Ryan Nickel

Certified Family Financial Counselor

Cherry Creek Mortgage Company
Phone: (208) 356−0707
Fax: (208) 359−1616
ryan@treasuretomorrow.com
www.treasuretomorrow.com

Your Credit Score

What It Means to You as a Prospective Home Buyer
Introduction Why Your Credit Score is So Important

The subject of credit scoring has The credit scoring model seeks to quantify the likelihood of a
become an increasingly hot topic, and consumer to pay off debt without being more than 90 days late
for good reason. For many years, the at any time in the future. Credit scores can range between a
general public only associated the low score of 350 and a high score of 850. The higher the
concept of credit scoring with the need score, the better it is for the consumer, because a high credit
to purchase high−ticket items such as a score translates into a low interest rate. This can save literally
new car or a home. Today, credit thousands of dollars in financing fees over the life of the loan.
scoring goes much further. Your credit
score can affect your ability to get a Only one out of 1,300 people in the United States have a
good rate on commodities such as car credit score above 800. These are people with a stellar credit
insurance, cell phones, or even rating that get the best interest rates. On the other hand, one
determine whether or not you get the job that you want. out of every eight prospective home buyers is faced with the
Indeed, the financial snapshot provided by the credit score has possibility that they may not qualify for the home loan they
also become a gauge for many employers, especially those want because they have a score falling between 500 and 600.
who seek to place employees in a position of financial
responsibility. The following chart illustrates how an underwriter interprets
the credit score in terms of risk, and how the interest rate is
The History of Credit Scoring affected as a result. Mortgage lenders consider a score of 700
or above to be very good.
The credit score system used today has evolved since the
1960s. It was originally designed to provide lenders with
financial profiles on consumers who wished to borrow money.
The lenders' biggest concern was whether or not an individual
had the ability to repay a loan, and establish what percentage
of risk might be involved.

Congress passed the Fair Credit Reporting Act in 1971 to

establish guidelines for fair practices in regard to the use of
credit scoring. This law was designed to promote accuracy in
reporting and protect the privacy of consumers. In light of the
increased use of credit scoring and a growing fear of identity
The Five Factors of Credit Scoring
theft, recent legislation has been passed to further protect
Credit scores are comprised of five factors. Points are
Americans and improve consumer awareness.
awarded for each component, and a high score is most
favorable. The factors are listed below in order of importance.
The Fair and Accurate Credit Transactions Act of 2003
(sometimes referred to as The FACT ACT or FACTA) was
1. PAYMENT HISTORY − 35% IMPACT
signed by President George W. Bush on December 4, 2003.
Paying debt on time and in full has the greatest
This amended the Fair Credit Reporting Act, enabling each
positive impact on your credit score. Late payments,
American to obtain one free credit report every 12 months
judgments and charge−offs all have a negative
from each of the three main credit reporting agencies (CRAs);
impact. Missing a high payment will have a more
Equifax, Experian and TransUnion. Those bureaus have
severe impact than missing a low payment, and
created a central web site, www.annualcreditreport.com, to
delinquencies that have occurred in the last two
accommodate Americans who wish to obtain copies of their
years carry more weight than older items.
credit report.
Your Credit Score Page 2 of 5

