About Credit Reports: What you really need to know

In an effort to simplify the whole credit report shebang and provide a starting point, here’s some advice I posted on LifeHacker.com earlier today.

What about your credit report? It’s out there and you’re wondering what it looks like and how it will appear to a prospective Lender. Maybe you’re preparing for the big home purchase sometime next year and you want to have all your ducks in a row. Perhaps you’re worried about identity theft or you’ve had problems in the past because your Dad, whose first and last names you share, has credit accounts appearing on your report. Or you’re just getting started building a credit history.

Whatever the reason, you want to know and you want to know now. And, once you know what your report looks like, what do you do to correct mistakes or increase your score?

The latest fashion seems to be for consumers to focus tremendous amounts of time and energy checking and protecting their credit history. Franky, I think all this energy being expended on credit reports is nonsense, but what do I know? I’ve only been looking at them for seventeen years!

In an effort to simplify the whole credit report shebang and provide a starting point, here’s some advice I posted on LifeHacker.com earlier today:

1. You can get a free report once a year from each of the three bureaus:
http://www.annualcreditreport.com

2. If you check your report and discover mistakes, fix them yourself. NEVER pay anyone to do this. The Federal Trade Commission has an excellent tutorial to guide you through the process of credit repair:
http://www.ftc.gov/bcp/conline/pubs/credit/repair.htm

3. Want to know how your credit score is calculated? Try MyFico.com:
http://www.myfico.com/CreditEducation/?fire=1

4. If you have superb credit, consider opening a credit card with a bank based in the state of Arkansas. The reason most credit card companies base their operations in either Delaware or South Dakota is the law does not provide for an interest rate cap. Arkansas has a very reasonable cap, which in the 16 years I’ve known about it, has made credit cards from that state the best deal around. Once you’ve got an Arkansas credit card, transfer your balances from thos Delaware and S.D. cards and begin saving money on interest!

5. If you had problems before or you’re new to the credit card arena, ConsumerAction is one of the best resources I’ve found on the ‘net for advice on rebuilding or starting anew a credit history:
http://www.consumer-action.org/

6. I think the subscription services provided by the credit bureaus is a waste of money and time. You really don’t need to be alerted every month about your credit report. If you pay your bills on time, use your credit wisely, then you really shouldn’t need to worry about your credit score because it will be excellent.

You can access these websites directly from my homepage, tcurranmortgage.com on the “Links” page.

They’ll Run Your Credit

Mortgage professionals must run your credit report to qualify you. The question is, “How many times will they run it?”

You need to know something about mortgage people and credit reports.

We cannot thoroughly qualify anyone for a mortgage loan without a credit report in front of us. And that credit report must be provided within the company we are working for.  We use a Tri-Merge report with reporting from all three credit bureaus provided by a company called Credco.

Other mortgage companies and banks use a wide variety of other types of reports and various other service providers to access those reports.

Is it possible for me to look at another mortgage company’s report to qualify? Yes, and no. If you have a copy of such a report (and you’re not supposed to have one, only the score disclosures) then I can review that report and get a sense of your creditworthiness. But I cannot use that report to qualify you thoroughly.

Why is that? Well, depending on the service provider the report may not be as complete as the report we use. More often, though, it’s a matter of age. Mostly, it’s because a Lender has underwriting requirements related to the reports used.

So, no matter which way you look at it, if you are getting qualified for mortgage financing, people are going to run your credit.

What you must watch out for are those people who say they won’t run your report. Or, worse, those people who say they’ll only run it once: only to have it run multiple times.

To the first group there, remember that under Fair Credit Reporting Act, we can only run your credit report with your written permission. The New York State Banking Department requires we keep a log and a record of your signed authorization. Problem is many mortgage people run credit reports just on a verbal authorization. So, you’re on the phone with a loan rep. and he’s taking basic information about you to qualify you. He asks you for your social security number.

You say, “Oh, I’m not ready to have you run my credit. I just want to hear more about the 4% 30year fixed interest rate you’re offering with no points, no application fee, no closing costs, no nothing and someone comes to my house to do the windows every Tuesday afternoon after I close with you, advertisement.”

He says, “We can’t properly qualify you for that program without complete information from you.” (That part is true)

He continues, “We just have to put this information in your file. But don’t worry, we won’t run your credit.” (This is a good time to hang up the phone or run for the hills)

They will run your credit if you give them the information. Later they’ll tell you not to let anyone else run your credit report because the inquiries will stack up and lower your credit score (partly true, mostly a bad sales gimmick).

The second group of mortgage folks will tell you they will run your credit report. But only once. That may be true: it’s what I do when I qualify you (with your written, signed, permission). But, I work for a Direct Lender. I’m not shopping your loan with seven different Lenders. My underwriters review your ONE report and use that to prequalify you.

When working with a mortgage broker, it’s different.

