Understanding your Credit
What is a Credit Score?
A credit score is used by a lender to help determine whether a person qualifies for a credit card, loan, or service. Most credit scores estimate the risk a company incurs by lending a person money or providing them with a service—specifically, the likelihood that the person will make payments on time. Generally, the higher the score, the less risk the person represents.
Applying for new credit can impact your credit score. There are two categories of new credit inquiries that consumers use when applying for credit:
- Rate shopping: Inquiries posted when a consumer is shopping for a mortgage loan, student loan, or auto loan are recognized by the credit scoring system as rate shopping. While all the inquiries will show on the credit report, only the first inquiry will impact the credit score during a 30- to 45-day time frame.
- Seeking new credit: If a consumer applies for multiple credit cards in a short period of time, each inquiry will impact their credit score. The impact of a single credit inquiry is minimal but seeking multiple new credit lines can lower your score.
Your credit score is determined by FIVE COMPONENTS of your credit habits. Improvements in the two most important categories, “Payment History” and “Amounts Owed,” will have the most dramatic effect on your credit score and help you to reach your long-term financial goals.
- 35% PAYMENT HISTORY – Late payments can damage your score quickly, but a record of on time payments helps your score.
- 30% AMOUNTS OWED – The more you owe in proportion to your credit limit, the lower your score will be.
- 15% LENGTH OF CREDIT HISTORY – The longer your history of responsible credit, the better.
- 10% TYPES OF CREDIT – Responsibly managing different types of credit—such as auto loan, and credit cards—can help your score.
- 10% NEW CREDIT – Opening several accounts in a short time may lower your score.
Common Questions about Credit
Most of us don’t think about credit until a specific event sparks our interest. Maybe we want to buy a car, or a home, or perhaps we receive a preapproved credit offer in the mail. Here are answers to some of the most commonly asked questions.
When you make a payment on a credit card or loan, a record is kept of how much and often you pay, as well as the credit limits and loan balances. Businesses and other sources may report your credit, loan and payment history to one of more credit reporting companies who combine the information into a credit report. The report typically consists of identifying information including your current and former names, address(es) and/or employers, a list of businesses that have given you credit or loans along with amount and frequency of payments including any missed or late payments. The credit report will also show public record information such as bankruptcies, tax liens, and judgments. Finally, the credit report will also list all recent creditors who have obtained a copy of your credit report.
The Fair Credit Reporting Act grants credit report access to companies which have a “permissible purpose.” The FCRA specifies those purposes as the granting of credit, the collection of a debt, the underwriting of insurance, employment purposes, for issuing a license as required by some government agencies, or for a legitimate business transaction between a business and a consumer. Obtaining a credit report under false pretenses, or improper use of a credit report, is a violation of federal law.
Credit reports do not contain any information about a person’s character, lifestyle, religion, national origin, political affiliation, race, friends and associates, or relatives. Nor do credit bureaus collect or transmit data on an individual’s medical history.
The best source for a free copy of your credit report is www.annualcreditreport.com. The website is sponsored by the three major credit bureaus (Trans Union, Equifax and Experian), and you can get a free copy of your credit report once every 12 months. Monitoring your credit report regularly is the single best way to spot errors.
Applying for a pre-approval early in the home-buying process will allow you to review your mortgage credit scores from all three credit bureaus to assure you are in the best position for a home purchase. If you discover some bumps and bruises on your credit history, Liberty FCU has a free mortgage credit counseling service for homebuyers that may need help to qualify for the best programs and rates.
Both the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) caution consumers to be wary of companies that make claims regarding credit repair. Credit repair companies must comply with the Credit Repair Organizations Act which states that a credit repair company cannot charge a fee in advance of services rendered. Credit repair services provide no service that the consumer cannot do on their own at no cost.
Liberty FCU offers free mortgage credit counseling for members applying for a mortgage with us. Our credit counselor can help you understand the steps to improving your credit history and lay out a specific game plan and estimated timeline to get you ready for a home purchase.
Many credit card companies and lenders utilize the credit bureau’s database to offer pre-approved credit. The company making you an offer does not have the ability to see your credit information. They simply purchase a list of names and addresses from the credit bureau of people that fit certain criterion. You have the right to opt-out or prohibit any promotional credit or insurance transaction. To opt out of receiving them for five years or opt out of receiving them permanently, call toll-free 1-888-567-8688 or visit www.optoutprescreen.com
Much like the credit card companies use the credit bureau’s database for their pre-screened offers, mortgage companies request a list of recent mortgage applicants that meet their criteria. The same list of mortgage applicants are often purchased by multiple mortgage lenders resulting in excessive solicitation calls. Some mortgage applicants have received up to 30 calls a day resulting in frustration and confusion. Using the pre-screen opt out service and the National Do Not Call Registry before applying for a mortgage can reduce the number of calls. You can add your phone number to the free do not call registry at DoNotCall.gov or by calling 1-888-382-1222.
The Fair Credit Reporting Act specifies the length of time information may be reported on a consumer credit file.
2 Years or Less
- Fraud Alerts (Initial) – Can be placed on a credit report for a minimum of 90 days
- Fraud Alerts (Active Duty) – Can be placed on a credit report for a minimum of 12 months
- Inquiries – Two years but can only impact the credit score for 12 months
7 Years
- Collection Accounts – Seven years from the date the account first became delinquent without since becoming current
- Judgments – Seven years from the date filed
- Tax Liens – Seven years from the date paid. Indefinite if not paid
- Trade Lines – Seven years from the date of the last activity
- Late Payments – Seven years from the date of the occurrence
- Consumer Statements – Can be placed on a credit report for up to seven years
- Fraud Alerts (Extended) – Can be placed on a credit report for a maximum of seven years
10 Years
- Bankruptcy Chapter 13 – 10 years from the date filed. If discharged it is reportable for seven years from the date filed
- Bankruptcy Chapter 7 – 10 years from the date filed