Frequently Asked Questions - Credit

One of the biggest factors in qualifying for a mortgage is one's credit profile. Often times reviewing your credit report or even how credit works can become confusing for those of us who are not familiar with all the jargon, graphs, and numbers.

Why is my credit score so low? I pay all of my bills on time and have never been late on anything.

This is one of the most common questions asked and there can be many different reasons why your credit score is not where it should be. The most common reason for a below par credit score, even if you have perfect credit, is due to having too much revolving credit. Revolving credit is debt such as credit card debt. If you have a lot of different credit cards and most, if not all, of them are maxed out to their credit limit then this can be a major reason for a low credit score. The ideal maximum credit limit to actual balance ratio is to owe roughly 20-40 percent of what your available credit limit is. An example would be if you have a credit card with a $1,000 maximum limit, to use only between $200 and $400 on that credit card. Another reason for a low credit score could be that you have just way too much credit overall or a poor mix of credit. A person who has 50 different open credit accounts on their credit with balances would be a higher credit risk than a person with 5 open credit accounts with balances. Having a nice blend of credit will help increase a credit score. A nice blend of credit would be to have a couple of revolving credit accounts, an installment credit account (or two), and a mortgage account. A poor mix of credit might be 5 installment accounts (such as car loans, personal loans, etc...) and no other open credit accounts. Another reason for a low credit score could be due to the fact that you may not have a long established credit history with "aged" accounts that have been open for a long time and are still open. Many people make the mistake of closing some of their credit card accounts once they pay them off or if they don't use them anymore or even if they just don't want to have the account any longer. This can be a mistake because your credit score is rewarded for long established accounts and penalized if you only have new credit. There are many other reasons why your credit score can be lower than you think it should be even if you have never missed a payment in your life. Consult a mortgage professional if you would like some help on learning more about credit and how to increase your credit scores.

What is a good credit score?

The answer to this question depends on a lot of things, but generally, scores of 720 and up will get you the best rates.
680-719 is another tier down, then 640-679. Scores under 620 are usually considered "subprime" loans and will require you paying a higher interest rate. Anything under 500 is extremely hard to get financing.

As a living expense budget consists of many factors, so does what goes into an interest rate and their credit score is only a part of it...We all know a person with a higher score, going stated on a rural property non-owner occ'd at 100% can pay a higher rate than someone with a lesser score financing 50% full doc living in the home...Once this is explained it can keep a client from dwelling on their credit, good or bad...

If you have a workable credit file, why would you ever tell them anything other than it's a good score?...Make them feel good about themselves and they will make you feel good by giving you their business!~

This account was charged off. Why is it still on my credit report?

A "charge off" is an accounting concept. It means the creditor is no longer counting the account as an asset. However, this account is still owed by you and will remain on your credit report for at least 7 years from the date of last activity.

Often you can negotiate a reduced payoff for a charged off account. Depending on the creditor, this could be anywhere from 10% to 60% of the balance. Further, a few creditors may change how this account is reported in order to get payment. Removing the account completely from your credit report would be the best choice. Changing reporting to "Paid as agreed" and not changing the "date of last activity" is a pretty good choice as well.

Do not disclose that you may be refinancing or purchasing a home because you lose leverage. Get any agreements in writing and agreed to by original creditor and any collection agency.

What is considered the "average credit score"?

The average credit score in the USA is around 680.

Your report my be wrong, or more diplomatically, your credit report may contain inconsistencies or innacuracies. One of the most common things we see on credit reports is "Account Closed by Credit Grantor". This is considered a negative, it's what someone would write about you if you didn't pay your debts in a timely fashion and you were being sent to collections. But we see this a lot on a store card you signed up for to get the 20% discount, never used, and never even activated. It's very easy to get this changed to the more positive "Account Closed by Consumer" and get a score improvement of anywhere from 2 to 20 points or more depending on the quality and quantity of the account being corrected (and you can ask us to do this for you if repairing your credit seems like something you'd rather not get involved with)

Many times, loans that are maxed out will negatively affect your credit score. Make sure your credit cards and other loans are well below their respective limits.

Credit scores were created by analyzing a large representative group of credit reports at the beginning and end of a two year interval. The credit scoring companies then analyzed which credit factors were common among those who experienced a 90 day late payment during those two years. They found that factors such as owing a large percentage of the total available credit, having finance company loans, and recent bad accounts, among other factors were common in those reports. This study is repeated periodically. Unfortunately, people who have perfectly good credit histories and little chance of default sometimes have minor similarities between their credit report and those "90 day late" credit reports in the study. This is why your credit score may be lower even if you have not ever made a payment late in your life.

» DISCLAIMER: The information contained in this article on 'Frequently Asked Questions - Credit' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.