What they don’t tell you is that when they’re shopping for your loan approval with different Lenders—this is typical of mortgage brokers, who don’t lend directly, they place your loan with a Lender—they send a basic application for you to the Lenders. This is part of the qualification process and there’s nothing wrong with that.

When the Lender gets your application, guess what the Lender is going to do? Run your credit! Again!

The more Lenders receive your application from the original mortgage broker, the more inquiries on your credit report.

I recently tried to qualify a client for a refinance. He had been working with two different mortgage brokers for almost a year trying to refinance. His credit report had 67 inquiries within three months. His score was in the 400’s. He had decent credit, not great, but not bad enough to have such a low score. His low score was a direct result of all those inquiries.

Guard your credit information. Try to suss out the mortgage people you want to work with before they run your credit report. Once you’re comfortable with that, then you can proceed to complete the qualification process.

Because at the end of the day, no matter what, they’ll run your credit.

About Credit Reports for Mortgage Prequalifications

When you are being qualified for a mortgage, there are different
types of credit reports we use to qualify you.

About Credit Reports for Mortgage Prequalifications

When you are being qualified for a mortgage, there are different
types of credit reports we use to qualify you. The type of
report is determined by how thorough the qualification is. If
you are being prequalified, a basic “In-File” or “Tri-Merge”
report is used with credit scores.

If you have made your formal loan application, we’ll use a “RMCR”
or Residential Mortgage Credit Report.

There are different charges for different types of credit reports:

1. The “free” report you get at most mortgage brokerages/lenders
actually costs the company anywhere from $5.00 to $30.00 depending
on the volume that company does with it’s credit agency. Since we
use these credit reports for prequalification purposes, we
typically don’t charge the client for the report. We eat it. In
fact it is extremely rare that you would be charged for either the
report OR the prequalification. I would recommend not doing
business with any mortgage company that is charging for this early
level of service.

2. RMCR averages $50-$75. This type of credit report is known as
a “RMCR” or Residential Mortgage Credit Report. This is not just
a credit report. This is a full factual report done by an outside
credit bureau to verify your credit history (with all three scores),
your employment (the agency calls to verify your job) and your
rental history (the agency calls your landlord). If you’re
self-employed, the agency contacts your accountant. The result of
all these phone calls is presented to the Lender in the report.

This type of report is used only when you have made a formal loan
application. Typically you will pay this fee upfront at time of
application along with your appraisal fee and application fee
(if applicable).

3. In New York State a Lender or broker CANNOT earn income from
inflated fees for credit reports. The NYS Banking Dept. requires
that we only charge our actual cost for the report. Therefore,
if we collected $55.00 for credit and $350.00 for appraisal at
application time and our actual charges are $52.50 and $325.00
respectively, we must refund the difference to you at closing.

4. You need to RUN away from any mortgage person who a) charges
$55 to run a prequalification credit report b) calls a
prequalification a “preapproval,” c) doesn’t explain or is not
accessible to answer your questions about these very important
issues.

5. “Preapproval” is a fancy-shmancy marketing term for
prequalification. You can’t be approved for a mortgage loan
until you locate a property and engage to purchase the property.

Credit repair and Settling a collection account for less than you owe.

With a well-organized action plan, credit repair and settling collection accounts can be accomplished without much fuss.

A friend has some heavy medical bills. While she was paying them, the hospital assigned the bills to a collection agency. This is not unusual in my experience with medical and dental bills, no matter the amount, large or small.

She is planning on offering the collection agency half the balance in order to settle the debt. It’s a great strategy, but one that requires tenacity, and extreme diligence to confirm the terms of settlement are in your favor. She was thinking of calling them everyday.

Here’s the advice I gave her:

Best path to credit repair success is to put it in writing every 30 days. 30 days is the cycle mandated by FTC. Under Fair Credit Reporting Act, the credit bureau has 30 days to investigate your dispute. While investigating, the disputed account must be removed (this is the source of the scam-artists who charge for credit repair) from your report.

In the investigation, the original creditor must PROVE the information. If they don’t, the item is removed permanently from your report. If they prove it again, the information goes back onto your report. You’ll get updated reports throughout the investigation period showing the disputed accounts and the status of same.

More on that from Uncle Sam here: https://www.tcurranmortgage.com/links.php

Also, advice on paying off that debt when you settle for less than full balance:
1. Always write down immediately the name of the rep. you’re speaking to.
2. Negotiate your settlement. Best tactic for this is to promise immediate, same day payment in return for favorable reduction of balance terms. Western Union QuickCollect or check by phone is best method of payment.
3. Once the rep. agrees, condition your payment upon a written confirmation via fax of the terms agreed upon. You want a fax because you want a signature on that letter. The letter should indicate the settled balance, date of payment, and that this payment settles the account completely and no further collection activity will be taken.

If they won’t send a written confirmation, you don’t make the payment. Because they can come back later and tell you you didn’t pay the full amount and they didn’t agree to a “short pay.”

