How to Build an Excellent Credit Report
When it comes to mortgage loans, nothing can compare to an excellent credit report with a great score. A person with a good income, if his credit report is lousy, he will pay higher rate. In other way around, there is a lot of advantages for people with excellent credit scores, 700 or higher. There are some loan programs that won’t require borrowers with credit scores 700+ to show their paystubs, bank statements, income tax returns or W2. That means there is no need to verify income and assets, he still get the lowest interest rates. If you belong to this group of a few good men and women, I congratulate you. If you are not, please don’t be so desperate. You are not alone. There are 1/5 of US men and women have credit scores lesser than 620. Credit scores 700 or higher are excellent; 670 to 699 are good; 650 to 669 are OK; below 620 are not very good. This article is dedicated to people with credit reports lesser than perfect; and people who wants to build better credit reports with better scores.
A good credit report and a good credit score are two different issues. They are related but it’s not necessary that they have to go hand in hand. I have seen borrowers who had good credit reports, never being late in their payments, never had collection, but the credit scores were just OK, not very great. In lenders point of view, credit score is the only thing that counts. Your interest rates are based on your credit scores. In order to build up high credit scores, you need to understand how the credit scoring firms’ computers judging us as borrowers and consumers.
The leading credit scoring firm in
the United States is Fair Isaac that makes FICO® risk scores for three major credit report agencies in the
US:
- BEACON®
at Equifax US and Canada
- EMPIRICA®
at TransUnion US and Canada.
- Experian/Fair
Isaac Risk Model at Experian
Credit scores range from 300 to 850. In mortgage financing world, your credit reports should have 3 different credit scores from 3 major credit report agencies. The middle credit score is your assigned credit score. Some credit reports only have two credit scores, then the lower one will be your assigned credit score. Your qualification, your interest rate is based on that score. Your credit score is 670 or higher, likely you will have lowest interest rate on the loan amount that you qualified. Lower than 650, some adjustments might apply to your interest rates.
There are some things you should
do, and some things you just don't do to your credit reports:
Stay away from late payments, collection and bankruptcy
So
lately, you’ve had a few problems to pay your bills on time. Do you know that
one 30 days late payment can plunge your score from a respectable 700 down to
640? One late payment can shave off your credit scores almost 50 points easily.
If you let your creditors send your bills to collectors, it even does you worse. You thought you already got away from some of forgotten loans or unpaid balance few years back then. Not so fast, your credit report has an elephant memory, it still clearly listed the old debts. When you go to apply for a mortgage loan, it is the redemption time for creditors who sent the bad loans to collection agencies. Usually, lenders will ask you to arrange some kind of settlement with collector agencies before to approve your loan, and of course with higher interest.
In Texas and other community property states in the
US, liabilities of one spouse may become liabilities as join account of both
husband and wife. Example: A married person went to hospital for treatment.
Later he or she has an overdue unpaid balance; billing department of hospital may
send to collection under a join account of both husband and wife. The collection
record will show up in credit reports of both husband and wife.
Please take a good care of your student loans and child support. If you are in default or behind those obligations, they could send your credit scores spin downward. Beside that, there are other serious consequences. Texas Real Estate Commission won't let anyone who defaults student loan to apply for real estate license. The title companies won't let anyone who is behind his or her child support payments, with records in county courts, to sign at closing to buy a house or refinance a mortgage loan. There was a borrower who owed lesser than $100 in child support back in 1997. He already forgot about that insignificant balance, until lately. In 6/2003, one day before closing of his refinancing loan, title company checked Counties' records and found out that he owed more than $700 in child support. He was angry and refused to settle this debt, and the refinancing loan fell through. Remember one thing that nothing accumulates in interest faster than the debts that you owe to IRS and child support.
Bankruptcy does the most damages to your credit more than anything else. It knocks off couple hundreds points in credit scores. It might stay up in your credit report up to 10 years. I have seen borrowers with bankruptcy records who got the loan rates 3 or 4% higher than loan A. That means several hundred dollars higher in monthly payments. Major lenders don’t want to grant credits to people with bankruptcy records. They just flatly deny. And if they do approve a loan, the interest rates will be sky high.
Public record section in credit report does the damages to the borrower no less. If you have a public record, you have a problem. Either someone sued you or you owed tax liens some where. You want absolutely nothing in public record section. It should be blank.
Don’t apply for too many credit cards
Lot
of people says that junk mails are not very bad. Everyday, we receive from junk
mails many offers from creditors to give us a loan with no interest for 6 months;
transfer balance with 1.90% interest for up to 1 year. The temptation is so
great. We ended up having 30 or 40 credit cards each person.
Every time you apply for a new credit card, you pull your credit scores
lower several points at least. In 10 years looking at the borrowers’ credit
reports, there is one certain thing to me is rarely someone with 30 or 40 credit cards
in credit report would have credit score higher than 700. No matter how hard he
or she tried to maintain the accounts, no late payments, and no collection. A
few late payments will send this person down to the neighborhood of lower 600s
easily. Closing all extra credit cards that you don't use will help to increase
your credit score again. But it takes a long while.
The best way to have credit scores in 700s is to have only 4 or 5 credit cards with a long good credit history with those cards. Take turn to use all those cards. A long good history of mortgage loan is also good for credit score. Consider charging less in credit cards, and don’t carry a large balance. Any large balance will make your scores lower and lenders will use it to reduce your qualification of loan amount.
Do
not pull your credit reports very often, they will bring the scores down. A 10%
off your purchase at department store is not worth it for applying another department
store's charged card.
Too many credit inquiries in your credit report will do more harm than good.
Sometime lenders require a letter of explanation from borrower for those
inquiries. 
Co-signing a loan for someone.
It sounds selfish, but just don’t do it. Every time you put your name in a loan for someone else, you invite big financial disaster comes to your way. I saw lot of people who co-signed a loan only to feel regret about that later. They just wished it hadn't happened. You do good things for your friends or your relatives to co-sign to buy a house, a car, or rent an apartment for them. What could they do for you when they are deep down in a big debt hole? They will be behind their payments and obligations, no matter how much they are fond of you as a co-signer, a good friend or relative. In the situation like that, their relationship with you will take the back seat, and it might go down in the hole too. They will distance themselves from the loan, and leave you alone with unpaid balance to deal with creditors. When you co-sign the notes, borrower or co-borrower have the same responsibility to pay back the loan. The creditors will go after you, the co-signer, for better chance to recover the money. Otherwise, the creditors didn’t require your signature as a co-signer in the first place. Beside your bad credit report, if the creditors choose to do, they could sue you for everything you have. In a situation like that, bad credit seems not so bad compare to other legal issues that the co-signer has to face.
How to repair credit?
This is a good question that almost 1/5 of consumers in the US are so curious about; they want to know the answers. There are too many answers that you see in the advertisements in newspapers, on TV, and on the Internet. You hear them on the radio. You see signs on the sidewalks. You get fliers in the mail. You may even get calls from telemarketers offering credit repair services. They all make the same claims:
- "Credit problems? No problem!"
- "We can erase your bad credit-100% guaranteed."
- "Create a new credit identity-legally."
- "We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!"
Now, there is another question popped up: Can they deliver? More often, I heard from my borrowers the disappointed results than the successful stories. I provide you a link to Federal Trade Commission - Fact to Consumers. You read the article then answer it yourselves.
Credit
Repair: Self-Help May Be Best
How to Build an Excellent Credit Report is the article that helps you to
maintain your good credit report as well as to improve it. There will be more. We write our articles in this website to help you to have
an inside look of real estate and financing world. Please come back
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Learn How To Read Your Own Credit Report
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