What are FICO® Credit Scores?  

It is a three-digit number that summarizes the positive and negative information on your Experian credit report.  Credit scores follow an algorithm first developed by the data analytics company FICO years ago. For a while, credit scores weren't the primary force behind a credit decision but over time the impact of a credit score became more and more important. All loan programs have a minimum credit score. Creditors such as JCPenny, GM, and VISA, report payment history to Equifax, Experian and TransUnion who apply the mortgage model to the data and create a FICO score. Each of those companies are independent. The reason their scores are not the same is because their mortgage model varies and creditors do not report to all repositories because it cost them money when they do.

There are five characteristics of your credit history that make up your three-digit score: your payment history, account balances, the length of your credit history, the types of credit used and how often you've applied for new credit. Credit scores will improve much more quickly by paying attention to the two categories that have the greatest impact on a score: payment history and account balances.

  • Payment history accounts for 35 percent of the total score. When someone makes a payment more than 30 days past the due date, scores will fall. An occasional "late pay" won't do much damage to your score but continued payments made more than 30 days past due definitely will. Preventing late payments is a key to recovering your score.

  • Account balances compare outstanding loan balances with credit lines and make up 30 percent of your score. If a credit card has a $10,000 credit line and there is a $3,300 balance, scores will actually improve, as the ideal balance-to-limit is about one-third of the credit line. As the balance grows and approaches or exceeds the limit, scores will begin to fall.

  • The remaining three have relatively little impact. How long someone has used credit accounts for 15 percent of the score, but there's really nothing anyone can do to improve this area other than to wait. Types of credit and credit inquiries both make up 10 percent of the score. By concentrating on payment history and account balances, scores will improve significantly over the next few months.

There are different modeling systems which is why our scores will vary from the scores you will receive if you pull your credit yourself, or those if you pull your credit. Below is the modeling system in the mortgage industry.

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Hold Periods (extenuating circumstances available)

  • Conventional

    • Deed-in-Lieu…..4-years

    • Short Sale…..4-years

    • Chapter 7…..4-years

    • Chapter 13……2-years from discharge, 4-years from dismissal

    • Multiple BK Filings…..5-years if more than one filing within past 7-years

    • Foreclosure…..7-years

    • BK & Foreclosure…..see guidelines

  • FHA

    • Deed-in-Lieu…..3-years

    • Chapter 7…..2-years

    • Chapter 13…..12+ months, permission from BK court.

    • Foreclosure…..3-years

  • VA

    • Chapter 7…..2-years

    • Chapter 13…..12+ months, permission from BK court.

    • Foreclosure…..2-years

    • Deed-in-lieu…..2-years

USDA

  • Chapter 7…..3-years from discharge

  • Chapter 13…..12+ months, permission from BK court.

  • Foreclosure…..3-years

  • Deed-in-lieu…..3-years

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Suggestions

  • Late Payments

    • If possible, get them removed. Some creditors will as a courtesy remove them.

  • Revolving Balances

    • Revolving balances ideally should be under 30%. There are three tiers in which you would see score improvement. 49%, 30% and 10%. Keeping the balance at 10% or less optimizes the score improvement. I would always recommend paying credit cards off monthly to avoid interest charges.

  • Collections

    • Under $2,000 usually do not have to pay.

    • $2,000 or more:

      • Pay in full before closing. (or)

      • 5% of the outstanding balance of each collection is included in monthly DTI.

      • Medical collections and charge-offs are excluded.

  • Judgments

    • Must be paid prior to or at closing.

    • An exception to the payoff of a court-ordered judgment can be made if you have an agreement with the creditor to make regular and timely payments.

    • Provide a copy of the agreement and proof of three months' payments made prior to credit approval. You cannot prepay the scheduled payment to qualify.

  • Taxes Lien from Current Tax Year (exceptions exist)

    • FHA - Must be paid unless; you can provide a valid repayment agreement and evidence to show at least 3 months of timely payments have been made.

    • Conventional - Must be paid unless; you can provide a valid repayment agreement and evidence to show at least 1 timely payment has been made.

  • Charge Offs

    • All housing and installment loans paid on time for last 12 months and no more than two 30-day late mortgage or installment payments in the previous 24 months.

