Buy now, pay later. These four simple words sum up what can be a complex subject: credit. Anytime you obtain goods or services with the agreement to pay for them at a later date, you are making use of credit. This could be paying via credit card, on a store account, or even your electric or water bill where service is provided first and invoiced after the fact.
Credit is central to the mortgage industry. A mortgage loan is a large extension of credit, generally this is the largest credit extension anyone will ever have to deal with, basically loaning funds to purchase a piece of real estate or a home.
Because of the scale of the transaction and the amount of credit provided, a thorough process is put in place to determine a your credit worthiness. A store credit card can often be opened on the spot, in a few moments at the register. A mortgage loan however, involves careful and thorough review of credit history, finances, and more – a process which can span a few weeks.
It’s not uncommon for there to be confusion surrounding credit reports, scores, and the impact it all plays on getting approved for a new loan.
UNDERSTANDING CREDIT REPORTS & SCORES
Your credit report is a snapshot of your credit history and current credit accounts. Your credit score is a numerical representation of your credit worthiness, or how well you have handled credit in the past.
Why is this important? Providing financial loans is big business. Banks, credit unions, mortgage lenders and more, loan funds to consumers and are able to make a profit by charging interest. The borrower agrees to repay the amount borrowed over time, plus some additional percent of that amount. The consumer benefits by being able to purchase the goods or services they want or need now, and pay for them slowly over time.
If the borrower is unable to repay the loan as agreed, the lender will generally incur additional costs related to seeking to collect on the debt, legal fees, repossession or foreclosure, or even writing off the unpaid amount. It’s likely that the lender would lose money on this transaction, and the borrower can experience the stress of not being able to pay the amount owed, potentially losing the items purchased, and see a negative impact on his or her credit report. Therefore, it’s best for all involved when the payments on a new loan are manageable for the borrower.
One great indicator for how a new debt will be managed is how other loans have been repaid previously. This information is captured on the consumer’s credit report.
Your credit score is a numerical representation of your credit worthiness, or how well you have handled credit in the past and can be expected to in the future.
BREAKDOWN OF THE CREDIT REPORT
1. Information that identifies you
The report starts with items such as your name, address, previous addresses, Social Security number, birth date, and employers. This helps creditors ensure they are looking at data associated with the correct individual.
2. Credit Accounts
Next, open lines of credit will be listed, such as credit cards, car loans, and mortgages. Information will be included about the type of account, how long you have had the account open, the credit limit, the current balance, and payment history. If you have had any late payments your credit report will show how many times the payment was late as well as the number of days late.
3. Inquires for new credit
A list of who accessed your credit report and why over the previous two years will be included. If you have applied for a new account it will be listed here as a voluntary inquiry, and if a lender has purchased access to your credit information in order to send you an unsolicited “pre-approved” offer it will show up as an involuntary inquiry.
4. Collections & Public Records Information
Overdue debts in the hands of collections agencies will be listed on your report. In addition, data from the public records of the state and county courts if applicable. This could include items such as bankruptcies, foreclosures, judgments against you, liens, or wage garnishments.
Good Credit & Bad Credit
The terms “good credit” and “bad credit” are often tossed around, but it’s tough to draw a line between the two. A high credit score and positive credit report will likely mean greater access to credit accounts, and better terms. An extremely low score might make you ineligible for new credit accounts until your credit is repaired over time. In between is a large sliding scale.
A. Qualifying for credit
The minimum credit score will vary by program and type of credit. It’s also important to understand that for more complex financing such as a mortgage, the credit score is only one of many qualifying factors. Others may include monthly income, amount in savings, employment status, property value, equity position, and more.
B. No credit history
If you have never used credit it’s possible that you don’t have an established credit history or score. This is common among young consumers or consumers who prefer to deal primarily with cash, checks, and debit transaction.
Want to establish credit for the first time? Consider a secured credit card or a store credit card which are generally easier to be approved for. Actively use the card, never spending more than you can afford to repay, and be sure to pay the bill on-time every month.