4. When you have the letter of confirmation in hand, and it’s correct, send your payment immediately.

You’ll receive a satisfaction letter indicating that all three credit bureaus have been updated to show this account as paid and settled for less than full balance.

With a well-organized action plan, credit repair and settling collection accounts can be accomplished without much fuss.

Little Things Count: watch out for little credit “nasties.”

There are lots and lots of “little” things that can pop up on your credit report. When they do, these little monsters can wreak havoc with your credit score.

Take care with all aspects of your credit profile. It’s not just that Christmas shopping VISA bill you have to worry about paying on time. There are lots and lots of “little” things that can pop up on your credit report. When they do, these little monsters can wreak havoc with your credit score.

Sometimes you can control these nasties making an appearance on some future credit report; sometimes you can’t. If it’s one of the items featured in this article from the Wall Street Journal then you had control at some point. Maybe it was a parking ticket you forgot to pay. Or that seriously overdue library book: the one from 2003!

These are examples of bits and pieces of our “credit life.” We forget how these lapses of responsibility can creep up on us in the future. Nowadays—as the WSJ article points out—the sudden appearance is on your credit report. And if you’re in the process of obtaining a mortgage, the affect on your credit score could affect the interest rate you are charged for the loan.

And then, there are the credit “nasties” which you don’t have any control over, yet they raise their ugly head on a credit report, too. These are the surprises for customers that I see most often: a collection account for a medical bill that should have been covered by insurance or a collection account for the cellphone you put in your name for your brother. Oops! You didn’t even know he hadn’t paid the account! Now there’s a collection account for $1179 on your credit report and your score dropped over 120 points! Ouch!

For those nasties we can control, I can only emphasize that responsibility for bill-paying is not limited to your rent, your car payment and major credit cards. In the WSJ article, a fellow is quoted as saying his children are prohibited from going to the library anymore; now they can only get books from Barnes & Noble. Well, that’s an immature and irresponsible reaction to an overdue library book fine. Libraries are great institutions and open to all the public. It’s really not that difficult to get a book back to the library on time. And if you can’t, and you return it a few days late, the late fee is literally only pennies.

If that late fee later blossoms into a $40 collection account, well, come on, that’s just plain silly. Show the world you’re a grownup and get that book back to the library. You’ll demonstrate your responsibility to yourself by preventing a stupid collection account, and to your fellow citizens for respecting their rights to use the library unhindered by missing books and service cutbacks for lack of funds.

Now, when it comes to the nasties we can’t control, I think the best defense is good record-keeping. The IRS says we should keep copies of our financial records for seven years. I don’t think that means we should keep every single receipt, statement, and ATM slip we have ever touched. Rather, you need a simple way to reference a bill you paid (or in the case of the Dentist, that your insurance SHOULD have paid) in the event something appears on your credit report five years from now. Maybe keeping your check registers, the copies of the bank statements with your checks (or the actual cancelled checks if you are lucky enough to still get them from your bank!) and an insurance file with the benefits-paid explanation statements. Get a system going, box it neatly and store it in the attic. Update the file folders every month or so.

Dang! Life is complicated enough, isn’t it? But, a little bit of responsibility now—whether that’s returning a book to the library or organizing a basic financial record-keeping system—will go a long way in the future to protect you from those little nasty credit surprises. In the end, it’s the little things that count.

Confusing Credit Issues: to pay in full or not to pay in full?

There is general confusion regarding the issue of paying credit card balances in full every month.

There is general confusion regarding the issue of paying credit card balances in full every month.

Sure, avoiding fees and interest is a great concept, but there’s more to the story.

In the mortgage industry, when we review a credit report, our loan decisions are not based solely on the score. We actually read the report. We want to see that an applicant actually uses the credit available to her.

If an applicant is in the habit of sporadically using credit, and then paying the balance in full when she does, then her report—while it may have a good score—may reflect this lack of use of the accounts. We get a bit skittish when we see that.

You might say, “But if I show I use my credit conservatively isn’t that good for the bank? It means I have more resources to pay my mortgage, thus I’m a good risk.” While that’s perfectly logical thinking, you must remember we are rating your entire set of qualifications based on the risk factors for making a loan to you. Therefore, we really do want to see that you use your credit on a consistent basis (and you pay on time, of course).

If you use your card(s) every month, paying them in full as you go, then this isn’t really an issue because we’ll see the activity. It’s those big holes of several months at a time when you don’t use credit that you want to watch for.

That all having been said, truly the only time you want to “worry” about your credit scores and this crazy useage issue is when you are planning on buying a home or a car. Since those are two big purchases, you want to have all your ducks in a row. Otherwise, worrying about your score all the time is a waste of time. Your score will always be good if you pay your bills on time, use your credit wisely and conservatively, and in general maintain an even keel in your credit life.

If you go to my “Links” page, there’s a link to MYFICO.com which explains how credit scores are determined. There are also other good resources there regarding credit.