Here is an excellent primer on how credit factors into the home buying and approval process:
9-11 Correct: A
8 Correct: B
7 Correct: C
6 Correct: D
0-5 Correct: F
For a quick, over the phone pre-approval, give us a call today at (434) 444-7136...
Sept. 23, 2011, 12:01 a.m. EDT
A pop quiz on credit scores
These 11 answers help take some mystery out of credit scores
Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers’ questions on real estate.
WASHINGTON (MarketWatch) — Get out your pencils, boys and girls. Today’s column takes the form of a pop quiz to test your knowledge of credit scores, that all-important number on which mortgage lenders and most other creditors base their decisions not only to grant you a loan but also how much to charge.
A high score means you can obtain a home loan at the best possible rate. A low score and you’ll pay dearly, if you can get a loan at all. The difference between a 720 score and 580 could be as much as three full percentage points, according to the Consumer Federation of America.
Unfortunately, many people — and that includes lenders — seem to know very little about the manner in which they handle credit impacts their scores. “Our sales reps are continuously hearing feedback from mortgage professionals that they, along with their borrowers, do not understand the ramifications their actions have on their credit scores,” according to Credit Plus, a Salisbury, Md.-based credit services firm.
To educate its clients and their customers, Credit Plus developed the following 11 true-or-false statements:
1. Paying off an account that has been turned over to the creditor’s collections department or a collection agency will increase your credit score.
Sorry to start out with what amounts to a trick question. But the correct response is false — most of the time. Only if the account has gone into collections recently is it wise to pay it off. Older accounts should be left alone.
Scoring systems place the most emphasis on the most recent activity in your credit record. And paying off collection accounts, no matter their age, registers as recent activity. Consequently, the closer such a step takes place to pulling a credit report, the lower your score will be. If the date of the last activity exceeds 12 months, leave it alone.
If the mortgage lender requires that you pay off an account in collections as a condition of obtaining funding, do so as part of the closing process so it will not impact the score the lender will pull shortly before closing to make sure nothing detrimental has happened to your credit since the loan was first approved.
2. Closing a credit card account will increase your score.
False. Closing a credit card could actually lower your score because the amount of revolving credit available to you will decrease. Rather than close an account, keep your balance below 30% of its limit. Credit scoring models rate debt utilization, or the amounts owed on your accounts, almost as important as payment history.
3. Having cash on hand in a savings account will improve your score.
False. While lenders prefer that borrowers have some cash reserves to tide them over in case of emergency, scoring systems look only at credit.
4. Borrowing money from a finance company is no different than borrowing from a bank.
False. All credit accounts are not ranked equally. Credit from finance companies will score lower than a bank card, travel and entertainment card, oil card or auto loan. Ditto for payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.
However, as long as a credit file contains an even mix of types of credit accounts, the impact of finance company accounts and the like on your score is relatively low.
5. Seeking the help of a qualified consumer credit counselor will automatically improve your score.
False. More often than not, a credit counselor negotiates on behalf of the consumer to make a lower monthly payment on an overdue account. Even though the creditor agrees, it is not the same arrangement for which the consumer signed up originally. As a result, the payment more than likely will appear as late on the person’s credit report.
6. You only need to worry about your credit score when you are buying a big-ticket item such as a house or automobile.
False. With the amount of fraud and identity theft taking place, all of us should check our credit reports at least once a year, and Credit Plus recommends twice. By law, you are entitled to one free copy annually. Go to annualcreditreport.com .
7. Your credit score differs, depending on the item you are purchasing.
True. Different industries use different scoring models, so scores will change, depending on whether you are buying a house, purchasing a car or applying for insurance. Make sure your lender uses a score developed solely for the mortgage business. Others are almost always 50 to 60 points higher than the score developed solely for the mortgage business.
8. A finance company credit card scores the same as any other credit card.
False. Finance company cards, which typically allow borrowers to open a store account with zero interest for a year, weigh more heavily on credit scores. Worse, when you open the account, the creditor sets your limit at the cost of your purchase, meaning the card is maxed out and well above the 30% balance you should strive not to exceed.
9. Negative credit information can stay on your record forever.
False. Generally, negative information remains on your report for seven years from the last activity. But if it involves a bankruptcy, it can stay for as long as 10 years. The exception is a federal tax lien, the removal of which is determined by a prescriptive period.
10. There’s nothing wrong with using your maiden name when pulling your credit report.
False. Always use the same, full legal name. Being consistent will help avoid confusion with other borrowers with the same name as yours. Not all credit bureaus use Social Security numbers as the primary means of identification.
11. If you have poor credit and cannot obtain credit on your own, the best ways to start rebuilding your credit record is by obtaining a secured credit card or asking someone to co-sign with you for a major credit card.
True. One reason for a low score is because there is not enough “positive” revolving credit in your report. Indeed, in many cases, when “positive” credit is added, a score will increase.
You can do that by obtaining a secured credit card, which requires you to put up the money first and then lets your borrow against the balance. Another option is to ask someone with an established credit history to act as a co-signer on an account with you.
Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 40 years. MarketWatch readers are encouraged to send their real-estate questions to him at email@example.com. Answers will be presented in this column every Friday. Because of the volume of email he receives, he cannot answer every reader’s query. But he will endeavor to answer all those of general or topical interest.
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