By Mike Heayn

When you were in school you were given grades to reflect how you did. As an adult, the grades have turned into numbers called FICO scores, which reflect how timely you make payments. FICO scores ultimately determine your credit worthiness. The single most important item needed to attain a competitive mortgage rate is good credit. Nothing plays a more important role in getting a residential loan than your credit score. As a synopsis of your credit history, your credit report and score are made up of several elements, coming from three different bureaus, and reflecting up to 10 years of your credit history.

The three credit bureaus, Experian, Equifax and Trans Union, collect information from creditors and compile it into a unified credit report.  According to www.myfico.com, a credit report reflects the following information:

- Identifying information such as your name, date of birth, social security number and address.

- Trade lines, also known as accounts or debts.

- Credit cards, real estate mortgages, car loans, cell phone bills, gym memberships, etc.

Inquiries show with whom you have applied for credit, who has pulled your credit, when it was pulled and how many times it was pulled.

Public record/collection is state and county courts information; overdue debt from collection agencies and bankruptcy, foreclosures, lawsuits, wage attachment, liens, judgments, etc. 

Credit scores, generically called FICO scores, range from 350-850, with scores of over 730 considered near perfect credit. The three bureaus report at different rates and sometimes do not report the exact same information. Therefore, a median score is often used instead of a particular bureau’s score. For example, if you received a 680 from Experian, a 715 from Equifax, and a 700 from Trans Union, the Trans Union score of 700 would be used as your median credit score by a potential lender. 

Credit reports and scores have allowed lenders to efficiently, effectively and fairly lend to many people by showing a quick synopsis of a person’s past credit history. With literally hundreds of home loans and lenders available it is no wonder why a quick synopsis of a person’s credit is needed. Many lenders can give pre-approvals over the phone after a credit report has been pulled. However, if you want a great rate you have to have a great credit score. Loans do exist for individuals with low credit scores, but the interest rates are generally higher. 

Over time a credit score will forgive a person’s mistakes as long as that person makes an effort to make timely payments. That is why paying your bills on time is so crucial. One late payment or bankruptcy will bring your score down quickly, but it takes several months of “perfect” behavior to have it start increasing. 

A credit report will not reflect race, color, religion, national origin, gender, marital status, current interest rates on existing accounts, any items reported as child/family support, certain types of inquires, any information not found in your credit report. 

A credit score is calculated using the following breakdown according to www.myfico.com:

- 35 percent reflects your payment history. That is why making one payment late will dramatically affect your credit score.

- 30 percent reflects the amount of money owed on your accounts. If you go over your credit limits by 45 percent or more, your credit score will be affected negatively. This is why you should not max out your credit cards.

- 15 percent reflects the length of time you have had credit. If you and your parents had the exact same credit cards, both paid in a timely fashion with the exact same balances, your parents would have a better score because they have had credit for a longer period of time. Many older individuals who have excellent credit have high scores partially because they have had credit for a long duration.

- 10 percent reflects the number of time your credit has been pulled. Many lenders will tell you not to have a lot of people pull your credit and not to open a lot of new credit accounts because the frequency of having your credit pulled affects the overall score. Every time you authorize someone to pull your credit the score goes down anywhere from two to four points. If you were to have five lenders pull your credit in one week your score could be reduced by 20 points, possibly affecting the interest rate you will receive.

- 10 percent reflects the types of accounts that are opened under your name. Think of this percentage as a good mix. Like any good recipe, a proper mix of ingredients is needed. The same rule applies to your credit report. You want to have a good mix of revolving, installment, mortgage, etc. accounts. That does not mean you have to have a one-to-one ratio, just don’t go crazy in any one category.

A tip to good credit is pulling it every six months to make sure no one has stolen your information. Make sure you make payments on time, even if it means making a minimum payment. Remember, it takes a long time for your credit to increase, but not long for it to decrease because you didn’t make your $25 Visa payment on time. When shopping for a loan do not have a lot of people pull your credit.  Instead, go to a site such as www.freeannualcreditreport.com and pull your own credit. Bring a copy of your credit report to lenders. It is worth buying the scores since many lenders use them to determine interest rates. As an adult, a good credit score is your key to getting any type of competitive loan, especially a home loan.

(You can reach Rob Rose at 1-877-4 TM 1031, or e-mail at rob@tm1031exchange.com to discuss your specific needs. TM 1031 Exchange assists investors in planning and executing successful real estate investment strategies. Visit www.tm1031exchange.com for a complete list of investment properties and to download the TM 1031 Tool Kit.)