College students will likely find that they are inundated with offers for credit cards, and this can be a good way to establish credit. They tend to have lower credit limits & higher interest rates when compared to offers available to consumers with more established credit. It’s important to keep a close eye on the balance, never charging more than the limit, and ideally paying the balance off each month.
Strong credit can provide access to funds when you need them, at attractive terms that can help you improve your financial position. If you’d like to improve your credit and raise your score, there are several things you can do. Things might not change overnight, particularly if you have a long history of negative items on your credit report, but over time you should start to see things moving in the right direction.
1. Check your credit report for errors
The credit reporting system isn’t perfect. From time to time an account will get recorded on the wrong report or incorrect data will be included. If you have a very common name it increases the likelihood of this happening, and it’s not unusual for family members with the same name (Jr, Sr, III, etc.) to have each other’s accounts or items appear on their reports.
Check your report thoroughly to be sure that everything on it is accurate. You can get a free credit report from each of the three major credit bureaus (without a score) once a year by going to annualcreditreport.com . Some consumers check one every four months on rotation so that they can identify any errors or issues more quickly.
If you identify something you think is incorrect file a dispute with the credit bureau on their website, and contact the company or organization which reported the information.
2. Pay all your bills on-time
Late payments can damage your credit, particularly when paying late frequently or being more than 30 or 60 days overdue.
Create a monthly budget so that the money is there when you need it to pay your debt obligations. Setup reminders via email or on your smartphone to alert you to upcoming due dates. You can also setup automatic payments, just be sure that the bank account those payments will be withdrawing from has sufficient funds to cover them.
3. Pay down your balances
Owing a large sum relative to the amount of available credit can hurt your scores. Work to lower the balances on revolving credit lines. Consider paying a little extra each month to these accounts, and incorporating this in your monthly budget.
Should you pay off an account completely, don’t close it. Having that available credit can help your scores increase, while closing the account could have the opposite effect. If it is a credit card, use it for a small charge or two every few months. If you never use the card, you run the risk that the credit card company will close the account for lack of use.
4. Talk to your creditors
If you’re having trouble meeting all your financial obligations each month reach out to the companies you owe money to. Whether it’s a temporary hardship such as a job loss or illness, or some other factor, they may be able to help. Your mortgage servicer or landlord may be able to offer some relief in the form of a reduced payment for some period of time, or some other solution. If this alone does not do enough to make monthly expenses manageable seek assistance from a reputable credit counselor.
5. Don't open new credit accounts
When working to rebuild your credit try to avoid opening new credit accounts. If it’s necessary to take out a new loan, for example a used car loan, try to do your shopping for that loan within a short period of time. This is because the credit bureaus understand that you are shopping for the best deal on your new loan, and don’t penalize you for this. However, if you have a different auto dealer pull your credit every few weeks for several months, this could negatively impact your credit.
SAFEGUARDING AGAINST CREDIT FRAUD AND IDENTITY THEFT
After working hard to build up a solid history you want to keep it safe. Protect yourself from financial harm and a major hassle by reducing your risk of credit card fraud and identity theft.
Credit card fraud precautions:
1. Keep credit cards in your possession
The simplest type of theft involves physically taking your credit card and then walking into a store to use it. Don’t leave your cards (or receipts or statements with the account numbers) unattended in your home or office. Keep your wallet or purse on your person when out. Lock it your office or in a drawer when at work. Don’t let anyone borrow your card.
2. Review your transactions
Keep receipts for your purchases and compare them to your statement, looking for any discrepancies.
3. Report fraudulent charges
If you see unfamiliar charges on your statement or when reviewing your account online let your credit card issuer know immediately. Credit card theft can happen any numbers of ways, and criminals don’t need physical contact with your card.
4. Report a lost or stolen card
As soon as you realize you are no longer in possession of your card notify the card issuer. If you are not sure whether the card is really lost it’s better to be safe and report it as lost. If it turns up you can shred it and wait for the replacement to arrive.