    • Borrower provide a letter of explanation, which is supported by documentation, for each charge-off account. The explanation and supporting documentation must be consistent with other credit information. We must determine if the charge-off accounts were a result of the borrowers disregard for financial obligations, the borrower’s inability to manage debt, or extenuating circumstances.

  • Disputed Accounts

    • Conventional:

      • If the trade line does not belong to buyer or is inaccurate, must validate to ignore.

      • If trade line is buyers, a new credit report with the dispute removed must be obtained.

    • FHA:

      • If the cumulative outstanding balance of disputed accounts are less than $1,001, then you can leave as is.

      • If above $1,001, and the trade line is buyers, a new credit report with disputes removed must be obtained.

      • Disputed accounts not included in $1,001 limit: Has $0 balance; last late is 24-months or older; or payment is current and “Paid as agreed”.

    • USDA:

      • If the trade line does not belong to buyer or is inaccurate, must validate to ignore.

      • If trade line is buyers, a new credit report with the dispute removed must be obtained.

      • Remove disputes unless: Has $0 balance; marked as “Paid in Full” or “Resolved”; or balance owed is less than $500 or more than 24 months old.

    • VA:

      • No formal policy on disputed accounts.

      • If the trade line does not belong to buyer, or is inaccurate, must validate to ignore.

      • If trade line is yours, a new credit report with the dispute removed must be obtained.

  • Inquiries on Credit Report

    • Borrower to explain all inquiries within the last 120 days listed on credit report.

    • If new debt stated but not currently on credit report, a credit supplement showing new debt is required.

  • Debts Paid by Others  (FNMA Only)

    • Non-mortgage debt (installment loans, student loans, and other monthly debts that are non-mortgage) you can exclude the payment from the debt-to-income ratios if you receive 12 months documentation that the debt is paid by another party and has been paid as agreed. This policy applies regardless of whether the other party is obligated on the debt.

    • The policy does not apply if the other party is an interested party to the subject transaction (such as the seller or Realtor) or if the debt has been delinquent in the past 12 months.

    • Underwriting must evaluate the validity of the circumstances under which the payments are being made by another party. For example, payments on multiple student loans made by the borrower’s parent represent a common situation. However, additional investigation and documentation might be necessary when a borrower’s multiple installment and revolving debts are being paid by the borrower’s spouse who is not on the subject mortgage.

    • When a borrower is obligated on a mortgage debt – but is not the party actually repaying the debt – you may exclude the monthly mortgage payment from the borrower’s recurring monthly obligations if the party making the payments is obligated on the mortgage debt and if the borrower is not on title to the mortgaged property.  Need most recent 12 months’ canceled checks or bank statements from the other party making the payment that document a 12-month history with no delinquent payments. The party making the payments cannot be an interested party to the transaction.

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How long Stays on Your Report?

  • Credit Accounts, from 7 to 10-years

  • Judgments, 7-years from date filed, exceptions

  • Bankruptcy-Chapter 7 & 11 remain 10-years from date filed.

  • Bankruptcy-Chapter 13 non-dismissed or non-discharged, 10-years from file date.

Tax liens: Unpaid will not be removed. Paid remains 7-years from date release.

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ESTABLISHING CREDIT

  • The easiest method is using credit cards.

    • Get your own card(s). Check online or with your local bank for what they offer. Make sure the card will be reported to the credit agencies, if not, this will not help in establishing credit.

    • Types of credit cards:

      • A Standard Card, or unsecured card provides a line of credit on the expectation that you will repay.

      • A Secured Card requires a bank deposit as collateral on the account, and your credit line cannot exceed the amount of your collateral. Interest rates are variable.

      • An Authorized Card is one that is already established, and someone adds you as an authorized user. This used to be a great way to share credit and sometimes it works, however, I suggest not depending on this type of credit to establish personal credit.

      • A Prepaid Card does not report to the credit reporting agencies so they will not help you in establishing credit.

      • Student Cards are available to college students. If you have one of these, find out if they are reporting on the credit agencies, if not, they will not help you. Remember, do not create debt, but rather establish a payment history. Suggest two cards. Put $10 on t hem, pay bill when it comes, put another $10 on them, repeating...

  • Other types of debt such as Installment debt, i.e.: furniture, auto, jewelry. They are good for credit, however, they have a start and end date, so at some point the loan will be paid off and you will lose the active credit. It will remain as part of your history.

