A client of mine trying to purchase a home very recently had questions about credit repair and how to get started. Many of the calls I receive and quite a few clients I have are all in search for ways to improve their credit score. I thought this would be a great topic to write on as CREDIT in general is a question for so many people. It's one of those subjects that will follow you for the rest of your life and you will need to rely on from time to time, but yet there is no practical teaching of the very important life subject in high school or college. I can tell you that more of us would be benefited by a course in credit & credit scoring as opposed to courses in Shop, Home Ec, or the History of Rock N' Roll!!!
The basic way to explain credit is by first explaining how credit scores are derived and why they are used. The credit bureaus being Experian, TransUnion and Equifax all subscribe to a software distributed by the Fair Isaac Company. This scoring model is the most common credit scoring model used by mortgage lenders. The Fair Isaac Scoring model is a math computation or algorithm if you will. That math computation is based on a percentage breakdown of 5 areas:
- 35% - Payment History
- 30% - Debt Ratio
- 15% - Length of Credit History
- 10% - Types of Credit
- 10% - Number of Credit Inquiries
The credit scoring model is used to help creditors and lenders predict a borrower's likeliness to repay their debt. Think about that. The credit report is used by creditors and lenders to predict the likeliness that you will repay the money you borrowed. Therefore, if you have a track record of collections, charge-offs, delinquencies, bankruptcies and judgments, then the likelihood that you will repay future debts is not high. You therefore become a high credit risk. Or vice versa - if you show a track record of paying all your open credit cards, installments payments, auto loans, lines of credit and mortgages on time every month and have done so with no late payments consistently, then the likeliness that you'll repay a new creditor back is higher and you are viewed as a low credit risk. Look at it this way: if you saw your credit report, would you lend yourself money?
Also, when you credit report is pulled by yourself or someone else, it is just showing you a snapshot in time. The credit report information, including the score can and does change frequently throughout the month based on your payments made, when you made them and when your creditors report the data to the 3 credit bureaus or whether they report to the credit bureaus at all.
Another area of confusion amongst credit users is how the three credit scores will vary. This is due to the fact that not all creditors/lenders will report your data to all three bureaus. Therefore the information reported will be different amongst the three bureaus (Experian, TransUnion & Equifax). If the creditors/lenders are not reporting accurate data to the bureaus then that will also vary the information amongst the three.
If you have any further questions or would like a referral to a credit restoration specialist located here in Las Vegas, then please contact me.