or two years. This is of interest to creditors because it reveals recent credit activity.
•Information in public records and collection accounts are also collected by (or reported) to these agencies. Public records include courthouse records, bankruptcies, judgments, law suits, criminal records, etc.
•Credit history - which includes the name and ID number of each subscriber who makes a report and your credit/debt repayment history. Also included is the date an account was opened, credit limits, current balance, monthly payment amount and payment frequency for the last 12-24 months. Records are dated with each request of entry. Other information includes, but is not limited to, consumer disputes, criminal convictions, individual liability or joint liability of accounts, co-maker or guarantor of payment on a certain account, secured accounts and charge offs (when a creditor has reported an unpaid balance as a loss).
•Consumer statements - a statement, not to exceed 100 words, regarding any account(s) an individual may wish to more accurately and completely explain, often very helpful to credit decisions.
When is a credit file created?
Usually when you make application for a loan or credit card or when a party who extended credit makes a report to their credit reporting service on your debt repayment.
Who can legally look at my credit report?
Credit reporting agency subscribers comprised of banks, other lenders, merchants extending credit, life insurance companies, companies on employment applications, rental leasing, security clearance, etc. may not access an individual's credit record unless disclosure is made that a credit report will be requested and in many instances must receive authorization from the consumer. This authorization is standard procedure when you sign an application in any of the above transactions. Read the fine print on the applications for more details.
How often should I look at my credit report?
If you are actively using credit, using one or more credit cards with monthly or bimonthly charge activity, have installment loans(s), vehicle lease, etc. review your credit file every nine to twelve months, otherwise every 15 months is adequate.
What if I need help?
Avoid any type of credit repair firm or service. Do it yourself instead. It is easy and inexpensive.
7 Ways To Protect And Improve Your Credit Rating
1 - Order Your Credit Report.
Your credit score is based on your credit report, so you should begin by ordering your reports and reviewing each one for accuracy. You can get your reports from a service such as MyFico.com, or order from Equifax, Experian and Trans Union separately online or by phone.
2 - Check Your Credit Report Information for Inaccuracies.
Check the identifying information for name, social security number, birth date and incorrect address. Make certain that old negatives and paid-off debts are deleted. Check for accounts and delinquencies that are not yours, late payments, charge offs, lawsuits, judgments or paid tax liens older than seven years old. Also, paid liens or judgments that are listed as unpaid, duplicate collections, bankruptcies that are older than ten years and any negative information that is not yours.
3 - Always Pay Your Bills on Time.
Payment history makes up more than a third of the typical credit score. If you paid bills late in the past, you can improve your credit score by starting to pay your bills on time. Lenders are looking for any sign that you might default, and a late payment is a good indicator that you are in financial difficulty.
4 - Keep Credit Cards Balances Low.
Carrying smaller balances is the best way to increase your credit score. The score measures how much of your limit you use on each credit card or other line of credit, and how much of your combined credit limits you are using on all your cards. Within 60 days, paying down credit card balances can increase your credit score by as much as 20 points.
5 - Try Not to Open In-Store Credit Cards.
Although your first credit accounts can serve to build and improve your credit history, there comes a point when each subsequent credit application can reduce your score. New credit cards reduce the age of your credit history, and a department store credit card isn’t good evidence of credit worthiness. Every time you apply for a retailer’s credit card your credit store gets dinged.
6 - Be Conservative When Applying For Credit.
Having at least one credit card that’s more than 2 years old can help your score by 15 percent. Make sure that your credit report is checked only when necessary. Or, if you are shopping for a home, try to apply for loans within a two-week period. By keeping the loan process within a two-week period, all of the credit report lookups are seen as one single request.
7 - Don’t Close Credit Cards or Other Revolving Accounts.
Shutting down unused accounts that have outstanding balances without paying off the debt changes your “utilization ratio,” which is the amount of your total debt divided by your total available credit. It will reduce the gap between the credit you are using and the total credit available to you, and that can hurt your credit score.
Your credit score is based on your credit report, so you should begin by ordering your reports and reviewing each one for accuracy. You can get your reports from a service such as MyFico.com, or order from Equifax, Experian and Trans Union separately online or by phone.
2 - Check Your Credit Report Information for Inaccuracies.
Check the identifying information for name, social security number, birth date and incorrect address. Make certain that old negatives and paid-off debts are deleted. Check for accounts and delinquencies that are not yours, late payments, charge offs, lawsuits, judgments or paid tax liens older than seven years old. Also, paid liens or judgments that are listed as unpaid, duplicate collections, bankruptcies that are older than ten years and any negative information that is not yours.
3 - Always Pay Your Bills on Time.
Payment history makes up more than a third of the typical credit score. If you paid bills late in the past, you can improve your credit score by starting to pay your bills on time. Lenders are looking for any sign that you might default, and a late payment is a good indicator that you are in financial difficulty.
