Step 5: Your credit.

Checking your credit.

When you apply for a mortgage, the lender will check your credit to ensure that you you do not have any credit problems. If you have had a history of credit problems, you will probably want to get your credit report and be prepared to respond to any questions or problems on the report.

If you have not been late or missed any payments, you probably do not have to worry about getting a bad credit report. But mistakes happen and sometimes your report may include something that is wrong or a problem that has been resolved. So get a copy of the report to double-check.

Review your credit report.

There are three separate credit reports that lenders us to evaluate your financial worthiness. The reports are from Equifax®, Experian®, and Trans Union®. You should check your credit reports before you apply for a loan to avoid any surprises. You can receive one free copy of your report every 12 months from each of the three credit reporting bureaus. However, your free report does not contain your credit score. So for a fee you can order your credit score from each of the bureaus. If you should find a mistake in your reports you will need to contact the bureau and find out the bureau's procedure to remedy it. The general guidlines to a healthy score is to:

• Fix any errors in your credit reports.
• Do not open any new lines of credit.
• Do not max out any available lines of credit.
• Keep your balances low in relation to the max available credit allowed by any lines of credit.
• Do not move/transfer dept around to different lines of credit to avoid paying them.
• Make all dept payments on time.
• Do not get behind on any due bills.
• Do not fall behind in your rent payments.

You can order your credit reports on line at www.annualcreditreport.com or call the Annual Credit Report Request Service at 1-877-322-8228 and finally you can fill out a credit report request form at www.annualcreditreport.com and mail it at the address instructed on the website. By mail may take 2 to 3 weeks.

The three Credit bureaus are:

What information is in the credit reports:

Once you receive your credit report(s), you may wonder what all the information is all about:

• Identifying Information: Includes your name and any previous names, addresses and previous addresses, your Social Security Number, date of birth, current and past employments.
• Credit Information: here you will find any information about open credit accounts, the assigned credit limits for each, loan amounts, current balances, monthly payments for each, and the pattern that you have paid your credit for the past years. The names of individuals who are on your accounts will also be listed.
• Public Record Information: This section contains any federal, state, county and town court banckrupcy records, tax liens, monetary judgments and overdue child support.
• Inquiries: Listed here are the names of anyone who has obtained a copy of your credit report for any reason.

All of this information is used to calculate your credit score or FICO score - a scoring system derived in part from your past credit history.

The break down of your FICO score is as follows:

• 35% of the score is determined by payment histories on your credit accounts, with recent history weighted a bit more heavily than the distant past;
• 30% is based upon the amount of debt you have outstanding with all creditors;
• 15% is produced on the basis of how long you've been a credit user (a longer history is better if you've always made timely payments);
• 10% is comprised of very recent history, based on your efforts to obtain loans or credit lines in the past few months;
• 10% is calculated from the mix of credit you hold, including installment loans (like car loans), leases, mortgages, credit cards, etc.

FICO Credit Score:

The FICO credit score is a number between 300 and 850. It has a left-skewed distribution with a median around 723. Just like in school you have a grade (or vantage score with a range from 501-990) which is as follows:

• A: 901-990 - Outstanding
• B: 801-900 - Excellent
• C: 701-800 - Good
• D: 601-700 - Average
• F: 501-600 - Poor

Why is this so important?

When you apply for a loan your rate is calculated based on your FICO score. For example: you apply for a home mortgage at XYZ Bank, here is how they may break down the mortgage rate:

• 780-850 5.75% APR
• 700-759 6.00% APR
• 660-699 6.50% APR
• 620-659 7.10% APR
• 580-619 8.50% APR
• 500-579 9.50% APR
• 300-499 No loan offered.

As you can see the lower your FICO score the higher you will pay in interest rate. If you have a great credit score, in the 700+ range, you might be able to qualify for specific loan opportunities that a lender may offer. If your score falls below 620, you have a chance of getting a loan, but you will really have to work for it and will definitely pay for it in your loan interest rate.

Your FICO credit score is influenced by five characteristics that help lenders determine your credit risk. Each item is taken into account in descending order of importance:

• Past Delinquencies: If you have made late payments in the past, you are more likely to repeat this in the future, and you are more at risk.
• Use of Credit: If you max out your credit cards or keep them close to the limit, you are more at risk because of your spending habits.
• Credit File Length: If you have a short credit history, the FICO system assumes you are more of a risk because you are inexperienced with handling credit.
• Number of times asked for credit: If you initiate multiple requests for credit cards, loans, or other debt instruments in short period of time, you are more of a risk.
• Mix of Credit: If you only have credit cards, you are considered more of a risk than someone who has a combination of car loans, utility bills, rent, as well as credit cards, etc.

The system also looks for patterns and weather any problems appear to be on going. Such as:

• Housing Dept: An example of this type of credit is your current mortgage or rent. You should never have any payments past due.
• Installment Credit: An example of this type of credit is a car loan. You should have no payments that are 60 days or more past due and no more than two payments that are more than 30 days past due.
• Revolving Credit: An example of this type of credit is a credit card. You should have no payments that are 60 days or more past due and no more than two payments that are 30 days past due.

Should you have one or more of these risks, you might be considered a sub-prime borrower. Sub-prime lenders will charge a higher interest rate to compensate for the potential losses from customers who may run into trouble or default on a loan. Again, it does not mean you will never find a lender, it just means that you will have to work a little harder to find a match.

If you find that your credit is in tough shape, you can contact one of the personal credit counseling organizations for help. One such organization is the Consumer Credit Counseling Services at 1-800-577-2227. They might be able to help you sort out your credit problems for a small fee or possibly even at no charge. A knowledgeable lender may also be able to help you.