5. Don't give your credit card number over the phone
If you get a call, supposedly from your credit card issuer, hang up and call the toll free number on the back of your card or on the company’s website to ensure the call is legitimate. Only make purchases from organizations you trust via phone or online.
Tip: Check to be sure the website is secure and that the url begins with “https”.
6. Carefully dispose of anything with your credit number on it
When you no longer need expired or replaced cards, credit card statements, or receipts shred them before disposing of them. You can purchase a small, at home shredder, or take items to be shredded to a reputable business that offers this service. You should be able to put your documents into a locked box to be picked up by the shredding company, or watch the employee put them in.
Identity theft safeguards
While credit card fraud can be very frustrating and inconvenient, identity theft can cause serious and long-lasting ramifications on a whole other level. Identity theft goes beyond just stealing your money, and involves stealing your information and impersonating you. Criminals can get personal information in a number of different ways, including:
Once the information is obtained it may be used to open new credit accounts, file a tax return, apply for a passport, make insurance claims, and more. There are many ways you can protect your personal information. Depending on your level of concern and perceived risk you can choose which steps seem best.
1. Guard your personal information
Don’t carry anything with your social security number written on it on your person. Be wary of people asking for your SSN, account information, or other sensitive information over the phone, email, or online. Cover the ATM keypad when entering your PIN if others are waiting behind you in line
2. Take precautions when using technology
Use strong passwords and change them periodically. Don’t use the same password for everything. Store your passwords in a safe place both at home and at work. Make use of virus protection software on your computer. Don’t use a public computer such as at the library for online banking or other sensitive transactions.
3. Protect your mail
Collect your mail as soon as you can after it’s been delivered. If you’re going away from home for an extended period of time, have the post office put your mail on hold. If you are especially concerned you may choose to have your mail delivered to a post office box accessed only by key. You can also purchase a locking mailbox where items can be inserted via a slot.
Shred any paper with sensitive information on it such as receipts, offers for credit, statements, and expired cards. If you prefer to simply not receive these “pre-approved” offers, you can opt out (choose from a period of five years or permanently) by visiting optoutprescreen.com .
4. Keep an eye on statements and your credit report
Look for transactions or accounts you don’t recognize, and should you identify something, take action right away.
5. Freeze your credit
You can contact each of the three major credit bureaus and request that they place a freeze on your credit. Should you decide to open a new account you will need to temporarily lift the freeze.
Quickly Take Action
If you believe you have been the victim of identity theft it’s important to take action right away. Depending on the type and severity of the theft you may want to:
1. Contact local law enforcement
If you believe that you or anyone else’s safety is in danger, reach out to your local police.
2. Call any companies involved
If a credit account was opened in your name that you did not authorize contact the issuer.
3. Place a free fraud alert with the credit bureaus
Contact Experian, TransUnion, or Equifax to place the fraud alert – whichever you contact will notify the other two bureaus. This will make it more difficult for the criminals to open new fraudulent accounts.
4. Carefully review your credit report
Get a free copy of your credit report from each of the three bureaus listed above (available once a year at annualcreditreport.com ) and thoroughly review them for any accounts or items you were not responsible for.
5. File a report with the federal trade commission
Visit identitytheft.gov to enter your information. This will help you learn the next steps to take and may potentially help the Commission protect others from being a victim of a similar crime.
6. Sign up for a credit monitoring service
If your information was stolen from the records of an organization, they will often provide you with this service for free. Otherwise you may choose to obtain it on your own.
Credit can influence many aspects of your life like renting an apartment, financing a car, or applying for credit cards. Your credit plays a major role in the home-buying process and making small adjustments to your spending habits before starting the application process can help you get credit ready to buy.
Credit is not where you’d like it to be? Don’t get discouraged. Credit can always be improved over time and loan varieties have greatly increased as consumers look for unique solutions to their financing needs. This means that consumers have more choices than ever when it comes to purchasing a home.
Utah Mortgage offers a variety of programs with flexible options for clients with less-than-perfect credit. For more information on this topic, reach out to an Utah Mortgage Home Loan Advisor!