Credit reports are really telling but they’re also not always 100% accurate so be prepared to deal with any inaccuracies that may come up during the review process. Credit-reporting agencies prepare the reports.
Credit ratings are very important to lenders because they show your overall financial health and package it neatly into a multipage report that reads something like your report card from grade school.
There are three reporting agencies and they all have slightly different ways of determining your financial health although they are focused on the same task at hand. The three main reporting agencies are Experian, Equifax and Trans Union.
If you have concerns about your report and what lenders will see on it then it would be wise to order a copy of your credit report – typically for a nominal fee – via phone or on the web form.
Once you’ve filled out your loan application then the lender will order your “score” commonly known as FICO score (for Fair Isaac & Co.) from one or more of the reporting agencies just listed.
Lenders also use salary, length of employment and other factors when making their decision but the FICO score is one of the first places they look. Some lenders use one of the three scores while others select the “middle” score as a measure.
A credit score basically condenses your credit history into a single number and while the credit bureaus don’t reveal how these scores are computed, the scores themselves are calculated by using scoring models and mathematical tables that assign points for different pieces of information that best predict future credit performance.
Credit scores analyze various aspects of borrowers’ credit history, including:
- Late payments.
- The amount of time credit has been established.
- The amount of credit used versus the amount of credit available.
- Length of time at present residence.
- Employment history.
- Negative credit information like bankruptcies, credit card charge-offs and accounts that are in collections.
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