Know Your CREDIT?!
There are five elements that comprise a credit score. I wanted to share this with you to help you maximize your savings in the future by improving your credit scores. The advice on the payment history component of the credit score is obvious to most everyone. However, the advice on how to improve the other areas of a credit score may come as a surprise to many people. If you have any questions or just need some help on a personal level with any of this, please feel free contact me.
PAYMENT HISTORY
Payment history is the number one factor in credit scoring accounting for approximately 35% of the score itself. Here are some tips for improvement…
1. Pay your bills on time (Hopefully this needs no explanation.)
2. Get current and stay current. Once again, obvious advice, but it is important to understand that recent delinquent payments are much more destructive to the credit score than older late payments. Time heals almost all wounds and late payments are one of those wounds.
3. Collection accounts can be the single most devastating factor to the credit score of a truly creditworthy borrower. Specifically collection accounts that have been paid off yet they still show a balance on the credit report. If collection agencies were as vigilant about accurate credit reporting as they are about harassing people in an attempt to try to collect a debt, our lives would all be a little easier. Taking the proper steps to have these accounts show up as paid in full instead of with a balance owing can be the difference between a 680 and a 580 score. Re-aging of collection accounts is also a very important consideration. Since recent activity is so important, a favorite trick of collectors is to re-age old accounts to show recent activity. A five year old collection showing as outstanding balance will probably have far less negative impact on a credit score than if that account were paid now and showed as a current activity collection account paid off. The decision of whether or not to pay off an old collection account is one that should be handled with the advice of an expert and on a case by case basis.
AMOUNTS OWED
Amounts owed accounts for 30% of a credit score. Here are some tips and advice on how to improve in this area…
First, keep in mind the term “hierarchy of credit”. In other words, there is good, more important, credit such as mortgages and other installment debts like car financing and student loans. Revolving debts such as credit cards are viewed more negatively by the scoring systems.
And while a mortgage is the best type of debt to have, it is also the worst to be delinquent on. Conversely credit card debts will hurt the credit score, but a late payment on revolving debt will do less damage to the score than late payments on installment debts.
The primary factor in the “amounts owed” contribution to the credit score is the total revolving debt owed divided by the total available revolving credit. Scoring systems will also evaluate how those ratios look on each individual revolving account.
For an optimal credit score, revolving balances should be below 30% of the credit limit for each account. As soon as even one account has a balance of over 30% of the limit, then the damage to the score begins and it continues at other thresholds once the balance reaches 50%, 70% and 90% of the credit limit.
LENGTH OF CREDIT HISTORY
Length of credit history accounts for 15% of a credit score. Here are some helpful bits of knowledge to assist your customers to improve their scores…
1. Do not open several new accounts too rapidly, especially for younger people with a relatively short credit history to begin with. Rapid buildup of credit appears risky and will hurt the score.
2. New accounts will lower the average age of a person’s accounts thereby reducing the credit score.
3. Avoid closing accounts that you have had for a long time. When the account is closed, it no longer factors into the history component of the credit score and by closing it you could shorten the length of your credit history and hurt your score.
4. Adding someone to a long established account as an “authorized user” will instantly score points for them as it will increase the length of their credit history as long as the account is in good standing and the balance to credit limit ratio is low.
5. Keep in mind that a credit score is based entirely upon an individual’s credit history. Income, Assets, Race, Sex, Age and Religion are not factors.
NEW CREDIT
New credit accounts for 10% of a credit score. Here are a few tips for score improvement….
1. A credit “inquiry” is generated any time a potential creditor checks your credit. Too many recent inquiries into your credit can hurt your score. However, inquiries don't affect credit scores nearly as much as the public has been led to believe. For most people, one additional credit inquiry will take less than five points off their credit score. However, a single inquiry can have a greater impact if you have only a few accounts or a short credit history. In other words, the system is designed to flag inexperienced borrowers who could be in danger of overdosing on the ecstasy of credit.
2. Large numbers of inquiries also mean greater risk. People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports according to Fair Isaac Corporation.
3. If shopping for financing, try to do it all in a short period. Credit scores distinguish between a search for a single loan and a search for multiple new lines of credit. In other words, if you go car shopping on a Saturday and every dealer on “car row” in your town checks your credit, it will only count as one inquiry. On the other hand, if you apply for twelve credit cards in the same month your score will plummet from all of the “separate” inquiries that indicate potential risk.
4. Mortgage related inquiries within the most recent 45 days are scored as just one inquiry. This is a recent change from older scoring models that were retired in August of 2006 which only allowed for a 14 day “inquiry window”.
5. Requesting your own credit report will not affect the score if you obtain the report directly through one of the three reporting agencies or through an organization authorized to provide credit reports to consumers.
TYPES OF CREDIT USE
Types of credit use accounts for 10% of a credit score. Here are a few tips to improve the score.
1. Use caution when opening new accounts just to have more available credit. This strategy can backfire if the balance is run up. Otherwise, having more available credit to offset any outstanding revolving balances can have a remarkably positive effect on your score.
2. There is no perfect number of accounts to have for optimal credit. The rule of thumb is to have a balance of installment accounts versus revolving accounts. All other factors being equal, someone with 5 installment accounts to offset 5 revolving accounts will have a better score than the person with only 5 revolving accounts. Likewise, many people with very high credit scores have 10 or more revolving accounts, because they also have a healthy number of installment accounts reporting.
3. Closing accounts will not make them go away. They will still stay on the credit report for seven years.
HOW TO FIX A CREDIT REPORT
In order to fix incorrect credit information, a consumer has three choices…
1. The first choice is to deal with the creditor directly and rely on them to update the credit information to all three bureaus. This is easy; however, like so many “easy ways out” it does not always work because creditors are not always reliable in correcting information with the credit bureaus.
2. The other choice is for people to take matters into their own hands. This option is far more time intensive, but the results will usually be far better in the end. The customer must contact all three bureaus directly and work through the bureaus to correct the information reflected in the credit report. The entire process takes 45-60 days.
Always keep any documentation you get from any creditor regarding an account being paid in full or a problem being corrected. In the event it would ever show up again, you have the documentation at your finger tips rather than starting from square one to prove your innocence.
How to contact the 3 credit bureaus:
Equifax
1-800-685-1111
PO Box 740241
Atlanta, GA 30374-0241
www.equifax.com
Experian
1-888-397-3742
701 Experian Parkway
PO Box 2002
Allen, TX 75013
www.experian.com
Trans Union
1-800-888-4213
2 Baldwin Place
PO Box 1000
Chester, PA 19022
www.tuc.com
3. The third option is to utilize the services of a reputable credit repair service. This is the most expensive and time consuming method, and it is also the most effective. This investment can pay off more than a hundred times over for some consumers.
