Every consumer in the United States who has credit has an individual profile and rating through several private agencies – Transunion, Equifax, and Experian. Each one of these agencies receives reports from creditors concerning the types of debt, amounts issued, and payment history for every account a consumer has. These accounts include mortgages, automobiles, student loans, credit cards, and other consumer-related / retail-oriented debt. They do not include monthly utility obligations such as electric, gas, or water bills.
Each agency has a unique mathematical algorithm that they use to determine your credit score. While they do not disclose the formulas, the basics are fairly simple. They look at the different kinds of debt you have, the amount of debt you have, and how you manage your payments. Generally speaking, having a mortgage is seen as a favorable sign that a borrower is responsible and financially well-estalished. All things being equal, having a mortgage is a potential benefit to your score. On the other hand, having lots of consumer debt with high balances may be a sign of irresponsibility or financial duress. The credit bureaus are generally looking at the overall mix of the kinds of debt a borrower has in order to rate them.
Of course, late payments and charge-offs can be detrimental to your credit rating. Late payments on mortgages are by far the most punitive because they generally signal a borrower who may be in financial trouble or who is not serious about their obligations. One of the absolute best ways to mess up your credit score is to miss payments and make late payments.
It may surprise consumers to realize that there are different kinds of credit inquiries as well. When a car dealer pulls credit, they will get a different rating than a mortgage banker will. When consumers inquire about their own credit, they will often get a number that is much rosier than what a banker would see. The ostensible reason for that is pure marketing. If a consumer feels better about their credit, they are more likely to pay to have it pulled. Bankers aren’t interested in giving out kudos to people for high scores, they simply want to see how reliable a borrower is likely to be.
Many people are concerned that when bankers pull their credit that their rating will suffer. The reality is that the bureaus anticipate a consumer having to get several mortgage inquiries at once. That is viewed entirely different from having a department store run credit so that a consumer can open a new line of credit to buy clothes. The bottom-line is that mortgage inquiries rarely impact the score in a material way.
When bankers get credit scores, they get a rating from each of the three bureaus. Rather than averaging them, they simply take the middle score. If there are multiple borrowers, they consider the lowest mid-score of all the borrowers.
For the purpose of attaining a mortgage, the best pricing is given to people with scores over 740. Interest rate tiers tend to adjust for every interval of 20 points – 720, 700, 680, 660, etc. Most conventional loans require a minimum mid-score of at least 640, while some will go as low as 620.
If you are trying to improve your credit score, the best thing you can do is to pay-off as much consumer debt (credit cards) as possible. Generally speaking, you should not close them because this is a contraction of your overall credit profile. Pay them off and leave them paid-off.
If you need to dispute an item on your credit, get ready for a potentially difficult journey. The bureaus are not setup to be particularly friendly to disputes and corrections can be hard to make. It is often worth hiring an expert in this area to help you.