2. OUTSTANDING CREDIT BALANCES − 30−Year Fixed Rate with a Principal Loan Amount of $250,000
30% IMPACT MONTHLY
This factor marks the ratio between the outstanding FICO SCORE APR INTEREST PAID
PAYMENT
balance and available credit. Ideally, the consumer Above 720 5.71% $1,453 $272,928
should make an effort to keep balances as close to 5.796% to $277,845 to
620 to 719 $1,466 to $1,807
zero as possible, and definitely below 30% of the 7.84% $400,381
available credit limit when trying to purchase a home. 8.452% to $438,957 to
Below 620 $1,914 to $2,054
9.234% $489,365
3. CREDIT HISTORY − 15% IMPACT
This portion of the credit score indicates the length of SOURCE: Credit Resource Corp., How Much Does a Low Score Cost
time since a particular credit line was established. A You? http://www.creditresourcecorp.com
seasoned borrower will always be stronger in this
area.
How Does the Underwriter View My Score?
4. TYPE OF CREDIT − 10% IMPACT
A mix of auto loans, credit cards and mortgages is If you are considering a home
more positive than a concentration of debt from credit purchase, it is in your best
cards only. interest to make every effort to
increase your credit score,
5. INQUIRIES − 10% IMPACT especially if you know you have
This percentage of the credit score quantifies the issues you should be dealing
number of inquiries made on a consumer's credit with. It is often the case that
within a six−month period. Each hard inquiry can cost people are not aware of bad
from two to 25 points on a credit score, but the marks on their credit record until they apply for financing for a
maximum number of inquiries that will reduce the major purchase, such as a home.
score is ten. In other words, 11 or more inquiries
within a six−month period will have no further impact As part of the loan process, we run a credit report for you. But
on the borrower's credit score. Note that if you run a you can take advantage of the opportunity to get a free credit
credit report on yourself, it will have no affect on your report from each of the three main CRAs: Equifax, Experian
score. and TransUnion. As a sidebar, you can choose to get the free
report from all three bureaus at the same time, so you are
aware of what information each bureau has collected. Another
Remember that the credit score is a computerized calculation.
option is to pull your credit report from one agency, and
Personal factors are not taken into consideration when a credit
reserve the right to get your free reports from the other two
report is generated. It is merely a snapshot of today's credit
CRAs as you work on improving your credit standing.
profile for any given borrower, and it can fluctuate dramatically
within the course of a week.
We believe it is best to have the full overview up front.
Different CRAs have different methods of calculating these
How Does a Low Credit Score Affect My scores, and may also have different information contained
Interest Rate? within their findings. Consider the adage, "Why jump over
nickels to pick up pennies?" If additional reports are needed
Lenders estimate your ability to pay back within a 12−month period from any of the three CRAs, the cost
money based on your credit score. The is extremely minimal compared to the potential savings that
risk factor they take on is built−in to your can be realized by an improved credit score, and if you run a
interest rate as a financing fee. credit report on yourself it will not affect your own score as an
Therefore, a low credit score results in a inquiry.
higher interest rate, higher monthly fees,
and a higher amount of interest being The underwriter who is making the decision as to whether or
paid over the total life of the loan. not you should get the loan you are asking for will generally
look at the scores generated from all three CRAs. Typically,
Referring back to our chart, a borrower the score will not be the same from all three reports, and the
with a credit score of 620 would be questionable to an underwriter will consider the middle score as a barometer.
underwriter. While the lender may agree to provide financing,
the increased interest rate is factored into the monthly Disputing Errors On the Credit Report
payment. The following chart illustrates the difference in the
amount of interest paid over the life of the same loan with If you are in the process of reviewing your
three different credit score scenarios. credit reports, the first thing to do is make
sure that the information contained within
A borrower who increases his or her credit score from 620 to the reports is correct. In June 2004, The
720+ can potentially save $601 per month on mortgage U.S. Public Interest Research Group
payments, $7,214 per year, and approximately $216,432 over published the results of a survey it
the life of the 30−year loan. conducted involving 200 adults in 30
states to test the validity of credit reporting.
Their findings were as follows:
Your Credit Score Page 3 of 5

• Twenty−five percent (25%) of the credit reports If you do not already have a checking or savings account,
contained errors serious enough to result in the open one. Your bank or credit union may be able to provide
denial of credit; you with a credit card account once you have established a
history with them as a customer.

