Good Credit Report - Bad Credit Report

What is the difference between a good credit report and a bad one?

1 Answer

This is a very broad question with many potential answers.

I will answer in terms of what I, as a mortgage broker, consider to be strengths in a credit report and weaknesses. Keep in mind, there is no clear distinction between good and bad. it is a spectrum, and must be considered with other aspects of a loan.

  1. The first thing is the credit score. A higher score is always better. This is a no-brainer. I can do almost anything with a 720+ score and almost nothing with a 500- score. Averages vary depending on where you are and who you deal with.

Amount of debt. This is important because one of the factors in qualifying for a loan is Debt-to-Income ratio. The higher your monthly payments reflect on your credit report, the more income you must prove in order to qualify for the loan. Lots of debt can make a loan difficult and lower a credit score. As far as qualifying, it's all about PAYMENT and not about balance. As far as credit score, its about the ratio of what's owed to what's available. I don't necessarily think that no debt means it's a better credit report than having some debt. It's more about number 3.

  1. The way debt has been handled. This is about late payments plain and simple. The fewer lates, the better the credit report.

Public records. This is a corollary of number 3. If you have racked up tax liens, foreclosures, bankruptcies and collections, these will show on your credit and they are not good. That said, they won't cripple you if you show that you have rebuilt your history since the negative item occurred. Also, the more distant in the past they are, the better. No public records makes for a better credit report. (Note: in this context, I use "public records" to refer exclusively to negative public record).

Credit Inquiries. Though I, as a broker, don't look at inquiries, they can affect your score slightly.

Depth. Lenders want to see that you have some established credit. Even if you have a 720 score, it might be difficult to get certain loans if you don't have enough credit history. As a lender, I'm looking for a minimum number of active accounts that have been opened a minimum amount of time. In this case, it's not "the more, the better," but rather, "the longer and steadier, without having too much credit, the better."

If you have additional questions, please email me and I will add your question to the credit FAQ.