  • Stay current on ALL payments.

  • See "Credit Information".

DID YOU KNOW?

  • Medical bills, #1 cause of bankruptcy filings

  • Heart disease is the No. 1 cause of death in the U.S. Every 40 seconds someone in America will have a heart attack, and every 40 seconds someone will have a stroke.

  • Just over 1 in 4 of today’s 20-year-olds will become disabled before they retire.

  • The average disability claim lasts 31.6 to 34.6 months.

  • 1,688,780 new cancer cases were expected to be diagnosed in the U.S. in 2017.

  • 30.6 million people in the U.S. each year have accidental injuries that require emergency department visits. There are 41.6 deaths due to unintentional injuries per 100,000 people.

  • There are 4 times as many days lost from work due to off-the-job injuries as for on-the-job.

  • Sweat Till You're Wet! Work up a sweat for at least 1 hour per week to enjoy a range of benefits: reduced risk of heart attack, better mood & lower blood pressure.

  • Exercise Your Brain! Dance! Studies show that regular, moderate exercise helps fight the effects of aging on the brain. No grueling workouts required!

  • Hit the Sack! It might not seem like a diet factor, but 7 hours of sleep per night not only helps you live longer, but also lowers your stress, sharpens your memory, and reduces cravings for pants-splitting foods.

  • Grab Some Nuts! They are among the best sources of healthful fats and protein. Half of a handful eaten about 30-minutes before a meal will temper your appetite and help you avoid the drive-thru.

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MANAGING YOUR DEBT

  • Contact your creditors and request any assistance on addressing debt, such as a lower interest rate, varied terms.

  • Paying down debt. There are two primary approaches to paying down debt; the snowball approach and the avalanche approach. The avalanche approach will save you more money in the long run, but the snowball approach will allow you to see faster results.

  • Snowball Approach

    • Pick your bill with the lowest balance; pay as much as you can on it each month.

    • Pay only the minimum balance on your other bills.

    • When the smallest bill is paid off, combine the amount you were paying on that bill with the amount you were paying on your next-smallest bill and concentrate your efforts on paying off that bill, while continuing to pay the minimum on all other bills. Keep all bills current.

    • Continue this strategy until all bills are paid.

  • Avalanche Approach

    • Pick your bill with the highest interest rate; pay as much as you can afford to pay on it each month.

    • Pay only the minimum balance on your other bills.

    • When the highest interest rate bill is paid off, combine the amount you were paying on that bill with the amount you were paying on your next-highest interest rate bill and concentrate your efforts on paying off that bill, while continuing to pay the minimum on all other bills. Keep all bills current.

    • Continue this strategy until all bills are paid.

Protect Your Credit

There are many services that you can use to Freeze and Unfreeze your credit. Be careful who you use that they are not simply attempting to collect your personal information. Below are links to the repositories to do this individually.

Freezing your credit is a way to limit most access to your credit file at each of the three credit bureaus for free. Each bureau offers multiple ways to place a credit freeze (also known as a security freeze), including online and in-app options. Once you've learned more about how to freeze your credit, consider placing a credit freeze if you suspect that you have been the victim of identity theft.

What Is a Credit Freeze?

A credit freeze, also known as a security freeze, is a tool designed to help protect you from fraud and identity theft. It limits access to your credit report unless you lift the freeze, or "thaw" your credit. Having a freeze in place won't affect your credit scores, but it will keep your credit report from being accessed to calculate scores unless you first lift the freeze.

Freezing your credit can help protect against identity thieves and other criminals using stolen personal information (your Social Security number, for instance) to apply for new credit in your name. Since checking your credit report and credit scores are typically the first steps in processing any credit application, freezing your credit at the national credit bureaus (Experian, TransUnion and Equifax) can help stop unauthorized credit accounts from being opened.

The major drawback of credit freezes is that, along with limiting unauthorized credit applications, they also limit authorized checks. This can complicate legitimate applications for loans, credit cards and other things because you'll need to lift your credit freeze on your file before the process can move forward.

You must contact each national credit bureaus individually to freeze (or unfreeze) your credit reports. Each credit bureau will do a credit freeze for free upon request. Each credit bureau allows online and phone credit freeze request.