What is a Credit Score? - California Finance

WHAT IS A CREDIT SCORE?

Before deciding which loan program you qualify for, a lender wants to know two things about you: 1) Your ability to pay back the loan, and 2) Your willingness to pay back the loan. For the first, they consider your income. For the second, they consult your credit score.

The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (they're named after their inventor). A FICO score is between 350 (high risk) and 850 (low risk).

Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. In fact, the fact they don't consider demographic factors is why they were invented in the first place. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.

Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.

Different portions of your credit history are given different weights. 35% of your FICO score is based on your payment history. 35% is your current level of indebtedness. 15% is the length time your open credit has been in use (ten year old accounts are good, six month old ones aren't as good), and another 15% is the types of credit available to you (installment loans such as student loans, car loans, etc., versus revolving accounts like credit cards). Finally, 5% of your score is based on the number of credit inquiries in your file.

Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.

DISPUTING YOUR CREDIT REPORT

Your credit report is a record of your credit activities. It lists your present and past credit card accounts, mortgages, other loans, and their balances and payment history. It also shows if any action has been taken against you because of unpaid bills such as collections and lawsuits, and whether or not you have filed bankruptcy in the last ten years. Because businesses use this information to evaluate your applications for credit, insurance and employment, it’s important that the information in your report be complete and accurate.

The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission (FTC), is designed to promote accuracy and ensure the privacy of the information used in consumer reports. Under the FCRA, both the credit reporting agency (CRA) and the organization that provided the information to the CRA (usually the credit card company) must correct any errors or incomplete information in your report.

If you do encounter a mistake on your credit report, several steps need to be taken to correct the matter:

1. The first thing to do is get a copy of your credit report from each of the three major CRAs: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com.

2. In a written letter, tell the CRA what information you believe to be inaccurate. Include copies (not originals) of documents that support your position. Provide your complete name and address, identify each item in your report you dispute, and request deletion or correction. Be sure to make copies of your dispute letter and enclosures.

3. Send your letter by certified mail, return receipt requested, so you can document what the CRA received.

4. The FCRA mandates that all CRAs investigate the items in question — usually within 30 days — unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the credit card company. After the credit card company receives notice of a dispute from the CRA, it must investigate, review all relevant information and report the results to the CRA.

5. If the disputed information is found to be inaccurate, the credit card company must notify all nationwide CRAs so they can correct this information in your file. Disputed information that cannot be verified must be deleted from your file.

6. When the investigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the credit card company verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the credit card company.

7. In addition to the CRA, you should also write to the credit card company about the error. Again, include copies of documents that support your dispute. If you are correct — meaning the information you disputed is found inaccurate — the credit card company cannot use it again. Further, at your request, the CRA must send notices of corrections to anyone who received your report in the past six months.

right BANKRUPTCY

Filing bankruptcy delivers a serious blow to your credit score, but it doesn’t mean you have to wait 10 years before you can qualify for a mortgage. Many consumers who have filed for bankruptcy have been able to obtain a mortgage, although it is often at a higher rate than someone qualifying for a prime or "A-paper" loan.

Here are some tips to keep in mind when you inquire about a mortgage and have an imperfect credit history:

Give explanations. No mortgage lender is going to ignore the fact that you’ve filed bankruptcy, and they may want to know the cause of the filing. Your lender will be particularly interested in whether the same situation could happen again. Your chances of being qualified are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, than if it was the result of simply having bad spending habits.

Reestablish your credit. Many people who file bankruptcy swear off credit altogether. However, it is important to reestablish your credit rating. Get a secured credit card or take on some sort of loan — furniture, a car or a major appliance — to demonstrate that you are able to make timely payments. Make sure you are making other payments (utility bills, cell phone, etc.) on time as well. This won't turn things around right away but your credit score will improve ov left er time.

Dispute any credit report errors. There’s no need to add to your troubled credit history with errors on your credit report. You can run your credit using this website or get a copy of your credit report from each of the three major credit reporting agencies: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com. If you encounter any errors, inform the credit reporting agency in writing what information you believe to be inaccurate and request deletion or correction.

Save your money. Lenders may be more willing to loan you money if you show substantial cash reserves.