What is a Credit Score?
A credit score is a measure of risk used to assess an individual’s credit worthiness. Credit scores are generated from statistical models that weigh several factors in a person’s credit record, like bill-paying history, the number and type of accounts, late payments, collection actions, outstanding debt, and the age of accounts. A credit scoring system awards points for each factor. A total number of points make up a credit score. This score helps predict how likely it is that an individual will repay a loan and make the payments on time.
What Your Credit Report Determines
Your credit report can determine whether or not you get a credit card, mortgage or car loan, as well as the rates and fees you will be charged. If you have bad credit, it will influence your insurance rates plus your ability to rent an apartment or land a job.
Here’s a list of how long negative items stay on your credit report:
Delinquent Payments: If you make a payment more than 30 days after the due date, it will appear as a late payment in your credit report.
Bankruptcy Chapter 13: 7 years from the filing date
Bankruptcy Chapter 7, 11, or 12: 10 years from the filing date
Charge-off: 7 years from the date of original delinquency
Collection: 7 years from date of original delinquency
Credit Inquiries: 2 years
Foreclosure: 7 years from filing date
Judgment: 7 years from date it was reported
Paid Tax Lien: 7 years from date paid
Paid and Closed Revolving/Installment Accounts: 10 years
Unpaid Tax Lien: 15 years
It is critical to monitor your credit report thoroughly for outdated information that may impacting your credit score. Remember, that with the exception of Chapter 7 bankruptcy negative account information may no longer be reported by your creditor after seven years from the date of first delinquency. If the creditor reports that the seven-year cycling off period has been reached, the credit bureau may no longer report that account.
How to Get the Best Rates
If you want the best interest rates and the lowest costs, you’ll need an excellent credit score, usually 720 or higher with a 20% down payment. If you can’t meet these tighter lending requirements then next best thing is an FHA loan. FHA is a federal agency that insures mortgage loans against default. Most lenders are requiring that you have a 620 credit score with a 3.5% down payment to get a FHA mortgage loan. This benchmark has recently changed from a middle credit score of 580 to a 620 with most lenders.
For mortgage approval, there is no single cutoff score that applies across the board. Every mortgage company has its own standards of what they are willing to approve and how they interpret risk. Lenders will also consider other factors in addition to your credit score, such as your employment and salary, your savings and your debt-to-income ratio. To ensure that your credit score is as strong as possible, you should check your credit report for any errors or inaccuracies at least 3-4 months before loan shopping.
Do Not Seek New Credit Before Your Mortgage Closing
If you are applying for a mortgage as of June 1, 2010, your lender might be ordering a second full credit report before closing. This last minute credit report is intended to find out if you have obtained or even shopped for any new debt between the date of your loan application and your closing. If you have any new applications of credit of any type the closing can be put on hold until the lender can research these applications.
