This concept is hard to believe I know. As if posting a picture you didn’t intend your co-workers to see or accidentally updating something to completely offend half of your friends list wasn’t bad enough, soon your Facebook and Twitter may diminish your ability to obtain a loan and blemish your credit report.
The terms credit report and credit score seem synonymous, but really there is a difference between the two that as a consumer is important to know. To sum it up you can have a credit report without a credit score but not the other way around. If you’ve pulled your yearly free credit report at annualcreditreport.com (which you really should!) you’ll notice it’s missing a credit score. Let me break it down:
When you apply for a Credit Card or loan, the financial lender will automatically examine your Credit report. It will then formulate a credit score for you and either accept or decline your loan or credit card application based on that score. So what is a credit report and how do you find out what yours says?
Whenever you pay your bills or repay loans, the Credit bureau is essentially watching you. The credit you have on hand, the monthly debts you’ve accrued, and other miscellaneous financial information, is all collected by Credit Bureaus. Even your record for paying off your Sears credit card is on file! The bureaus sell this information to financial institutions, which use it to determine if you are a good candidate for a credit card or loan.
Your Credit report score has been affecting your Credit History for years and you may not even know you have one or what it is. A credit score is a numerical number that is determined from a mathematical formula based on the information found in your Credit bureau report.
The formula is complex and looks at many things in your credit report to determine your score, like, how old your credit is, how you have paid your credit in the past and what standings your debts are currently at, how many debts you have, the number and age of inquires, how you utilize your credit, as well as what your balances are in relation to your credit limits.
Your credit score is based on multiple variables that are dependent on your credit and amount of money loaned out to you.
Like - historical payments, time you have had an account, types of accounts and age of account
Your credit, or more appropriately addressed as the ability for you to pay back the money that has been loaned to you, whether it be through a credit card, mortgage, home equity loan, car, RV, boat, motorcycle, rental apartment or town home, or just about anything that involves you paying back money trustingly for the items you have purchased or pay for on a monthly basis.
When your credit score is accumulated, each item is passed through a system where points are either awarded or deducted based on the status of the terms.
For example, if you have a specific amount in a loan, and you are paying consistently and on time, then you will be awarded positive points. However, if you are late on payments, and have many credit cards close to maximum limit, perhaps have not made every house, car, or RV payment, on time, then you will be deducted points.
The computer program evaluates the awarded points and deducted points to come to a total. This total can range from around 330 to the lower 800's. This score is used to evaluate if you can make your payments and on time. There is usually a clear relationship between those that pay on time with a higher score and those that pay late with a lower score.
Those people with a higher score, above about 680 are capable of paying back the loans that they take out. However, those who have a score below 680 are less capable of paying back their debts on time. Lenders use this information to determine the terms of your mortgage when buying a home. If your credit score is up to par, you can expect a lower interest rate, shorter terms, and less fees. However, if your credit score is below the average, then you can expect to have a higher interest rate, more fees, and possibly more expenses that are associated with the lender taking a greater risk with a person that may not be capable to pay back the mortgage in a timely basis.
So as a result, your credit score is a huge influence in the mortgage terms that you can qualify for. Because of this, you should try to clean up your credit score to the best of your ability. This means paying back loans, paying on time, and closing out any credit cards that are not necessary in your financial situation. There are many things that actually affect your credit score. Keep in mind that if you pay on time and are on top of the debt that you have, having some debt and credit is a beneficial thing.
If you can prove that you can handle debt, and pay on time and towards the principal amount, then you will not have as many problems. If you have too many delinquencies, a short credit history, too many revolving accounts, too few revolving accounts, balances that are close to maximum, too many accounts, and of course major problems such as tax liens, judgments and bankruptcies, then you can expect your credit score to be lower than average.
In order to repair these credit issue to get the mortgage rate that you deserve, be sure to handle any debts or payments that might deduct points from your score. Pay above the minimum, on time, and you will quickly see your credit score increase as the problems are depleted. The basics for having a decent credit score is to not have too much debt, pay your debt on time, and not have too high of interest rates! If you feel you need to correct some issues on your credit score, then do it! You can end up saving thousands of dollars! Do not buy a home until you are financially stable and capable of maintaining a house. You do not want to take on something that you can not handle financially.