A credit report is a history of your credit activities compiled by the three credit bureaus, Equifax, Experian and Trans Union. It lists credit accounts that you have, such as mortgages, auto and student loans, plus credit cards, their balances and payment requirements. If you don't pay your bills, it can show actions taken against you as well as some public records, such as bankruptcies and tax liens. It also lists those who recently have obtained a copy of your credit report (called inquiries).
Just as important is what a credit report does not show. It does not show your income. It also does not reveal your assets, such as bank accounts and the address of real estate you own. It does not show your utility accounts and usually doesn't show rent payments. It does not contain any personal information other than your name, current and previous addresses, Social Security number, date of birth and current and previous employers.
That means it contains no information about your race, medical history, personal lifestyle or criminal record. Finally, the report only shows information that was reported to the credit bureaus. If a creditor doesn't report the information, it will not appear on your credit report.
The credit bureaus use your credit history to compute a "credit score." Most creditors using the FICO credit scoring model, thus the term "FICO score" is used synonymously with credit score. FICO scores range from 300 to 850 (higher being better), and each credit bureau computes its own version of your score. While the exact formula used to compute the scores is secret, the score's developers have identified the following factors:
Whether you pay your bills on time
How much of your available credit you are using ("credit utilization")
Age of your credit accounts
Types of credit used
Recent credit inquiries
(We will cover these factors more next week when we discuss qualifying without perfect credit.)
So, this begs the question — what FICO do you need to qualify for a mortgage? The answer can depend on the mortgage program you intend to use. However, we're seeing most lenders gravitate towards a minimum middle score of 620 to 640. (Middle means that of the three credit bureau scores, ignore the lower and higher.)
This link references a reasonably good list of available services and whether the services provide a FICO or FAKO score.
Interestingly, government loan programs allow for much lower credit scores (500 for FHA, no score minimum for VA), but lenders generally are not allowing these lower scores because lower scores typically correspond with greater risk of non-payment. Lenders fear the government will force them to buy back the loans if they default.
A word of caution about credit scores: many companies sell consumer credit scores, but rarely are these FICO model scores, which is the scoring model used to qualify you for a mortgage. In the industry we call them "FAKO" scores because they are not based on the FICO model. While these scores and the services through which they're offered can be useful for monitoring your credit, they rarely are indicative of your FICO score.
Many consumers have complained to us that the FAKO scores are much higher, leading them to believe they will qualify for a mortgage or a better interest rate. This link references a reasonably good list of available services and whether the services provide a FICO or FAKO score.
Credit reports can contain errors, but according to a recent study, the incidence of errors and the likelihood that they will affect your ability to qualify are fairly small. We will discuss correcting errors on your credit report in two weeks.
So what do you do if you don't have perfect credit? Next week we will cover steps you can take.