• Seventy−nine percent (79%) of the credit reports

contained mistakes of some kind; Ask your family or spouse to add you to their credit card
account. By adding your name to an established line of credit,
• Fifty−four percent (54%) of the credit reports you can ride on their coattails, so to speak, and gain points by
contained personal demographic information that was using that person's credit history.
misspelled, long−outdated, belonged to a stranger, or
was otherwise incorrect; It is also wise to start saving money for the down payment on
your home. The lender will look at your application more
• Thirty percent (30%) of the credit reports contained favorably when you are able to come to the table with a 20%
credit accounts that had been closed by the down payment. Bear in mind, there are certain loan programs
consumer but incorrectly remained listed as open. available that permit a percentage of gift money for down
payment, which can come from a relative, or even the person
SOURCE: U.S. Public Interest Group Research; One In Four Credit selling the home.
Reports Contains Errors Serious Enough To Wreak Havoc For
Consumers, US PIRG Press release, 06/17/04 Dealing with Credit Challenges
http://uspirg.org/uspirgnewsroom.asp?id2=13650om

If you find that you have errors on your credit report, follow this Unfortunately, a person with a bad credit
procedure to correct those errors. score is often in this position because he or
she lacks the discipline to pay bills on time.
1. Make a copy of the report and circle the items you
are questioning. Keep your original copy for your own Of course, there are exceptions where
records. unforeseen circumstances come into play,
such as health complications, or loss of
2. Prepare a letter to the CRA that provided you with the employment.
report in question, and request to have the erroneous
item(s) removed. If you have proof of payment for an There are a few things that may be able to bring your score up
item in question, include a copy of that so that you can secure a better interest rate on your mortgage
documentation. loan.

3. Prepare a letter to the creditor reporting the problem, Example 1: Distribute debt from revolving credit.
especially if you feel you are a victim of fraud or Our borrower, Mr. Jones, has a credit score of 664. He has
identity theft. Inform the creditor that you are five credit cards, but his Visa account is almost maxed out. His
disputing an error reported to the CRA, state why the other four credit cards have relatively low balances. Mr. Jones
claim is inaccurate, and include any relevant moves the part of the debt from the Visa account to the other
documentation to prove your point. major credit card accounts, thus distributing the debt more
evenly over the five cards. This changes the ratio of debt to
4. Send your correspondence via certified mail. available credit (which has a 30% impact on the overall credit
score), and Mr. Jones successfully raises his credit score by
20 points with very little effort.
You should receive a response from the CRA within 30 to 45
days. If the error has been corrected, they will send you a
Example 2: Transfer outstanding balances to new
fresh copy of your credit report at no charge to show you that
accounts. Our borrower, Mr. Smith, has only two credit cards,
the item has been removed. They will also send a corrected
but both are pushing the limit of available credit. Mr. Smith
report to any entity that received a report that contained errors
opens two new credit card accounts, each with a credit limit of
within the last six months. If you cannot have a disputed item
$5,000. He transfers part of his existing balances to the new
removed, you have the right to include your side of the story
accounts. While he has acquired two new cards that have no
on the credit report. Your statement should be a concise
established history, the greater impact is the change in the
explanation (100 words or less) as to why you are challenging
ratio of debt to available credit.
the item in question. From that point on, this notation will be
included in your credit report as long as the item in question
Ultimately, experts say that it is best to have two to five credit
remains on your report.
cards, and no more than that. You should keep your balances
as low as possible. If you have a credit account with a zero
What If I Have No Credit? balance, do not close the account.

A borrower will sometimes not have Instead, make a small purchase so the card shows up as an
enough credit references to obtain the active account on your credit report, and you will be awarded
loan they wish to secure. In this case, points for your long−term credit history.
start by opening small lines of credit
that report to one of the three major
CRAs, and make purchases that can
be paid off easily.
Your Credit Score Page 4 of 5

These are just a few tips to consider as you seek to obtain DON'T CONSOLIDATE DEBT TO ONE OR TWO CARDS −
mortgage financing. But you should always know that as your Once again, we don't want you to change your ratio of debt to
loan originator, my job is just beginning when you close your available credit. Likewise, you want to keep beneficial credit
loan with me. history on the books.

