Check your Credit Report & Credit Score
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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?
If you liked this site then you might like some of my other sites:
How to Find Cheap Airfare How to Save Electricity How to get listed & ranked well in Google
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Michael Bluejay Inc. • All information is "use at your own risk" Contact .
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