Your credit history is one of the most crucial elements required to help you obtain a good rate on your upcoming loan. Our goal at Money Lender Loans is to give clients across Orange County, CA a wonderful lending experience. The types of loans we offer include real estate loans, private money loans, and commercial and industrial loans. We prepared this guide to help you evaluate your possible credit rating and the type of terms to expect from a loan originator.
What Does a Credit Score Mean?
Before getting into details about what a credit score means, you have to understand what "credit report" means. A credit report is a record showing whether you pay your bills on time, whether you have been arrested or sued, where you have lived and what debt you have. Creditors usually report your debt and payment information to the relevant credit reporting agencies (CRAs). TransUnion, Experian, and Equifax are the three major CRAs in the country.
Once CRAs receive this information, they use it to compile credit reports, which guide other creditors when deciding whether or not to give you credit. Since your credit report gives insights on your credit score, it is wise to check the report regularly. Tell the CRA about any missing or inaccurate information included in the report.
How Can You Check Your Credit Report?
Regularly checking your credit reports can help you spot any discrepancies or cases of identity theft. You can get your credit report copies for free from each of the three CRAs every 12 months. You can also obtain them through the following means:
- Once every year if you are beneficiary of a public assistance program
- Once every year if your credit report is inaccurate due to identity theft or other types of fraud
- Once every year if you are currently unemployed and you are planning to look for a new job in 60 days
- By requesting your credit report within 60 days from when a company denied your employment, credit or insurance application
Your credit score helps determine a suitable credit rating, which most lenders use to categorize borrowers. The Fair Isaac Corporation (FICO) credit rating model is the most accepted and used credit rating model. While referring to the FICO model, your credit score number is a number between 300 to 850.
Which Factors Count Towards Your Credit Score?
As an indication of whether or not you have a history of responsible credit management, your credit score is based on certain factors. The score also shows whether or not you have a financial stability history. Here are five of the elements defining your FICO score.
The amounts of money owed (to creditors and other parties) contribute 30 percent to your FICO score. It would be best to make all your debt payments on time to avoid lowering the score. The FICO model usually factors in your credit utilization ratio by measuring the amounts owed against your current credit limits. The money owed on accounts such as installment accounts, credit cards, auto loans, and mortgages also matter.
Having little debts is better than not having any at all when it comes to building credit scores. Lenders expect to see your financial stability and responsibility when it comes to paying borrowed money. Credit scoring programs also expect you to have a mix of various credit types, which you manage responsibly.
One major element of your credit score considers the possibilities of you being trusted to repay debts. The primary concern lenders have before loaning you money is whether you will pay it back. Since your payment history counts 35 percent towards your credit score, on-time payments can help you secure a better credit rating.
Charge offs, wage garnishments, lawsuits, public judgments, liens, debt settlements or bankruptcies can paint a bad picture on your credit report. A lender may use them to conclude that you are financially unstable to repay a loan. Missing several payments in a short span may also negatively affect your credit score.
The FICO credit-rating model considers the number of accounts under your name. The model also considers the number of accounts you recently applied for and the last time you opened a new one. Once you apply for new credit, lenders do a hard pull (or a hard inquiry), which involves reviewing your credit information as part of the underwriting procedure. New lines of credit account for 10 percent in the calculation of your credit score.
Hard pulls result in a small but temporary decrease in your credit score. When conducting hard pulls, lenders may assume that opening several new accounts is an indication that you plan to take on more new debts. It may also indicate that you are facing cash flow problems. FICO scores only consider your new lines of credit and history of hard inquiries in the last 12 months.
For instance, when applying for a mortgage, the lender will review all of your existing monthly debt obligations. This hard pull procedure helps to determine the amount of mortgage you can afford. Since lenders cannot rely on your future spending plans to give you credit, they can refer to your credit score to evaluate your credit risk thoroughly.
Credit History Length
The length of your credit history helps determine your credit score. The FICO credit-rating model will want to know how many years you had financial obligations. The model will also consider the average age of your accounts and the age of your oldest account. Long credit history may be helpful when late payments among other negative elements do not characterize it.
Short credit history may be fine if you meet your financial obligations on time and have fewer debts. One way to improve your credit score based on the length of your credit history is by leaving your credit card accounts active (open). The age of the accounts (even if you do not use them anymore) can significantly boost your credit score. Closing your oldest account can translate to an overall score decline.
Types of Credit You Currently Use
The FICO credit-rating model calculates 10 percent of your credit score by evaluating the various types of credit in use. The accounts may include mortgages, installment loans, credit cards, and store accounts. The FICO formula also considers the number of accounts under your name.
What Type of Information is not Used in the FICO Formula to Determine Your Credit Score?
FICO does not consider the following information when determining your credit score:
- Marital Status
- Receipt of public assistance
- Occupation, employer or employment history
- Race, national origin, color or religion
- Participation or enrollment in a credit counseling program
- Any information not included in your credit report
- Family/child support obligations
- Area of residence
What are the Credit Ratings Used by Lenders to Categorize Your Creditworthiness?
Within every credit score, a unique letter is usually assigned to identify your trustworthiness further when it comes to repaying a loan. Credit ratings resemble letters A, B, C and D of the alphabet with each representing a possible credit score. Letter "A" represents the highest score while letter "D" represents the lowest credit score. A through D credit ratings highlight a quick letter grade to your credit history.
For you to have the “A” credit rating, your credit score should either be 620 or more with no late payments on your mortgage. The rating may apply to your financial situation if you are not more than 30 days late on your installment or revolving credit and have not made a bankruptcy filing within the past two to ten years. Other requirements for the “A” credit include a 36-40 percent maximum debt ratio and a 95-100 percent maximum loan-to-value ratio. With an “A” credit, which FICO considers as the best credit rating, you can demand the best interest rates available.
