How do credit reports work? Part 2
The three repositories- Transunion, Equifax and Experian each offer their own statistical models for credit scores. Unless you've worked in the credit reporting industry, or are closely affiliated with the process, the scoring system may seem unusual.
I've seen credit scores 100 points apart from each other and I've seen scores where two repositories were exactly the same and the third was far lower. Regardless of how the scoring is done, it's seems like a good system overall.
Mortgage companies understand the variances in the score models, and generally use the middle of the three. I think this is a sensible safeguard while offering the consumer wiggle room.
So, Whether the borrower is looking for a home purchase loan, mortgage refinance loan, real estate investment loan, FHA loan, VA loan, student loan or auto loan, credit scores are viewed in essentially the same manner. Credit scores are quick to obtain, and are a reliable analysis tool for the vendor.
Notwithstanding credit issues due to a hardship from career or medical, generally the rule holds- the lower the credit score the more unreliable the person is.
Now, what makes a good credit score? Let's quickly list the basics that everyone should know:
* Paying your bills on time
* Having a handful of established credit lines older than 24 months
* No liens
* No judgments
* No adverse reporting
What makes a poor credit score? Obviously, the opposite of the above and more.
One little known feature that causes poor scores, is High credit balances. A borrower may be given a credit line of $10,000, choosing to use the entire amount. Anything above 50% of the limit can be reason for the agencies to ding someone’s credit score. Conversely, keeping the balance below 50% of the limit would be a positive.
Many of the negative impacts are a result of borrowers liberally "testing" the limits of credit. Some common causes of low credit scores arise due to; simply not paying or not paying due to a dispute, maxing out credit lines, opening too many lines or making too many inquiries. Most of these characteristics imply that the borrower is loose with credit, and or shows a imbalanced regard for commitments.
Borrowers wishing to increase their credit scores need to be disciplined, ethical and moderate in their credit usage. The opposite situation of not seeking credit, as with an earlier era, can have the same impact on credit scores.
See also my article Part I Credit
