For real estate investors, there is probably no more important element for success than the ability to obtain financing, and that is largely dependent on your credit history. It is extremely important to know what is in your credit reports and what your FICO® scores are (see below).
The most familiar component is the credit reporting company. There are three major credit reporting companies, and their primary function is to act as clearing houses for financial information. Most merchants, lenders, brokers, etc. send information to the credit companies and they in turn compile and sell individual’s financial histories to other merchants, lenders, etc. who may be contemplating extending credit to an applicant. The resulting credit report contains information on past and present residence, employment history, bill payments, and public records such as lawsuits, bankruptcies, arrests, etc.
Credit reports contain four primary types of information:
- Credit accounts such as credit cards, merchant credit accounts, auto loans, mortgages, student loans, etc.
- Accounts that have been referred to collection agencies for recovery of unpaid debts.
- Public records such as bankruptcies, foreclosures, court judgments, tax liens, divorces, etc.
- Inquiries made by providers of credit and certain others when someone applies for a loan, employment, insurance, even a cell phone.
The FairIsaac Corp, (www.myfico.com) compiles a proprietary credit score for individuals based on each of the three major reporting agencies’ data. Lenders and others extending credit seek a standardized and simple way to evaluate credit-worthiness of prospective borrowers and rely upon these FICO (FairIsaac COrporation) scores in determining whether to approve an application and at what interest rate. While borrowers may not consider it fair to be reduced to a three-digit number, that’s the way the world works and we must accept it. It is strongly suggested that you spend some time on the myFico.com website as it is a very rich source of information on this important aspect of your life.
Since it is so important to have “good credit,” periodic reviews of all three credit reports and their associated FICO scores is essential to protect against various types of reporting errors and identity theft. Within certain parameters and with varying degrees of success, credit histories can be “cleaned up,” though some of the techniques used by so-called credit repair firms can be ineffective or illegal. Those seeking to “clean up” their credit should proceed with caution and do extensive due diligence before engaging the services of such companies. Many are outright scams. Platinum Properties Investor Network recommends none in particular.
The 1970 Federal Fair Credit Reporting Act (FCRA) was enacted by Congress to ensure the accuracy and confidentiality of credit reports and prevent the improper use of such reports. Among the provisions of this legislation is a schedule for the length of time certain categories of information may remain on a credit report. For example, certain negative items can be kept on the report for 7 years, including lawsuits or unpaid judgments (where statutes of limitations may also apply), and bankruptcies remain for 10 years. There are no time limits for such things as criminal convictions and information reported because of an application for credit in excess of $150,000 (Refer to
http://www.ftc.gov/os/statutes/fcra.htm for more information on FCRA).
There are three major credit reporting agencies (credit bureaus):
All will provide current copies of your credit report upon request and may require payment of a nominal fee (which may be waived under certain circumstances).
Other websites that provide valuable credit-related information are:
- Credit Reporting Code Of Conduct – privacy.gov.au