Credit
Reports & Credit Scores
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Problems caused by bad
credit
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- Inability to get a loan
- Higher interest rate if you
do get the loan
- Larger down payment required
if you do get the loan
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As I write
this in June 2009, you generally need a credit
score of at least 660 to get a mortgage.
Not too long ago you could get a loan with as
little as 580, but banks are more cautious these
days because of the mortgage crisis (which was
caused by lending to folks with low credit scores
who ultimately defaulted on their loans).
Your
credit score doesn't just dictate whether you can
get a loan, it also impacts how good an
interest rate you get.
The worse your credit score, the higher
the rate of interest. You might also have to have a
larger down payment than otherwise. This bears
repeating: Bad credit doesn't just mean you might
not get the loan in the first place, it means that
if you do get the loan, you'll have to pay
more interest, and you'll be required to make a
larger down payment.
Here's an example from MyFico.com in June 2009
about how credit scores might affect the interest
rate -- and therefore the cost of the loan -- on a
30-year, $200,000, fixed-rate mortgage.
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Credit Score
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Interest
Rate
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Monthly
Payment
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760 - 850
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5.26%
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$1,540
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700 - 759
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5.48%
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$1,567
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680 - 699
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5.66%
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$1,589
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660 - 679
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5.87%
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$1,616
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640 -
659
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6.30%
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$1,670
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620 -
639
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6.85%
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$1,741
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Payment based on
$200k home, 5% down, PMI, closing costs rolled into
mortgage, includes estimated taxes + insurance.
Loans are not generally available to those with
credit scores below 660.
Consumer
Reports also addresses this topic, saying,
"Over the life of [a $150,000] loan, the
people with the best credit scores may pay roughly
$138,000 less than those with the worst."
The higher your credit score, the less you'll
pay for your mortgage. The lower your score,
the more you'll pay. It's therefore important that
you improve your credit score if it's low.
Average
credit scores
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The median U.S. score is 723.
Here's how the American population's
credit scores stack up.
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Credit
Score
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Percentage of
population
with this score
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800+
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13%
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750 - 799
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27%
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700 - 749
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18%
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650 - 699
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15%
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600 - 649
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12%
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550 - 599
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8%
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500 - 549
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5%
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less than 500
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2%
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From
MyFico.com, Aug. 2006
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Credit Report vs. Credit
Score
Your credit report and your
credit score are two different
things. Your credit report is a list
of things like your credit card and bank
accounts, outstanding loans, and your payment
history. Your credit score is a rating of
how good your credit is, based on your report.
In other words, your credit report is a bunch of
pages, and your credit score is a number from
300 to 850.
The main things on your credit report that
hurt your credit score are:
- Bankruptcy
- Outstanding (unpaid) debts
- Late payments
- Credit card balances near the credit
limit on those cards
- Liens (both outstanding and paid)
You increase your credit score by
cleaning up your credit report. The score
is based on the report, so get a clean report,
and you'll have a good score. We'll cover
cleaning up your credit report later, but for
now let's continue learning about your report
and your score.
You actually have three
credit reports
The companies that keep track of
your credit report are called credit reporting
agencies (CRA's) or credit bureaus. There
are three of them: Trans
Union,
Equifax,
and Experian.
So you actually have three credit
reports, since there are three CRA's that track
your credit. They're usually very similar (often
nearly identical), but sometimes they can
differ. For example, most credititors
report late payments to all three CRA's, but
some might report late payments to only one or
two CRA's rather than all three.
This means that if you need to clean up your
credit report, you probably have to clean up
three different credit reports. You never know
which CRA your lender is going to consult about
your credit (although some lenders will tell you
if you ask). Many lenders consult all three
CRA's, too.
You can get your own reports yourself because
by law each CRA has to give you a copy of your
report once a year if you ask for it. You start
out at AnnualCreditReport.com
which in turn sends you to each of the three
CRA's websites. But be careful! These
sites often make it hard to see how to get your
report for free, while they put misleading
come-ons for paid services right in front of you
(free for the first 30 days after which they
bill you every month). Many people sign up for
these accidentally, thinking that that's what
they need to do in order to get their credit
report from the site. You can really get your
reports from these sites for free, but you might
have to hunt a while for the right options.
