Understanding Your Credit Score
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This month's newsletter is focused upon credit and credit repair. The recent problems in the mortgage industry have had a significant impact on loan requirements. There has been an across the board tightening of requirements. For the average consumer this simply means it is harder to get a loan, more of a down payment may be required, and the amount of money that can be borrowed has based upon our debt and income is less than what it was a year ago.
The following primer should give you a basic understanding of how your credit score is derived and help you to better manage your credit score.
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2. Understanding Your Credit
- Thirty-five percent of your credit score is based upon your payment history. Consistently being late on your credit card payments will hurt your credit score. Pay your credit card bills on time to preserve your credit score.
- Credit inquiries account for 10% of your credit score. Making several
credit or loan applications
within a short period of time will cause your credit score to drop. Keep applications to a minimum.
Mix of Credit
- Having only credit cards or only loans will hurt your score. The mix of credit accounts for approximately 10% of your credit. When you have only one type of credit account, either loans or credit cards, your credit score could be affected. This factor is especially significant when you have a limited credit history.
Non-payment of Credit Card Debt
- Completely ignoring your credit card bills is much worse than paying late. Each month you miss a credit card payment, you're that much closer to having the account charged off. Always pay something, even if you can't pay the minimum amount.
- When creditors think you're not going to pay your credit card bills at all, they charge off your account. Charge offs are one of the worst things for your credit score. Creditors often use third-party debt collectors to try to collect payment from you. Creditors might send your account to collections before or after charging it off. A collection status shows that the creditor gave up trying to get payment from you and hired someone else to do it.
- Loan defaults are similar to credit card charge-offs. A default shows that you have not fulfilled your end of the loan contract.
- A bankruptcy will devastate your credit score. It's a good idea to seek alternatives before filing bankruptcy. If you have had a bankruptcy, most banks will require you to be two years post discharge before they will consider a extending a loan to you.
- Getting behind on your mortgage payments will lead your lender to foreclose on your home. In turn, the late payments will hurt your credit score and make it harder to get approved for future mortgage loans. Even if you have an acceptable credit score, if you have had more than two late mortgage payments over the past 2 years this may disqualify you with some financial institutions.
- A judgment shows you not only avoided your bills, the court had to get involved to make you pay the debt. While they both hurt your credit score, a paid judgment is better than an unpaid one.
High credit card balances
- The second most important part of your credit score is level of debt, measured by utilization. Having high credit card balances (relative to your credit limit) increases your credit utilization and decreases your credit score.
Maxed out credit cards
- Maxed out and over-the-limit credit card balances make your credit utilization 100%. This situation should be avoided because it will negatively impact your credit score.
Closing Credit Cards
- When you close a credit card that still has a balance, your credit limit drops to $0 while your balance remains. This makes it look like you've maxed out your credit card, causing your score to drop.
Closing old credit cards
- Another component of your credit score, 15%, is the length of your credit history - longer credit histories are better. Closing old credit cards, especially your oldest card, makes your credit history seem shorter than it really is.
Closing cards with available credit - If you have several credit cards some with balances and some without, closing those credit cards without balances increases your credit utilization.
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3. Credit FAQ's
What is a credit report?
Your credit history, and other personal information about you, is collected and kept on file with major credit reporting agencies ("CRAs"), such as Trans Union, Equifax and Experian. CRAs legally sell your credit report information to businesses that, under the law, have the right to obtain and use your otherwise private credit information when, for example, you apply for credit, insurance, or employment. You have a credit record on file at a CRA if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains information about your debts and credit payment history. It also indicates whether you have been sued, arrested, or have filed for bankruptcy.
Annually, over 2 billion credit reports are sold to businesses, so most American consumers have had their credit reports looked at many times each year. However, every year, only a small percentage of consumers ask for and receive copies of their own credit reports. That means that hundreds of millions of consumers who have important decisions made about them daily, based on their credit reports, have never even bothered to look at their own reports.
