The Basics Of Credit Scores

The Basics Of Credit Scores

Your credit score can make or break your mortgage application. It also plays a big part in the percentage interest rate you can obtain. Join us as we dive into what credit is, how credit is scored, and what your rights are as a consumer.

To help us dive into the world of credit, we asked homebuyer advisor and credit expert Tom Wemett, to share his expertise and help you get on your way to great credit.  

What is credit?

Credit is the ability to borrow money or access goods or services with the understanding that you will pay it later.
Lenders, merchants, and service providers (known collectively as creditors) grant credit based on their confidence of trust that you will pay back what you borrowed, along with any finance charges that may apply.
To the extent that creditors consider you worthy of their trust, you are said to be creditworthy or to have "good credit."

Factors that apply to your credit score

Payment History

This answers the question, "do you pay your bills on time?" Know that even one missed payment can lower your score.

Amount Owed
Your credit usage also plays a significant factor in your score as it looks at how reliant you are on non-cash funds (credit). Using more than 30% of your available credit is considered negative by creditors.

Credit History
Showing you can responsibly manage credit for a long period looks favourable to lenders.

The Mix Of Your Credit
This applies to other loans or credit accounts you might carry in addition to traditional credit, like a car loan, student loan, or a mortgage. If you plan on buying a home soon, it is NOT a good time to take out a new loan, get a new car, etc.

New Credit
In addition to credit history, they also look at how many credit accounts you have opened recently and hard inquiries. Too many new accounts and inquiries within a short period can lower your score and make you look riskier.


What is a "good" credit score?

Do not be discouraged if you happen to be in the lower portion of scoring. Most people do not fall into the "Very Good" range, and those that do are typically older as they have a long history of credit. Remember, you can always make positive changes to help increase your score (which Tom will discuss in a later article).


Credit and your rights

Every year we hear more and more stories about how credit bureaus damage people's ability to rent an apartment, get a job, buy a car or buy a home simply by ignoring the law that pertains to protecting consumers' rights to fair credit reporting. It is known as the Federal Fair Credit Reporting Act (FCRA).

"The federal Fair Credit Reporting Act (FCRA) promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies. There are many types of consumer reporting agencies, including credit bureaus and speciality agencies (such as agencies that sell information about check writing histories, medical records, and rental history records)."

Just a few of your rights under the FCRA include:

They must tell you if information in your file has been used against you.
Anyone who uses a credit report or another type of consumer report to deny your application for credit, insurance, or employment – or to take another adverse action against you – must tell you, and must give you the name, address, and phone number of the agency that provided the information.

You have the right to know what is in your file. 
You may request and obtain all the information about you in the files of a consumer reporting agency (your "file disclosure"). You will be required to provide proper identification, which may include your Social Security number. In many cases, the disclosure will be free. You are entitled to a free file disclosure if: A person has taken adverse action against you because of information in your credit report; You are the victim of identity theft and place a fraud alert in your file; Your file contains inaccurate information as a result of fraud; You are on public assistance; You are unemployed but expect to apply for employment within 60 days.
In addition, all consumers are entitled to one free disclosure every 12 months upon request from each nationwide credit bureau and from nationwide specialty consumer reporting agencies at (During the COVID-19 pandemic, accessing your credit is important. That's why Equifax, Experian, and TransUnion are continuing to offer free weekly online credit reports.) As of the writing of this, the policy continues and you can access your credit reports as often as every week. Please note that you may want to save the reports rather than print them out. Mine run from between 50 to 90 pages.

You have the right to ask for a credit score. 
Credit scores are numerical summaries of your creditworthiness based on information from credit bureaus. You may request a credit score from consumer reporting agencies that create scores or distribute scores used in residential real property loans, but you will have to pay for it. In some mortgage transactions, you will receive credit score information for free from the mortgage lender.

You have the right to dispute incomplete or inaccurate information. 
If you identify information in your file that is incomplete or inaccurate and report it to the consumer reporting agency, the agency must investigate unless your dispute is frivolous. 

Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information. 
Inaccurate, incomplete, or unverifiable information must be removed or corrected, usually within 30 days. However, a consumer reporting agency may continue to report information it has verified as accurate.

Consumer reporting agencies may not report outdated negative information. 
In most cases, a consumer reporting agency may not report negative information that is more than seven years old or bankruptcies that are more than ten years old.

Stay tuned for our next article, in which Tom will give you some important tips on how to increase your score.

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