Also beware that these sites will generally
try to sell you fake credit scores -- scores
that are completely different from what your
lender actually uses. To protect yourself
against that, let's learn more about credit
scores.
Kinds of credit
scores
The most common kind of credit score
is the FICO score, which is calculated by a
company called Fair Isaac. Fair Isaac makes its
money by selling the FICO scores on individual
consumers to banks. When your bank buys a credit
report from a CRA like TransUnion, it also buys
the FICO score calculated from the TransUnion
report. Since you have three different credit
reports, you also have three different FICO
scores. In fact, your bank might order all three
scores.
While the FICO score is the most common,
the three CRA's each have their own scores that
they try to sell to the banks. TransUnion
sells a "TransRisk" score and Experian sells a
"ScoreX" score. Banks generally use the FICO
score because it's the industry standard, but
some banks might go with the CRA brand because
it's cheaper.
Many banks have also devised their own
system to calculate credit scores from credit
reports. That way they don't have to pay
anyone for the credit score.
So there are potentially seven different
scores your lender might see:
- The FICO score from the three CRA's
- The proprietary score from the three
CRA's
- The lender's own internal score
So why is this important? Because if
you're checking your credit score(s), you need
to make sure you're looking at the same one(s)
your lender sees! The best way to find out what
scores your lender uses is to ask them --
they'll generally tell you. If you don't have a
lender in mind yet, then get genuine FICO
scores, because that's what most banks use.
Getting your credit
scores
Paying for
them
- You can get your TransUnion- and Equifax-based FICO scores from MyFico.com for ~$32.
- You can get just your Equifax-based FICO score
for $16, which is okay only if you know that
that's the only score your lender is going to
look at.
- You can't buy your
TransUnion-based FICO score alone from anywhere. The only way to
get your TransUnion-based FICO score is to buy it together with the
Equifax-based score from MyFico.com.
- You can't get your Experian-based FICO score from
anywhere, because Experian doesn't allow consumers to have it, even if
they pay. Only your lender can see it. (Yeah, Experian has
gotten a lot of flak about that.) You can buy Experian's proprietary score (which is what they want you to do), which will at least give you an idea of how good your Experian credit report is.
- Beware of sites
offering "Your Credit Score", since 99.9% of
the time they're not real FICO
scores. That's true on even the TransUnion and Experian sites, which don't sell FICO scores directly. The only places to get real FICO scores are MyFico.com (TransUnion + Equifax) or Equifax (Equifax only).
Getting them for
free
You can ask your lender for your
score(s) once they've run your credit.
Getting your credit scores after
you've applied for a loan is kind of like
putting your seatbelt on after you've already
had a wreck, but if you've already applied
for a loan, your lender will often tell you
your score if you ask. In fact you should ask
for a copy of the whole report(s), so you can
get an idea of what the problems are if your
score is low. Most lenders make you pay for
the report(s) before they order it, and if
that's the case and they won't share it,
point out that you paid for it, not them.
Of course, if the lender already approved
your loan and you got a great interest rate,
then your credit score is kind of a moot
point. But if you didn't get the lowest rate
possible, then you'll want to shop around at
other lenders, and in that case you need to
know what's on your credit report to see if
you can clean it up to improve your score.
(More on that later.)
Another possible way to get a free FICO
score is through your credit card company.
Most cards don't offer this service, but
some do. For example, with my Washington
Mutual card, I can login to my account online
and see my FICO score based on my TransUnion
report. The problem here is that you can't
see the other two FICO scores, and if you're
making an investment as big as buying a
house, it's best to cover all your bases and
get all three.
Do I need to improve my
credit score?
That depends on how good your credit
is, of course.
Excellent credit. If you know
that each of your FICO credit scores is 760
or higher, your credit is excellent and
there's no need to try to improve your score.
Good credit. If your FICO scores
are between 700 and 759, then you have a
choice: cleaning up you reports and getting
your scores about 760 will get you a slightly
higher interest rate, but not much. (See the
table above.) So it's up to you whether it's
worth your time in trying to improve your
credit rating.
Fair to Bad credit. If your FICO
scores are less than 700, or if you don't
know your scores but you have your credit
reports and can see that they list negative
items, then it's time to start rebuilding
your credit. That's our next item.
Where to
now?
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This page last updated in June
2010.
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