Jim's Credit Corner - August 11

Dear Jim,

We really like your articles and you probably discussed this in a past article, but we have no idea what our credit looks like and we are planning to buy our first home in the Fall. What should we be doing now to ensure everything looks okay, and what impacts our scores the most?

Thanks for sharing!

— J.T., Grand Junction

Dear J.T.,

I am so glad you asked this question since a large majority of the population have never checked their credit or check it on a regular basis. Whether you plan to buy a home or not, it is something you should do on an annual basis to avoid any risks.

A government study shows that approximately 40 million Americans have mistakes on their credit reports, including wrong addresses, accounts that do not belong to you, incorrect names and incorrect late payments. These mistakes can have a large impact on your credit score and could mean you are a victim of identity theft.

The good news is that you are entitled to a free credit report from each bureau (Experian, TransUnion and Equifax) every twelve months. You simply go to www.annualcreditreport.com and you will have immediate access to your credit reports. If you find a mistake, you can dispute them online. While you can purchase your credit scores, please remember these are only personal scores and are usually higher than the scoring models for a mortgage or an automobile. They are not used by any industry, so they may mean very little and I prefer to call them "feel good scores".

I encourage you not to order your credit report from all three bureaus at the same time. Since you can order a credit report from each bureau every twelve months, I encourage you to split them up over twelve months. For example, order a report from TransUnion in January/February, the next one from Experian in June/July and from Equifax in October/November. This will allow you to monitor your credit throughout the year for free!

Always check the name variations, the addresses you lived, all of your accounts, credit limits and any derogatory information (late payments, collections, etc.). Be sure that any inquiries are ones that you made. If not, this could be a sign of identity theft. If anything is incorrect, I encourage you to correct these as soon as possible. Again, you can dispute these through www.annualcreditreport.com.

Also, all three bureaus (Equifax, TransUnion and Experian) offer a monitoring service, which will allow you to stay on top of any changes to your credit. And certain credit cards may also offer monitoring services. However, these usually include a monthly fee.

FICO scores are calculated and grouped into the following categories.

Payment history and the length of your payment history makes up to 50 percent of your score, which is based on paying your account on time, the length of the positive credit history and the severity and quantity of delinquencies on your accounts. It helps to have long payment history showing that you use these accounts often.

The second greatest impact to your FICO score is the amount owed on revolving accounts which makes up 30 percent of your FICO score. I encourage you to keep your revolving balance at 30 percent or less than your credit limit. For example, if your credit limit is $1,000, you should keep your credit card balance below $300.

New credit makes up 10 percent of your FICO score and may represent a greater risk especially if you do not have an established credit history.

Finally, to have a healthy mix of credit it is recommended to have at least two installment loans (mortgage, auto, student loan, etc.) that include a fixed payment and term and three revolving accounts with balances such as credit cards and/or revolving lines of credit.

This will help you avoid any surprises when you are ready to apply for a mortgage and help you maximize your FICO score.

Jim Kaiser

Branch Manager,

NMLS #1721861

Cherry Creek Mortgage

Jimkaisermortgages.com

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