When you’re looking for a new mortgage, many lenders evaluate your credit based on the “Three C’s.”

Credit

Is it likely that you will repay the loan?  Are your payments on time and up-to-date?  Are you financially stable and reliable? What are your credit scores?  Today’s marketplace, most conventional lenders require your scores to be in the 700+ range and most FHA loans a 620 score or higher.

Capacity
Are you able to pay the loan?  What kind of outstanding personal debt do you have?  Do you have enough earning power and net worth to repay a mortgage or home equity line of credit?

Collateral
Do you own something of value that can be promised to the lender if you don’t repay the loan?  If you have home equity loans for less than perfect credit collateral may assist your loan request.

There are a few more factors mortgage lenders look into when evaluating your capability of obtaining a loan.  To confirm your responsibility and stability they may examine:

• Your monthly income
• Occupation and length of time with employer (two or more years is ideal)
• Home ownership status and history
• How often you move or have moved; patterns of behavior and the timing of that behavior

And there are other examples such as, if you had a charge-off (when the creditor sells your debt to a collection agency) in your credit file from several years ago and you’ve been able to maintain your credit over the years, you will be judged differently from someone who recently had a charge-off.

But whatever the case, it’s imperative to get off on the right foot when rebuilding your credit.. It is important to establish good credit behavior as early as you can in order to build a solid credit reputation.

Essentially, credit bureaus will look for five main characteristics when determining how high your credit score will be.

In descending order, they are:

1. Past delinquency.  If you have failed to make payments in the past, lenders fear you will repeat that behavior based on your bad credit history.
2. How your credit has been used.  Have you maxed out or spent close to the limit on a credit card?  If so, then you may be considered a greater risk than someone who is more conservative with his or her credit line.  Do you pay off your bill every month or a keep a revolving balance?
3. How long you’ve established your credit history.  The scoring models can judge each individual separately.  Credit reporting agencies may take into account the duration of a person’s credit history.
4. Frequency of credit inquiries.  It is recommended that you check your credit once a year to see if you have a good or bad credit rating.  Creditors requesting reports several times in a short period may send a signal that you are applying for a lot of credit due to financial difficulties, or that you are taking on too much debt and overextending yourself.
5. Your credit variety.  It is best to have a mix of installment and revolving loans (e.g., auto, credit cards, retail, etc).  On installment loans, a person borrows money once and makes fixed payments until the balance is gone, while revolving borrowers make regular payments, each of which frees up more money to access.

It is important to understand all the factors that determine if you have good or bad credit.  It is never too early to begin building a good credit history and avoid bad credit inconveniences in the lending process

Till next week…

Herschel

Starting September 2007, the newest version of the FICO scoring module will ignore all authorized user information when computing scores. The company that created FICO, Fair Isaac Corporation, changed the formula after learning that some credit repair companies were “buying” authorized user slots on the credit cards of people with good scores and “renting” those slots to strangers with bad credit to quickly boost their scores. This made it look like the bad credit person had a long history of build good credit and credit card balance with a high credit limit and very low balance, thus effectively lowering their debt to credit ratio and increasing their history. Credit scores would increase dramatically for them. Not a bad idea and since it still works for the older scoring modules of which most creditors still use, I would suggest not “buying” a slot but borrowing a family members slot on a good card to do the same thing. We call it “piggybacking”.

A mistake on your credit report can cost you literally thousands of dollars, especially in this economy. So what can you expect from a big credit bureau if you ask them to investigate and correct the error?

What a great question and one that Spence Wharton, an NCF consultant shot me recently. Smart Money magazine did an article and one that I thought merits your attention. Just click the link below?

http://www.smartmoney.com/Spending/Rip-offs/Why-The-Credit-Bureaus-Cannot-Get-it-Right/

People ask me all the time how can they, the credit bureaus, do this or that? Why would they not delete this right away? How can they get away with this?

You’ll read about when testifying before Congress, one CEO of an independent Arizona credit bureau likened the dispute process to “having an IRS audit, brain surgery, getting a tooth pulled or going to your own funeral.

So, take a few moments with a hot cup of coffee or perhaps over lunch today and find out some facts on how the credit bureaus basically snub their noses at the average Joe consumer. How they abuse folks just like you and I.

This is just a taste of the battles we fight every day for our members!

Be Bold!

Herschel