Your credit score is an indication of how likely you are to default on a debt obligation in the next 30 days.

The credit score is made up of many different components. All a credit score is, is an indicator or rather a predictor of how likely you are to default on a monthly debt obligation in the next 30 days. The higher the credit score the less likely you are to not make a debt payment, conversely the lower the credit score, the more likely you are to default on a debt obligation, and as result, the higher the risk, the creditor takes in providing you credit. Credit scores in the eyes of a creditor are nothing more than a measure of risk. It’s a question of how much risk the creditor willing to take in helping you secure mortgage or get a credit card etc.

There’s three major credit reporting bureaus Equifax, Experian, and Transunion, and each one of these credit bureaus produces one credit score. Each bureau’s score can range anywhere between 500 to 800 depending on your unique characteristics. So if you are obtaining a credit report you should be getting a credit score from each bureau which is otherwise known as a tri-merge credit report. This is what mortgage lenders go off of and it’s the most accurate depiction of your true creditworthiness. If you’re looking for a mortgage loan, the creditor will be looking at the middle score. For example if you have a credit score that is 740, 705, and 780, they will go off of the 740 credit score.

Following is a list of credit score myths:

1. Multiple credit pulls make your credit score go down-as long as they are all mortgage related within any 30 day period of time this will not artificially reduce your credit score. Consumers get into trouble when they search for a mortgage, and search for a credit card, and then search for an auto loan for example all at the same time. You could literally run your credit report every single day for 30 days in a row and your credit score will not go down.

2. Auto loan credit report shows credit score is higher-let’s say for example you just bought yourself a new car and the car dealership told you your credit score was 700. Auto dealerships use what is called a Beacon credit score, and it is not an indicator of your true credit score. They used a one merge score meaning they will only look at one of the credit scores not all three.

3.Free Credit Reports are the real deal-this is completely untrue. The truth is online free credit report companies don’t provide a full tri-merge credit report with the most accurate information. The credit reports they provide are beyond difficult to read and you cannot get a mortgage based on a free credit report you received from a marketing company. Stay far away from places like free credit score.com.

4.Paid off an old delinquent account credit score should go up right? Wrong, unfortunately what happens in situations like this is the creditor offers the consumer a discount in paying off the debt they owe. For example let’s say you owe an old medical collection $1000 and they say if you pay us right now in full we will settle the account for $500 and you say okay. This will bring a recent activity on an old account which will make your credit score
drop immediately and then likely it will go back up, but only after 30 to 60 day time frame.

5.I don’t need credit, I pay all my bills on time.- This is bad news. Not having credit is almost worse than having bad credit. Why? It’s because no credit represents zero financial responsibility to a creditor. The credit takes higher risk in such a scenario. Build credit, even if you don’t want a credit card, get one, use it to pay for gas and pay it off in full every month. Building credit is absolutely important to getting any kind of long-term credit down the road and getting the best terms possible.

Your credit score could be your worst enemy or your best friend.

If you have a great credit score you will likely qualify for the absolute best possible terms on a mortgage or on a credit card etc. Not paying your bills, having a past delinquency that is not resolved will impact your credit score overtime. The good news is that if you do have bad credit most of these items will fall off within seven years anyway. The question is how old were the delinquent accounts? A good mortgage lender can certainly look at your credit report can tell you all you need to know.

My advice on credit cleanup and maintenance is first to do this on your own. Hiring a credit repair company can be an added expense which does not guarantee anything. Your credit score is too important to let some company give you false hope in getting your credit score up. Most of these companies simply write letters to your creditors on your behalf away. This is something that you could easily do on your own if it’s even necessary.

Here are some tips on maintaining a great credit score.

Always make sure to keep your credit card balances no bigger than 30% of the total allowable credit lines. For example if you have a credit card with a $5000 credit line you don’t ever want to have a balance above $1500. This will send a red flag to all three credit bureaus that you are maxing out your credit card. Try to resolve any possible lates on any old past delinquent accounts. If you are looking for a high ticket item like a home mortgage loan, do not pay off in full any accounts until you talk to your loan officer! Your new home loan could depend on what you do or don’t do with your credit report.

You also want to make sure to NEVER close credit cards. This is probably the worst mistake people do again and again. If you are not going to use your credit card for whatever reason keep the count open even if you are not planning on using it. Closing out credit cards sends a message to the credit bureaus that you can’t manage your debt and they penalize you by artificially reducing your credit score. If you’ve had any major credit challenge such as a short sale, foreclosure, or a bankruptcy make sure to know the following items or contact Scott.Sheldon@nafinc.com.

1. Bankruptcy 7 or 13- make sure that all of the debts that are supposed to be included in a Chapter 7 or Chapter 13 are in fact included and discharged, and reports that way on the credit report. You can get a mortgage within two years of a bankruptcy, or under two years on an exception basis.

2. Short Sale- make sure the debt that was released says “Paid in Full” this is huge, because what you don’t want to say it is “settled for less than full balance”.

3. Foreclosure-you can get a mortgage three years from a foreclosure or from a short sale. The date on the credit report for a short sale or for a foreclosure is what the lender will go off of.

Remember your credit score is something that you can control.

Your credit score is completely within your control. Keep credit card balances low, if you’re late make sure its not 30 days late, be mindful of paying in full old derogatory accounts and no matter what, don’t close out credit card cards.

If you’re looking for a mortgage or would like to get a mortgage rate quote Sonoma County, CA and want to deal with a credit specialist call Scott Sheldon (707) 217-4000. Scott Sheldon with your credit score can help you get a mortgage.