B+ to B-
A “B+ to B-” credit rating is generally considered a good credit with its FICO scores ranging from 581 to 619. To qualify, you must be two to four days late past the 30-day deadline on your installment or revolving credit or two to three days late past the 30-day deadline on your mortgage. Other requirements include less than 60-day lates on payments, taking 2-4 years after a bankruptcy discharge.
The maximum debt ratio should average 45 to 50 percent for a “B+ to B-” credit rating. Consequently, the maximum loan-to-value ratio should average 90 to 95 percent. With this type of credit, you can obtain interest rates 1 to 2 percent more than the present market rate.
C+ to C-
The FICO scores for a "C+ to C-" credit rating range from 551 to 580. A three to four-day late payment past the 30-day deadline on your mortgage is allowed for this rating. You must also have one to two years since your last bankruptcy discharge, a 55 percent maximum debt ratio and an 80-90 percent maximum loan-to-value ratio. A "C+ to C-" credit can enable you to get rates that are three to four percent higher than the current market rates.
D+ to D-
A “D+ to D-” credit rating is generally considered as a poor credit rating with FICO scores being 550 or less. Your credit score can be assigned this rating if you are two to six days late past the 30-day mortgage deadline. The rating will apply to your situation if your installment and revolving late payments indicate a poor payment record with a constant late payment pattern. Your current foreclosure or bankruptcy will be allowed with loan proceeds to pay your unpaid debts.
The maximum loan-to-value ratio for a “D+ to D-” credit rating ranges from 70 to 80 percent. The maximum debt ratio for the same averages 60 percent. With a “D+ to D-” credit, most lenders will offer you interest rates that are 12 to 14 percent higher than the current ones. You also have the option to refinance one year after making your mortgage payments on time to lower the rates.
Debunking Credit Score Myths
While the Internet provides various information sources on how to be financially responsible and stable, it tends to be misleading at times. Do not let inaccurate information about credit scores mislead you. Discussed below are the myths about credit scores with their corresponding facts.
Myth: Making enough money is a prerequisite to paving a good credit score.
Fact: Although people with more money or valuable assets tend to have higher credit scores, your income has little effect on your credit score. It is possible for high-income earners to borrow above their limits and take credit to pay for items instead of using their existing funds. You can improve your credit score, regardless of your wealth, in various ways. They include keeping your oldest credit card open, monitoring your credit report and paying down debts.
Myth: All credit cards are the same as far as credit ratings are concerned.
Fact: It is false to say that credit cards such as an American Express card, a visa card or a department store card are the same. Cards offered by retailers are of a higher risk than those provided by banks. Continually using these cards could negatively affect your existing credit score especially if you default on paying any debts.
Myth: Paying off your collection account will immediately help clear your credit score.
Fact: While it is a wise idea to pay off a collection account, doing so will not help eliminate it from your credit report. The account will remain in the report for about seven years and form an essential aspect of your credit score. Provided that you are up to date on your credit card and mortgage payments, the account will probably not harm your score drastically.
Myth: A small parking ticket fine will not show up in your credit report
Fact: A fine as little as $6 imposed for failing to pay a parking ticket can lower your credit score by about 50 to 100 points. The same applies to utility bills and library-card fines among other minuscule fines. You will be okay once you pay them before a debt collection agency gets hold of your debt information. Expect also to get reminders for the due fines.
Myth: Paying cash for everything would guarantee you an excellent credit score
Fact: Credit card issuers usually consider clients without credit cards or any form of debt as high-risk ones. They are likely to consider clients with existing cards and proof of responsible debt payments for credit cards. CRAs (credit rating agencies) also expect to see your history of settling your credit obligations on time rather than having none.
Which Ways Can Credit Scoring Help You?
Credit scores present lenders a fast yet objective means for measuring your credit risk. Before lenders started using them, loan underwriting processes used to be slow, unfairly biased and inconsistent. Ever since they were established, the following became possible:
Fast Access to Loans
Since your credit score can be generated almost instantaneously, lenders get the chance to speed up their loan approvals. Most credit decisions made these days take fewer minutes and are fairer. Lenders rely on the scores to focus on facts related to your credit risk instead of judging you based on their sentiments. Credit scoring also makes it possible for internet sites and retail stores to make credit decisions instantly.
More Credit is Available to Borrowers
With credit scoring, lenders get more precise and consistent information needed to base credit decisions. They can also identify clients with the potential to settle debts faster. They gain the confidence to make credit more accessible as they are aware of the risks associated with their actions. Even clients with lower scores can benefit from lending solutions geared to their credit risk levels.
Past Credit Mistakes Count for Less
With credit scoring, your past credit mistakes will fade in a short time provided that you are maintaining good payment patterns. Instead of being turned down when trying to for a loan, you may get affordable rates on loans. Credit scoring helps to weigh your good and bad credit-related information in your credit report.
Get an Affordable Loan Today Irrespective of Your Credit Score From a Lender Near Me
Do you suddenly need money to make payments on school tuition, a medical bill or any other emergency? Are you in need of the loan but your credit score will not allow you to get it from traditional lenders? At Money Lender Loans, we believe that credit (whether bad or good) cannot prevent you from getting a loan from us. We have the ideal lending solution designed to meet your credit needs.
Depending on your emergency or need, we can give you the financial support you need to cope with whatever you are going through. Money Lender Loans operates as a direct lender with competitive rates and fees. We help clients across Orange County, CA, enjoy our fast loan approvals and closings. Contact us today at 949-409-4372 for a quote regarding the type of loan you need.