Credit Scoring

1. What Makes Up A Credit Score

We now understand having a good credit score is very important to secure low interest rates, but what makes up your credit score? The answer is more complex than you may imagine. Many people think that if bills are paid on time then they must have perfect credit. This is false because there are five main areas that make up your credit score.

Thirty five percent of your score is made up of payment history. Payment history is broken down into various areas. There are public records, collections accounts, delinquency accounts, and accounts that are paid as agreed. It sounds confusing but below I have broken it down for you.

Public records: This will include bankruptcies, foreclosures, judgments, liens, wage attachments, etc.

Collections accounts: Any and all accounts that have been turned over to a collection company. If an account has not been paid for a certain amount of time (typically 90 to 120 days) the creditor will sell to a third party agency for collection of the debt. At that point the account is considered an R9 rating or a charge off.

Delinquency accounts: These are also known as past due accounts. Your credit report will reflect how long you have not made payments on all accounts.

Accounts that are paid: On your report you will notice an account that has not been delinquent will be reported as paid as agreed. This is how you will want all accounts reported as.

Another important factor to maintaining a good credit score is keeping your debt level low. Your credit cards should not carry more than 25% of the limit. For instance, if you have a $1,000 limit on a card your balance should stay below $250.

The problem that many cardholders are facing right now is that banks are lowering credit limits on many cards and loans. Lowering credit limits is affecting a borrower credit score drastically. For example, you have that card with a $1,000 limit and had a balance of $200 you were 20% maxed which helped your credit. Suddenly without notice your bank lowers your limit to $400 now you are 50% maxed out which will negatively impact your credit. You will notice a decrease in your score immediately.

The question that lingers in our minds is can the banks do this? The answer is yes. The Government is in the process of passing a credit card reform, which will put guidelines as to what the creditors are allowed to do. Prior to that fully going into effect the banks are trying to make as much money as possible. Additionally they are lowering limits on people in hopes that the borrower will go over the limit and then fees can be charged. To avoid this scenario try to keep credit card balances as low as possible.

Having a couple credit cards will help you build credit, while on the other hand having too many cards will negatively affect you. Credit bureaus will lower your score if you are carrying too heavy of a debt load on numerous cards. The best advice is to have a few credit cards and keep them all under 25% of the limit allowed.

Has anyone ever told you that no credit is worse than bad credit? If they have then they are 100% right! Someone who has mediocre credit has an advantage over the person who has no credit history. You may wonder why; the answer is simple there is no record of that person. According to the lender they never existed in the credit world until now. The lender must take a huge gamble in extending any money to this person. Whereas the person who has not so perfect credit is a high risk and the lender knows that and is able to take the precautions necessary to decrease the risk of default.

It is imperative to build a credit history. The best way to do that is to get one credit card and use it sparingly. Anytime you use credit you want to be sure you are not living beyond your means. Only purchase what is affordable. Many times individuals get into credit card debt because they choose to charge a luxury to have it immediately instead of saving up for it. Using credit wisely will help you build a good credit score.

Do you take advantage of applying for a credit card to get a discount on your purchase at a store? If you answered yes then you are negatively affecting your score each time you do. Any time you give someone permission to pull your credit your score takes a drop. The term for this is referred to as an inquiry. There are hard inquiries and soft inquiries. A hard inquiry is you giving permission to pull your credit and this does count against you. Soft inquiries are when your credit is pulled without your permission. Even though these do not count against you they will reflect on your report. The only person who can pull your credit without is hurting your score is you. You can pull your own credit as often as you wish and it will never hurt you.

The final ten percent of your credit score is made up of the types of credit that you use. Mortgages and car loans will weigh heavier than credit card debts. Missing a payment on your mortgage will greatly reduce your score, whereas missing a payment on your credit card will affect your score but not as greatly. The bureaus will take into consideration all types of debts that you carry including, but not limited to, mortgages, loans, and credit cards.

2.Benefits of Credit Scoring

Approvals Quicker: Gone are the days where you had to supply a lender with proof of income and other personal information and then wait days or even weeks while everything was processed. Most financial decisions are now made within minutes due to credit scoring. Once you apply for a loan or credit card the only step the lender must take is to request a copy of your credit report and usually very shortly after you find out if you qualify.

Personal Feelings are discounted: Lenders only rely on the facts in your credit report to approve or decline you the loan. Race, gender, age and other factors are not taken into account. It gives everyone an equal opportunity.

Increase of credit availability: Lenders are able to extend more credit due to the fact that they are aware of who is high risk. Without a credit scoring system anyone would be able to get credit and then the default rate would increase, which in turn the banks would lose money or even go bankrupt. If this happened no credit would be available for anyone and the economy would suffer greatly.

3. Tips to improve your score

Throughout this newsletter we have gone through why credit is important and how to maintain a good credit score. The most important thing you can do as a consumer is be vigilant. Stay on top of your credit report and fix any errors immediately. Over 65% of consumers have errors on their report and do not even know it. It could be something as simple as a bill that was paid but still showing a balance. A simple letter and ten minutes of your time will improve your score.

Understandably, too many Americans have turned to plastic to cover daily expenses, however this does not have to define your credit score. Take the steps to improve your score and reduce your debt.

Pay your bills on time. Stay current and if you have missed a payment make it up.

Get help if you need it. Contact a credit counseling service if your creditors will not work directly with you.

Don't juggle cards. Opening a new card to pay off the old ones will actually hurt you more than help. This will affect your score in two ways. First you are allowing someone to pull your credit, which lowers your score. Furthermore, you are opening a new card, which will increase your overall debt load, and revolving accounts.

Shop for a mortgage within a 30-day period. Mortgage companies will pull your credit in order to approve you for a loan. The bureaus will only count this against you one time within a 30-day period regardless of how many mortgage companies hit your credit.

Only open cards that you need. Having many cards will not help your credit. Having a couple and paying them as agreed will improve your score.

Pay down your bills. Take advantage of the no prepayment penalties available through most mortgages and cards. Not only will it improve your score but also it will save you a lot of money in interest.

Use your oldest card. Keep in mind if you have not used a card in a while the creditor will stop reporting it to the credit bureaus. Make a small purchase and pay it off right away. It establishes good payment history and length of credit history all in one swipe.

Pull your credit report and dispute any information that is inaccurate. Credit bureaus must respond to you within 30 days or the item will be removed until is proven accurate.

What are the three credit bureaus and how do I contact them?

TransUnion P.O Box 2000
Chester, PA 19022
800-916-8800
www.transunion.com

Experian 475 Anton Blvd.
Costa Mesa, CA 92626
888-243-6951
www.experian.com

Equifax Credit Information Services, Inc
P.O. Box 740241
Atlanta, GA 30374
800-685-1111
www.equifax.com

Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us - to reserve your seat contact our Education Team on 561-883-2398 Ex.310

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