Dan Marchiando's Mortgage News Blog

Why Should I Care about My Credit Score and Credit Report?

February 5th, 2009 3:20 PM by Dan Marchiando


The decision process that occurs at the offices of mortgage lenders has become more and more computerized in the past 10 years or so, just like so many aspects of our life today. This trend has allowed mortgage lenders and other industries that have leveraged technology, to make better and faster decisions, sometimes at prices less than were possible in the past. Credit reports themselves are a great example of technology making a product cheaper. Credit reports in the early '90s used to cost about $35, but now cost as little as $10. Credit decisions that used to take weeks to analyze, in many cases can now can be done in a matter of minutes.

Mortgage lenders are not the only ones checking your credit

You probably knew by now that mortgage lenders rely on credit scores and credit reports. But did you know that credit card companies, insurance companies, utility companies, and employers also rely on credit scores? A credit score could make the difference between being offered a 14% interest rate or a 21% interest rate on a credit card. Insurance companies use scores to predict the likelihood that someone will file an insurance claim, figuring that someone in difficult financial straits is more likely to file an insurance claim. Utility companies use scores to decide whether to require an up-front deposit on new services. And employers look at credit scores as a measure of trustworthiness—perhaps steering clear of candidates who might be distracted by personal financial problems. A good credit score may indicate to an employer that a job candidate can manage finances and work within budgets; which are required skills in many fields.

Credit Agencies

There are three main Credit Reporting Agencies (credit repositories) —Equifax, TransUnion and Experian— The Big Three. Each is a separate and individual company, and for the most part, they do not communicate with each other. These companies operate huge computer databases, like huge sponges full of information. They have been collecting data since the 1960's or so. They collect the information, but they don't double-check it for accuracy unless asked and prodded to do so. Right or wrong, the responsibility to monitor and seek correction of incorrect information ends up falling on us as consumers.

Credit Reports

Credit reports are produced by companies that tap into the data that is stored by the Big Three credit agencies. These companies organize the data into (somewhat) readable reports, in many cases combining the information from all three agencies into a single summary report. 2004 was a good year for consumers, as government legislation required the Big Three credit agencies to make free credit reports available to consumers once a year.

Visit www.AnnualCreditReport.com

Credit Scores

The history of credit scores goes back into the late 1950's, although the scores we know of today were introduced in the early 1980's, and didn't become common until the early 1990's. The credit scores that have become standard in several industries, including the mortgage industry, were developed by an engineer and a mathematician named Mr. Fair and Mr. Isaac, and are commonly referred to as FICO scores from the Fair Isaac Corporation). After studying decades of credit information, they applied statistics to develop a computer program that could quickly evaluate the data in credit reports and produce credit scores. Think of a credit score as a three digit Cliffs Notes version of a War and Peace-length credit report. So what does the score mean? Well, simply put, it represents the likelihood that a person will pay their debts as promised, based on their past history of paying debts. The score number itself is only significant when compared to the range of possible scores. In the case of the FICO score, that range is 300 to 850. Depending on the lender, a score of 720 to 740 is considered excellent; a score of 680 to 720 is considered average. A score below 620 will make obtaining credit more expensive. Credit scores became available directly to consumers starting in 2001, although the law did not require them to be free (like credit reports).

Good Reasons to Watch Credit

? The good news, as you can see from the above chart is that the majority of people are already doing just fine managing their credit.

? Good credit and good scores can save money on mortgages, car loans & leases, and credit card rates.

? Good credit can streamline the lending process, allowing borrowers to dig up less documentation.

? Good credit can make insurance more available and cheaper.

? Good credit can make getting a job or promotion easier.

? A lot of reports have errors, so it pays to stay on top of them while they are fresh, and get them corrected ASAP. The agencies don't correct errors unless they are informed of the error, and asked to investigate and correct them.

? It can frankly be challenging, and take a fair amount of time to get errors corrected, so it pays to allow plenty of time to correct errors before applying for a new loan.

Next month I'll discuss what goes into a credit report and credit scores.

Thanks for your interest, Dan 

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