Today I’m sharing important information about the different types of credit reports and provide answers to the most common credit related questions.
Hello, welcome to the channel, or wherever you are viewing this video. Keith Renno here, and would like to share with you some information today pertaining to credit. I’ve been a mortgage professional for over 15 years, a real estate investor, I’ve had the privilege of learning a whole heck of a lot about credit and being able to educate folks on how to maximize their credit scores. There are some common questions, some common themes when it comes to credit that I get asked, or I have the opportunity to share, and want to relay some of those here on this video.
So let’s start with the confusion when it comes to the consumer report. So oftentimes, I will get a call from a potential customer and they’ll say, “Hey Keith, I have a 700 credit score.” I will run their credit and I will have to relay to them that I have pulled and discovered that they are, say, a 680 credit score. And there’s, say, a 20 point difference there or so.
Now, quite commonly, we will see that type of discrepancy in the consumer report versus what we pull on the home lending side, a mortgage report. And now when it comes to the credit bureaus, at the end of the day, they are taking the information that they have gathered, they have algorithms, that’s how they generate these scores. And they have different algorithms. There’s the consumer report, as we’re calling it. And that is typically what other companies are able to monitor. When maybe a company’s doing a soft inquiry, they are accessing the consumer report. And there is an algorithm that the credit bureaus use to generate that score and that consumer report. Now, when you’re applying for a mortgage, each time you apply for a mortgage, that is a hard inquiry where you are accessing, let’s call it, a mortgage report. And that report is unfortunately based upon a different algorithm.
And I say unfortunately because it can be misleading. And really at the end of the day, each time you’re accessing a mortgage report or something that might be a hard inquiry, it costs money and it’s kind of a way a credit bureaus, they make money. So they charge for this hard inquiry, that’s the official inquiry. And that’s what us, say, mortgage folks are going to base our decision off of, of what we’re willing to lend and how we’re willing to lend to an individual is going to be based upon that algorithm. So now, these algorithms, they oftentimes trend in a similar direction, so if you’re monitoring your score and you see, “Hey, overall, my scores improve 20 points, great.” More than likely, on the mortgage report, your score will have approved that same number of points, but they are not identical. But again, can give you a general trend.
Now, regardless of the algorithms, whether you’re monitoring, looking at more of a consumer report or maybe you’re applying for a mortgage and you’re getting more of that, let’s call it, detailed report. I call it, say, that true and accurate credit report. What goes into the overall algorithm? What goes into that scoring model? So again, there’s some tweaks between the two, but for the most part, they’re going to look at your payment history. 35% of what makes up your credit score is going to be your payment history. So that’s kind of an obvious one. Make payments on time, continue doing so. The second biggest portion of the pie, as far as what makes up your credit score, is going to be your balance versus limit ratio on your revolving credit. It actually makes up 30%, almost equally as much as payment history. So a kind of pro tip here is I recommend you have two to three open and active revolving credit accounts.
So when I say revolving credit, really credit cards. Now, when I say open and active, you want to use these accounts, say, once every six months and that balance first limit ratio, what they’re looking at, if you have a limit of $1,000, ideally you do not want to owe more than $250, 25% or less. So if your limit’s $1,000, 25% or below would be $250. You go over 25%, you’re going to get dinged, you go over 50%, dinged a little further, over 75%, and so forth. So you basically want to show the credit bureaus that, “Hey, I have these accounts open and active. I could use them, I could get myself into debt, but I don’t need that credit, I don’t need that available credit. I’m doing fine, I don’t need to use it.” And then certainly, any use you’re making payments on time so you’re certainly not abusing it. That’s what’s going to maximize scores. And then the rest of your credit history and that overall algorithm has to do with the type of credit accounts that you have within your history.
The length of history. So someone that’s, say, 18, new to credit, there’s no way that they’re going to have the opportunity to have the credit score that, say, someone that’s 40, that has years of established credit and making payments on time, and managing their credit in a correct manner. So credit history, and then the other portion of that pie of inquiries. So you do want to try to prevent your credit from being ran unnecessarily, but, say, when it comes to applying for things like a home mortgage, it is a necessary component to discovering what you truly qualify for and what your options are, and certainly obtaining that financing. So hope you found some information here useful, insightful. Hopefully it wasn’t too much. I know I covered a lot of ground here in just a couple of minutes. Reach out with any questions or talk to a local professional that you know, like and trust. Take care.
Should you have any further questions feel free to send me a message.
Senior Loan Originator
Over the past 15 years as a mortgage professional, closing on average 150 loans per year, I have gained a wealth of knowledge and experience about the mortgage industry. My goal with this website is to give you just the INFORMATION you need about mortgages with ZERO sales pitch. I hope you find my posts of value and share it with 1 other person who might find value in it as well.