If you are like me and probably many other people, you might have found yourself sitting across from a mortgage broker at one point in your life just sure he or she would look across the desk and say, “I am sorry Mr. and Mrs. Jones, you will never own a home and have any kind of life because you have such bad credit history”. Now granted, I was over dramatizing the situation in my mind because I was pretty confident I had always paid bills on time. But what if? What if there was a time I didn’t? What if some traffic ticket went unpaid? What if there is something on my record I don’t know about? What if I owed too much to creditors? These questions circled through my mind over and over, convinced that I would be the reason I would be banned forever from the housing market. And then the magic words…”congratulations, you have an excellent credit score.” Ahhh the relief! I was ensured that I, too, would be able to join the ranks of homeowners.

I am sure you have seen commercials lately that talk about being haunted by your credit score. What is so important about your score and why the sudden attention? In the 1980’s, Fair, Isaac and Company devised a patented mathematical model (the actual calculation method to this day, remains a secret) to predict the credit risk of consumers based on information in their credit report. Today this system, known as FICO, is the scoring model most widely used by lenders. There are three companies that calculate your credit score: Equifax, Experian, and TransUnion. The range of credit scores is between 300 and 850. The higher your score, the lower the risk for the lender. Sixty percent of people have credit scores of 600 and above. Borrowers in the low 600’s are a risky investment. At 720 you are viewed as a safe risk and can typically receive a loan with no problems.

So what factors affect a score? The FICO score is calculated based on the following areas: 35% payment history, 30% amount owed, 15% length of history, 10% new credit, and 10% type of credit used (credit cards versus installment loans). Payment history is a record of any late payments or delinquencies. One late payment may not affect your score significantly if the rest of your history is good because the model is looking at patterns, not isolated credit mistakes. The “amount owed” is basically looking at the relationship between total used credit and total available credit. One who has maxed out credit cards and has little available credit will score poorly in this area. An interesting note in this category is the recent “0% finance” or “No payments 'til 2007” deals many stores offer. If you walk into a store and take advantage of this offer, you may walk out with 0% for a year or more, but to the credit reporting companies, it looks like you financed let’s say $1000 with an available limit of $1000 leaving no available credit on that card (maxed out). Again, this will not negatively affect your score if the rest of your history is good but if it’s part of a pattern of maxing out credit, it can be a problem. “New credit” is basically looking to see if you are taking on more debt. The last category, type of credit, wants to see a healthy balance of credit (bank cards, installment loans, department store cards).

So what is your score? A law has passed recently that lets us view our credit history once a year for free. Bill Grant, of Biltmore Financial Bancorp, of Palatine, warns against using many of the websites that claim to provide your credit report and/or score free of charge. But this site, www.annualcreditreport.com, is sponsored by the three credit reporting companies. So I sat down and walked through the website. Once again, my hands were sweaty and my stomach a bit nauseas but I forged ahead. It was super simple and in minutes there was my credit history right before my eyes…every payment, every inquiry, everything. I then wanted my score and for that I had to pay $5.95. I am glad to say that $5.95 set my mind to ease once again with a good solid score. It was worth looking up because it really can educate the consumer whether your score is good or not so good.

If it turns out that your score is not so great and a lender has turned you down, you have a right to ask for a written explanation of why you were denied credit. The first thing you should do, according to Richard Roller, of Wells Fargo Home Mortgage in Park Ridge, is to check your credit report for errors. If you find any, write the credit reporting company a letter with proof of payment or account status and ask them to update the incorrect information. "Any collections on your credit report, however small, may negatively affect your score", says Roller, so bite the bullet, and pay them off. Unfortunately, your credit score is not likely to shoot up overnight, so be patient. Correct information will likely remain on your credit report for seven years or longer. Although the general rule is that the only real way of improving your credit score is to pay bills down, lower your balances and not take on new debt, it’s worth sitting down with a mortgage broker to see what your options are for improving your credit score.

So what do you get if your score is really great? According to Bill Grant, a great score can’t really help you get a better mortgage rate but it can dramatically help in the flexibility of options. A good score can help you receive the financing you need quickly. It can provide more financing options such as “non contingent” financing. In today’s housing market, being pre-approved by a lender is essential in getting the home you really love.

So take the first step and check out your score. You can then talk with a lender to evaluate your options. It’s painless ….really!!! PFR

The mortgage brokers quoted in this article have worked with Picket Fence Realty and can be contacted with any questions:
William R Grant - Vice President
Biltmore Financial Bancorp
1530 E. Dundee Road, Ste. 100
Palatine, IL 60074
Phone: 847-348-1612

Richard J. Roller - Senior Loan Consultant
Wells Fargo Home Mortgage
100 S. Prospect Avenue, Ste 9
Park Ridge, IL 60068
Phone: (847) 318-9000 X 15


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