Your credit score is one of those big, important financial things they don’t teach you about in school. A high credit score can open the door to your next life change like a mortgage or auto purchase. Plus, a solid credit history usually results in the lowest interest rate possible on any loan you obtain. This blog will offer a brief lesson on what a credit score is in addition to discussing how mortgage preapprovals fit into the mix.
The three major credit bureaus are Equifax, Experian, and TransUnion. Each assigns a credit score to individual consumers. If a consumer has not yet used credit or uses very little, that person may not have a traditional credit score. Some of the things that affect credit score are payment history, the amount of revolving credit available, length of credit history, and payment history. The bureaus keep their algorithms secret, but the basic rules of good business apply here. If you pay your bills on time, your credit score will benefit. If you use credit conservatively and avoid opening too many accounts, your credit score will benefit. As such, consumers often wonder if a preapproval or series of preapproval applications will lower their credit scores. This is a smart question since lenders do pull credit scores as part of the preapproval process.
When you apply for a mortgage preapproval, the lender will ask you to fill out a standard application. You will be asked to provide your income information, assets, debts, social security number, housing history, etc. You may be asked to provide documentation to validate your information, or the lender might wait for final approval to collect documentation. Your loan officer will also ask permission to obtain your credit report. This credit check is considered a “hard inquiry” because it was initiated by the consumer and could result in new credit.
As stated above, the algorithms that the credit repositories use for calculating credit scores are a big secret. However, Experian does offer a bit of information on the subject. According to the Experian blog, a hard inquiry resulting from a mortgage preapproval credit check might reduce your score by a few points but “this score reduction is usually short-lived.”
Obtaining a mortgage and paying it on time will do good things for your credit score, far outweighing the temporary ding that results from your mortgage company’s inquiry. To get started with a Ruoff Mortgage preapproval, click here.
The United States government updated Fair Credit Reporting Act (FCRA) back in the early 2000s. FCRA now requires that the three bureaus provide every individual one free copy of their credit report each year. The bureaus are not required to provide consumers with their credit score, but you can request it for a fee (usually under $10). Go to www.annualcreditreport.com to get started. Obtaining free copies of your own credit report will not lower your credit score.
If you’ve read this far, you may be interested in improving your credit score. Here are a few tips:
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