Analyzing Credit Reports

Lenders and creditors analyze an applicant's credit history to forecast the likelihood that the prospective borrower will repay the requested loan amount. The theory is that credit histories demonstrate the consumer's ability to manage debt and that past history is a strong predictor of future performance. Lenders accomplish this by grading the applicant's credit history.

A sample credit report is available for review and comparison. This article contains two parts:

  1. Structure of the credit report. The first half reviews the contents of a credit report.
  2. Grading a credit report. The second half discusses how a credit report is graded.

Credit reports display the applicant's recorded history for up to ten years. By law, consumer credit may remain on a consumer's credit report for only seven years. Judgments—such as bankruptcies, foreclosures and lawsuits—and debts owed to the government usually remain for up to ten years. When grading an applicant's credit history, mortgage lenders place the greatest emphasis on the most recent 24-36 months.

The mortgage lender receives most of its credit reports from a credit reporting agency, which produce credit reports by gathering information from the large national credit depositories such as TransUnion, Experian (formerly TRW) and CBI/Equifax. These depositories, in turn, receive their data from creditors and lenders.

Note that lenders will also order their own credit reports from different sources.

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