Credit reports and scores are important in the mortgage industry in which I work, but they also influence almost every other aspect of your life including insurance, car payments, utilities, and in general, your lifestyle. In the mortgage industry, your credit score determines what type of loan you can qualify for and what type of interest rate you can get. Although good mortgages are available for people with credit scores as low as 500, it stills behooves one to work on improving their credit. Some general information on credit scoring will prove to be very useful throughout your life in maintaining good credit or in improving your credit.

General Background

Credit scores range from 0 to 850. There are three major bureaus that report your credit: Experian, Equifax, and Transunion. Each of the bureaus is separate and may receive information from different creditors. Credit scoring is a complicated procedure that I’m sure even the credit bureaus don’t completely understand. As a general rule derogatory credit will stay on your report for at least 7 years, but only active accounts from the past two years will significantly affect your score.

Debts

It is a common misconception that paying off your debts will always increase your score. Paying off your debts is undoubtedly a good thing, but in the mysterious world of credit scoring, paying off debts could increase or decrease your score depending on the type of debt.

Good Credit

Some of your credit report consists of tradelines. Tradelines are normally credit cards and loans. They contribute to your score if they are somewhat recent. Good, long-standing activity on these tradelines will help your score. However, your credit score can go down if you have multiple late payments of more than at least 30 days late or if your balance is significantly high as compared to the maximum allowable limit on the account. For these reasons, it is not always in your best interest to consolidate credit cards that will result in a significantly high balance.

Derogatory Credit

Your credit report also consists of derogatory credit. This credit could be items such as collections, judgements, and bankruptcy accounts. These items affect your score a little different than the tradelines mentioned above. If you are planning on getting a major loan in the next few years and need to improve your credit score before then, it may be in your best interest to wait to pay off your collections or other derogatory credit. If the account is less than a few years old or your have made recent payments on the account, you may want to continue to pay it off since changing your actions may not help your score. If the account is older than a few years and has no activity in that amount of time, paying off the collection will make the last activity on the derogatory account very recent and may lower your score. Unless the agency has agreed to remove the account from your credit report, you may want to discuss with your loan originator what the best action is for your situation.

Correcting your credit report

As mentioned earlier, credit scoring is a complicated matter that few understand. Some items in this article may have seemed contradictory or just plain incorrect, but that is how credit scoring works. If you need help on fixing incorrect information on your credit report you can dispute your case directly with the three bureaus mentioned earlier."

For further information or advice on credit reports, please contact Steve Bergstrum.