Managing and Protecting Your Credit

It is very important to understand what you can do to build and maintain your credit in good standing. Understand what creditors look at and how it affects your ability to borrow. Your ability to build a relationship with your lender in acquiring real estate is a key component to building wealth.

Common Types of Credit Accounts:
1. Open Ended. These are similar to lines of credit and home equity lines of credit (aka HELOCs) and can be accessed by telephone transfer or check.
2. Revolving Credit Account. These are provided by a credit card with a credit dollar limit.
3. Installment. These are home loans, car loans, also known as “ term loans” that amortize over a specific number of months called the “term.”

Who would be interested in your credit report?
1. Insurance Companies. These may charge higher premiums for lower credit scores.
2. Businesses. Your credit report may affect the terms you negotiate with suppliers.
3. Banks and mortgage companies. Your credit score will affect the rates and terms that you may be offered by lenders.
4. Landlords. You may be denied or accepted based on your credit score and the way you pay your bills.
5. Prospective employers.
6. Health providers. Coverage may be denied for high credit risk applicants.

Derogatory Credit, aka “Derogs,” always require written explanations when applying for bank credit. Lawsuits and judgments show on your report for seven years as Public Records. Bankruptcies and Discharge remains on the report for ten years as Public Records. The details of the accounts discharged in bankruptcy stay on the record for seven years. Tax liens remain without a time limit.

Credit granting entities report to the credit reporting agencies (Experian, TransUnion, Equifax) on a monthly basis. All three agencies us a different but, similar scoring procedure. Most lenders take all three scores and may average or take the middle one to be used in your request for credit.

Credit reports show the following data:
1. Derogatory public record or collection filed
2. Proportion of balance to high credit on bank revolving or all revolving accounts
3. Number of recent inquiries
4. Length of time accounts have been established
5. Lack of recent installment loan information

Request your credit report each year, or every time that you apply for credit. Do not pay for it. Make sure it is accurate and write to the credit reporting agencies with evidence that an error has been made when found. Example: With falling rates, many reports will show your monthly mortgage payment as old and too high. Also, your report may include your impounded taxes, but the lender may double count the taxes if they don’t know that they were included on the credit report.

Credit scores range from 400-850. Scores between 450-599 are not good. From 600-699 are not bad. From 700-799 are excellent. And, over 800 being rare. Scores are used by lenders for approving or denying credit. Or, they are used by lenders to set the rate and terms for the cost of credit.

Lenders will look at your credit score first. Then, they will calculate the debt to income as a percentage and the effect of the newly requested debt to the same ratio. Lenders generally like that percentage to range from 30-50% depending on the credit score and the loan structure and amount of equity in the collateral. The type of product underwriting standards will also play a role in that ratio percentage. In determining the amount that you can borrow to buy an owner-occupied home, lenders take the entire housing cost per month (loan payment + property tax payment on a monthly basis + homeowners insurance on a monthly basis) and divide it by the applicant’s monthly gross income. Ratios of between 28-33% are typically acceptable by lenders depending on the loan product.

READ: 11 myths about credit reports
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How to Check Your Credit Before Applying For a Mortgage
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