4 - Keep Credit Cards Balances Low.
Carrying smaller balances is the best way to increase your credit score. The score measures how much of your limit you use on each credit card or other line of credit, and how much of your combined credit limits you are using on all your cards. Within 60 days, paying down credit card balances can increase your credit score by as much as 20 points.
5 - Try Not to Open In-Store Credit Cards.
Although your first credit accounts can serve to build and improve your credit history, there comes a point when each subsequent credit application can reduce your score. New credit cards reduce the age of your credit history, and a department store credit card isn’t good evidence of credit worthiness. Every time you apply for a retailer’s credit card your credit store gets dinged.
6 - Be Conservative When Applying For Credit.
Having at least one credit card that’s more than 2 years old can help your score by 15 percent. Make sure that your credit report is checked only when necessary. Or, if you are shopping for a home, try to apply for loans within a two-week period. By keeping the loan process within a two-week period, all of the credit report lookups are seen as one single request.
7 - Don’t Close Credit Cards or Other Revolving Accounts.
Shutting down unused accounts that have outstanding balances without paying off the debt changes your “utilization ratio,” which is the amount of your total debt divided by your total available credit. It will reduce the gap between the credit you are using and the total credit available to you, and that can hurt your credit score.
5 Tips For Improving Your Credit Score
Here are 5 tips to help improve your credit score.
1. Get copies of your credit report —then make sure the information is correct.
Go to the Annual Credit Report web site. This is the only authorized online source for a free credit report. Under federal law, you can get a free report from each of the three national credit reporting companies every 12 months
.
You can also call 877-322-8228 or complete the Annual Credit Report Request Form at the Federal Trade Commission (FTC) web site and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
2. Pay your bills on time.
One of the most important things you can do to improve your credit score is pay your bills by the due date. You can set up automatic payments from your bank account to help you pay on time, but be sure you have enough money in your account to avoid overdraft fees.
3. Understand how your credit score is determined.
Your credit score is usually based on the answers to these questions:
Do you pay your bills on time? The answer to this question is very important. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.
What is your outstanding debt? Many scoring models compare the amount of debt you have and your credit limits. If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score.
How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.
Have you applied for new credit recently? If you have applied for too many new accounts recently that may negatively affect your score. However, if you request a copy of your own credit report, or creditors are monitoring your account or looking at credit reports to make prescreened credit offers, these inquiries about your credit history are not counted as applications for credit.
How many and what types of credit accounts do you have? Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score. However, too many finance company accounts or credit cards might hurt your score.
To learn more, see the Federal Trade Commission’s publication on credit scoring at their web site.
4. Learn the legal steps you must take to improve your credit report.
The Federal Trade Commission’s “Building a Better Credit Report” has information on correcting errors in your report, tips on dealing with debt and avoiding scams—and more.
5. Beware of credit-repair scams.
Sometimes doing it yourself is the best way to repair your credit. The Federal Trade Commission’s “Credit Repair: Self-Help May Be Best” explains how you can improve your creditworthiness and lists legitimate resources for low-cost or no-cost help.
1. Get copies of your credit report —then make sure the information is correct.
Go to the Annual Credit Report web site. This is the only authorized online source for a free credit report. Under federal law, you can get a free report from each of the three national credit reporting companies every 12 months
.
You can also call 877-322-8228 or complete the Annual Credit Report Request Form at the Federal Trade Commission (FTC) web site and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
2. Pay your bills on time.
One of the most important things you can do to improve your credit score is pay your bills by the due date. You can set up automatic payments from your bank account to help you pay on time, but be sure you have enough money in your account to avoid overdraft fees.
3. Understand how your credit score is determined.
Your credit score is usually based on the answers to these questions:
Do you pay your bills on time? The answer to this question is very important. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.
What is your outstanding debt? Many scoring models compare the amount of debt you have and your credit limits. If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score.
How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.
Have you applied for new credit recently? If you have applied for too many new accounts recently that may negatively affect your score. However, if you request a copy of your own credit report, or creditors are monitoring your account or looking at credit reports to make prescreened credit offers, these inquiries about your credit history are not counted as applications for credit.
How many and what types of credit accounts do you have? Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score. However, too many finance company accounts or credit cards might hurt your score.
To learn more, see the Federal Trade Commission’s publication on credit scoring at their web site.
4. Learn the legal steps you must take to improve your credit report.
The Federal Trade Commission’s “Building a Better Credit Report” has information on correcting errors in your report, tips on dealing with debt and avoiding scams—and more.
5. Beware of credit-repair scams.
Sometimes doing it yourself is the best way to repair your credit. The Federal Trade Commission’s “Credit Repair: Self-Help May Be Best” explains how you can improve your creditworthiness and lists legitimate resources for low-cost or no-cost help.
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