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What's in my credit report?
Your credit report contains the following types of information:
- Your name, and your spouse's name;
- where you live, where you work, and where you used to work;
- your Social Security number, prior addresses, phone number and birth date;
- whether you've paid bills on time, and how much credit you have available;
- if you've been late with rent or a mortgage payment;
- whether, and to whom, you have made an application for credit or a loan;
- companies who obtained your credit report; and
- bankruptcies, foreclosures, court judgments, convictions or tax liens.
Any particular company may not necessarily use all of these items in making determinations based on such reports.
What is a credit or insurance score?
The terms credit score or insurance score refer to a system used by companies to assist in determining what they consider to be a consumer's creditworthiness, insurability, or employability. Businesses use a variety of formulas to translate a consumer's credit information into a credit or insurance score. They may, for example, help predict how creditworthy the consumer is as compared to other consumers.
Who are the major credit reporting agencies?
There are three major credit-reporting agencies in the country, each of which probably has a credit file on you. They are Trans Union, 1-800-916-8800, www.transunion.com
; Equifax, 1-800-685-1111, www.equifax.com
; and Experian, 1-888-397-3742, www.experian.com
Can I repair my credit report myself?
Yes. You have the legal right to work out your credit disputes with the credit agencies and credit grantors yourself, much like your right as a citizen to represent yourself in court. However, many credit repair firms represent them because of the tools and experience they have at their disposal. Credit repair is a lengthy and time consuming process. Extensive follow-up is required to coordinate disputes with all three credit reporting agencies and the creditors appearing on your credit report.
Can I remove a bankruptcy?
Whether it is a bankruptcy or any other negative listing, all types of listings can be removed if it is questionable and disputable. Nevertheless, negative items such as bankruptcy or unpaid debts are certainly more difficult to remove from your credit report than other listings. This has more to do with the operational systems of the credit bureaus than with the severity of the negative credit listing. For example, judgments and tax liens are severely negative listings, but are considerably easier to remove.
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Is credit repair legal?
Disputing questionable items on your credit report and seeking assistance with credit repair organizations like Credit One is legal. In fact, it is your right by law to do so. In Sec 402(a), Title IV of The Consumer Credit Protection Act, Congress makes the following findings: .(1) Consumers have a vital interest in establishing and maintaining their credit worthiness and credit standing in order to obtain and use credit. As a result, consumers who have experienced credit problems may seek assistance from credit repair organizations, which offer to improve the credit standing of such consumers.. Using a variety of strategies, Credit One will advocate for your consumer rights.
Does paying my bills restore my credit?
The credit reporting system just doesn't work that way. When you pay an old debt, the negative credit listing doesn't disappear. Once paid, it may appear on your credit report as a paid delinquency, charge off or collection which will still affect your credit negatively. In addition to paying your bills, you must also work to restore your credit as the same time.
Do I need to pay my bills?
If there are delinquent account listings appearing on your credit reports that have not been paid off, the actual debt behind the listing will remain the same, even if the account is deleted from your credit report. If it is a valid debt, you may still owe it, subject to your state's applicable statute of limitations. If you don't pay the debt, the creditor or a collection agency may re-report the item. Removing the listing without addressing the debt is only a temporary solution. You should dispute credit listings that are inaccurate, unverifiable or misleading. If a negative credit listing is accurate, timely and verifiable, then you shouldn't dispute it.
What if deleted items reappear?
On occasion, a negative listing that was recently deleted may eventually be verified by the creditor. The Fair Credit Reporting act requires the credit bureaus to inform you before they re-report a previously deleted listing. The FCRA also makes it more difficult for credit bureaus to re-report listings. Because of these factors, it is fairly rare for listings to come back on once they've been deleted. If a questionable credit item is re-reported, it is a simple matter to challenge the listing again at a future time to press for permanent
Free Credit Report (as mandated by the government)
More Fico information, Tools and Calculators
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