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Credit Basics

Unless you are in a position to make a cash purchase, you will need to be familiar with your credit report and credit scores. You will need to know that there are three credit bureaus and five factors the bureaus consider to calculate a credit score.

A credit report is compiled data of companies that have extended credit to you, the amount of open credit you have, and the amount of credit currently in use. The report also includes companies that have recently asked to view your credit, your current employer, and your current and past addresses.

credit basicsThe three U.S. credit reporting companies are – Experian, Trans Union, and Equifax. Each agency collects and records information about your credit and financial obligations that are provided to them. Information gathered includes your repayment history, status of current accounts, new credit inquiries, collections, number of paid accounts, and so forth. They can also contain information gathered from public records such as liens, judgments, bankruptcies, child support obligations, etc.

If you haven’t already requested your credit report this year, you may do so now by visiting the website annualcreditreport.com. The secure site is the official online site maintained by Central Source, LLC and sponsored by Equifax, Experian and Transunion as the centralized source to obtain all three reports.

If you have already received a copy of your annual credit report earlier in the year, you can still request copies of credit reports direct from all three bureaus (at a cost), but these reports will not contain your credit scores either.
It is very important that you review a copy of your credit report from each bureau since mortgage lenders will be reviewing all three. This should be your first step in your journey to purchase a home, because you will want to have an opportunity to privately review the information contained in each report. You do not want wait until you are in the middle of a transaction to rely on a well-intentioned person telling you a bit of derogatory information won’t matter a whole lot, when in fact that ding may prevent you from qualifying for the best terms available.

If you find any inaccuracies or outdated information, you may submit a dispute yourself and get the report corrected as I will explain later. A correction of an error can boost your score and mean the difference in rates or programs for which you qualify.

A credit score is a number generated by each bureau for each person that has a credit file. The score is the result of an analysis of a person’s creditworthiness, and each bureau has their own scoring formula. If you do not have a credit history, you will not have a credit score. Loan programs available to you as well as interest rates will be tied to your score and your credit report. If you do not have a score, you will not be able to get traditional financing.

There are five factors that determine credit scores: payment history, amounts owed, length of credit history, types of credit in use, and new credit. Since the formulas and the file information are different at each agency, you will most likely receive a different credit score from each as well.

The bureaus only evaluate credit and payment history that they have accumulated. A credit score does not consider income, and it does not consider loans or debts not reported to the bureaus -whether paid or unpaid. Also, sometimes credit information is provided to one or two bureaus and not all three. Since each bureau may receive different information, there may be a wide variance in the credit score number for the same person as a result.

Scores are updated monthly and will change according to the amount of credit used, length of time accounts have been opened, late payments, inquiries, and any derogatory information i.e.- collections, judgments, liens. It’s very important before beginning your process that you know your credit score and review your credit reports so you can ensure all information is correct. Omitting potentially negative information that should not be on a report may raise your score. Higher scores usually mean qualifying for lower interest rates and higher loan values.

So how do you get a copy of your credit score? You have a couple of options. You may call a company with whom you have a current credit card to see if they provide that service. You may also request a credit score from the reporting agencies that create or distribute them, but you will have to pay for it.

Lastly, you may purchase a report and score online, or you can go to creditkarma.com and obtain your scores through them. CreditKarma.com currently does not charge for copies or reports or scores.



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