As soon as you begin to make mortgage payments on time DON'T RAISE RED FLAGS TO THE UNDERWRITER − Don't
and in full, your credit standing will begin to improve. My team co−sign on another person's loan, or change your name and
and I will continue to monitor rates on your behalf and alert address. The less activity that occurs while your loan is in
you to the opportunity to refinance into a loan program with a process, the better it is for you.
lower interest rate as soon as possible. Our long−term goal is
to help you build a strong financial future. DO JOIN A CREDIT WATCH PROGRAM − Your bank, credit
union or credit card company may be able to provide you with
Do's and Don'ts During the Loan Process a free credit watch program that can alert you to any changes
in your credit report. This can be a safeguard to help you
intervene before the underwriter sees a problem.
When you fill out a credit appli−
cation, we run a credit report for the DO STAY CURRENT ON EXISTING ACCOUNTS − Late
underwriter. Each lender and each payments on your existing mortgage, car payment, or anything
loan program has different guidelines else that can be reported to a CRA can cost you dearly. One
they must follow. You should not do 30−day late payment can cost anywhere from 30 to 75 points
anything that will have an adverse on your credit score.
affect on your credit score while your
loan is in process. We know it's DO CONTINUE TO USE YOUR CREDIT AS YOU
tempting...If you're moving into a new NORMALLY WOULD − Red flags are easily raised within the
home, you might be thinking about scoring system. If it appears you are diverting from your
purchasing new appliances or furniture, but this is really not normal spending patterns, it could cause your score to go
the right time to go shopping with your credit cards. You'll want down. For example, if you've had a monthly service for
to remain in a stable position until the loan closes and give us Internet access billed to the same credit card for the past three
the opportunity to help you lock in the best interest rate we can years, there's really no reason to drop it now. Again, make
possibly get for you. your changes after the loan funds.

Here is a handy list of do's and don'ts that you should adhere DO CALL YOUR LOAN CONSULTANT − If you receive
to after your loan application has been submitted to the notification from a collection agency or creditor that could
lender.* potentially have an adverse affect on your credit score, call us
so we can try to direct you to the right resources and prevent
DON'T APPLY FOR NEW CREDIT OF ANY KIND − If you any derogatory reporting to credit bureaus.
receive invitations to apply for new lines of credit, don't
respond. If you do, that company will pull your credit report * SOURCE: Based on The Top 10 Credit Do's and Don'ts During the
and this will have an adverse effect on your credit score. Loan Process, provided by Credit Resource Corp.
Likewise, don't establish new lines of credit for furniture, http://www.creditresourcecorp.com
appliances, computers, etc.
Credit Remediation
DON'T PAY OFF COLLECTIONS OR CHARGE−OFFS −
Once your loan application has been submitted, don't pay off
collections unless the lender specifically asks you to in order If you feel you would prefer to work with a
to secure the loan. Generally, paying off old collections causes credit repair service rather than try to
a drop in the credit score. The lender is only looking at the last tackle credit repair issues on your own,
two years of activity. please give us a call so we can help you
sort through your options. We will do our
DON'T CLOSE CREDIT CARD ACCOUNTS − If you close a best to refer you to a reputable credit
credit card account, it can affect your ratio of debt to available remediation service and guide you in the
credit which has a 30% impact on your credit score. If you right direction once we have the
really want to close an account, do it after you close your opportunity to review your credit report
mortgage loan. with you.

The Federal Trade Commission (FTC) regulates credit repair

DON'T MAX OUT OR OVER
services and provides free information to help consumers
CHARGE EXISTING CREDIT
spot, stop and avoid doing business with credit repair
CARDS − Running up your credit
companies that are not reputable. Their web site is located at
cards is the fastest way to bring your
http://www.ftc.gov.
score down, and it could drop up to
100 points overnight. Once you are
engaged in the loan process, try to
keep your credit cards below 30% of the available credit limit.
Your Credit Score Page 5 of 5

You can also write to the FTC to request a copy of their free If you have any complaints regarding your credit report or
brochure titled Credit Repair: Self Help May Be Best, which credit remediation services that you wish to report to the FTC,
includes information about credit clinics. The address to write contact them at:
to is:
Federal Trade Commission Federal Trade Commission
Sixth and Pennsylvania Avenues, NW Consumer Response Center, Room 130
Washington, DC 20004 600 Pennsylvania Avenue, NW
Washington, DC 20580

Let me help you get the best rates possible for your credit score! Head to
www.treasuretomorrow.com and download or fill out our online application.

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