How bad is my credit?


Is my credit really all that bad?

The most common question people ask before, during and maybe even after a loan application interview is “How bad is my credit?”

It’s not that hard of a question, but since every credit profile is different, the answers may not mean that much to you. I personally think the most important thing for you is to know where you stand today and then work to improve. There’s no speedy trip to Heaven as a prize, just better interest rates and better terms when you need to make financial decisions. Many insurance companies use your FICO score to decide whether or not you are a good risk, even for auto insurance. You need to get a handle on your own profile fast.

Your FICO score has become the number one way to determine how “creditworthy” you are. This number varies from lender to lender and you should never just take information like this and run with it unless you talk to various lenders about your own personal situation. I can only tell you what I know from my own experience. Do not let anyone play on your emotion or your insecurities. Know your profile and then ask specific questions about their programs before you agree to seriously begin the application.

You will probably be considered “A quality credit” if you have a FICO score of 620 or above. You should have a credit report with no lates or very few lates and NO mortgage lates. Lenders hate mortgage lates. If your score is >700, you probably qualify for the best rates and terms, unless that score is based on a credit report with very little information. Your credit report needs to reflect a history of at least 4 accounts, one currently open, to show the lender how you take care of credit obligations.

If you have a mortgage late or two, but only 30 days late, not sixty, then you’re probably a “B credit” borrower. No recent or unpaid collections or chargeoffs are on your report and your score hovers around 600. If it weren’t for the mortgage lates, you would be a model citizen. Never forget that lenders hate to see mortgage lates. If you’re not worried about your housing expense, how can they expect you to care about anything else.

When you hit the “C level credit” category, you’ll start to see drastic increases in the rates you’re offered. This is risky territory for the lender, since they can see that you are often late on your mortgage, sometimes even 60 days late. The credit report shows that you let things go to collection and sometimes accounts have even been charged off as bad debt. There is a good chance that you’ll be slow to pay this loan, too.

If you’ve had a recent bankruptcy or foreclosure, then you’re looking at “D credit” loan programs to help you re-establish yourself as a worthy borrower. A Subprime lender can help you get a loan to prove you know how to take care of your obligations, but that is the only program you’re going to quality for. These loans are usually structured with a higher rate and a short repayment term. The rate is less than a credit card, but much higher than A and B borrowers pay.

The idea is that you’ll make perfect payments for 6-12 months and then refinance into a better rate and term. This is no time to mess up again. You can quickly re-establish yourself after a “life event” by paying on time and being able to prove it.

If you don’t know where you fall, then get a copy of your credit report and see what’s on there. There might be something there that’s lowering your score and isn’t even correct information. Dispute and correct whatever you can legitimately before you need a loan. Be sure you order the package that includes report and FICO, since most plans are one or the other. My advice is get it from MY FICO, but the choice is yours. The one free annual report you can get does not include your FICO score, so the only real advantage is that you have the report details to see what needs to be corrected. I try to keep a link in the right hand column to MY FICO.

Copyright Judi M Moore, 2rhouse.org: September 28, 2005, all rights reserved