Credit Score “Secrets”
Payment History (35% of the credit score’s weight)
1) The fewer lates, judgments, liens or collections, the better.
2) Recent derogatory items are more indicative of future default than those that occurred 24+ months ago.
3) The severity of a delinquency (how far past due) will impact the score.
Amounts Owed (30% of the credit score’s weight)
1) Low balances on several credit cards are better than high balances on a few cards. Balances on your cards should be kept below 50% of the credit limit. Keep balances as close to zero as possible for optimal score.
2) Too few or too many credit cards can be detrimental. WARNING: DO NOT CLOSE ANY OF YOUR ACCOUNTS WITHOUT FIRST DISCUSSING YOUR COMPLETE CREDIT PROFILE WITH YOUR MORTGAGE PROFESSIONAL. YOUR SCORE COULD GO DOWN!!
Length of Credit History (15% of the credit score’s weight)
1) The longer accounts have been opened, the lower the risk indications are about you.
2) Opening new accounts and closing your seasoned accounts will negatively impact your score. AVOID “credit surfing.”
3) There must be accounts with recent activity in order to get a credit score.
Types of Credit in Use (10% of the credit score’s weight)
1) Finance company accounts will score lower than the accounts you secure through banks ordepartment stores. (Appears that you could not qualify for a better type of credit)
2) “90 days same as cash” and deferred payments generally are funded by finance companies.
New Credit (10% of the credit score’s weight)
1) Looking for new credit can indicate higher risk...
2) Multiple inquiries, regardless of the number, for mortgages, in a 45-day period of time, only have the impact of a single inquiry.
3) Promotional or administrative inquiries shown on your consumer credit report DO NOT adversely impact your score. Only authorized inquiries will impact your score.
WHAT DATA DO SCORES CONSIDER?
Scoring models DO NOT Consider - Race, gender, religion, marital status, income, nationality, neighborhood, employment history, position or title, sexual preference, or interest rate being charged on a particular card.
Scoring models DO Include - ALL the credit information stored in the repository’s credit file on you at the time of the request, NOT just the negative credit information.
How does credit scoring help you?
Credit scoring is not a crystal ball. But, it offers real benefits to both lenders and consumers:
• People get loans faster – Scores are delivered instantly and credit decisions are sometimes made within minutes.
• Credit decisions are fairer – Scores are completely objective. They can’t consider factors such as gender and race.
• Scoring speeds up credit decisions. Lenders can make decisions more rapidly, and often with less documentation.
• Credit mistakes can’t last forever. With scoring, past credit problems count against you much less.
• Scoring helps make more credit available. Lenders using scoring can approve more loans and offer a wider variety of options based on risk level.
Credit Myths!
MYTH: It is impossible /takes forever to dispute information on my credit file. FACT: By law, the bureaus have only 30 days to complete an investigation on your credit file – all you have to do is request it!
MYTH: My bad credit will haunt me forever. FACT: By law, negative information can only stay on your credit file for seven years (bankruptcies for 10 years). Also, the past 24 months are the most sensitive – older negative info will hurt your score less than more recent information.
MYTH:
It doesn’t matter when I pay a collection, because as soon as I pay it, it will be removed from my credit report. FACT: It’s best to pay a collection as soon as you’re aware of it. If you wait to pay a collection, the date will remain current affecting your score more severely. Also, paying it does not remove it – it will remain on your file as a paid collection, which is still a derogatory item.
MYTH: My score will drop if I apply for new credit (inquiries). FACT: Inquiries are a very minimal part of your score calculation. Also, multiple inquiries from mortgage or auto lenders within a short period of time are typically treated as a single inquiry.
MYTH:
It doesn’t matter how high my credit card balances are, as long as I make my payments on time. FACT: Maxed-out credit cards are viewed as a negative item. Try to keep balances at or below 30% of your available credit.
MYTH:
It’s a good idea to open up an account if I’m offered a discount at the store or 0% interest for a few years. FACT: Opening up a new account through a finance company has a negative impact on your score. On top of this, it will likely be reported as a maxed-out revolving account – another negative factor!
MYTH: I should close out old accounts I don’t really use any more. FACT: Those old accounts show nice long payment histories and add positively to your credit. Your score is based on both positive and negative credit. Keep them open and use them every six months or so just to keep them active.
MYTH: If I co-sign on a loan, it won’t affect my credit. FACT: By co-signing, you are signing on as a responsible party for that loan. It will affect your credit!
MYTH: Lenders will judge me based on my credit score alone. FACT: While a credit score is an important factor, lenders also look at factors such as your debt, income and employment history.
MYTH: If I dispute my information with one bureau, they will send the updated info to the other two. FACT: The bureaus don’t share information, so it’s up to you to contact all three bureaus.
What is included in a credit report?
A credit report is a person’s credit history as reported by the three major repositories: Equifax, Trans Union and Experian. This includes the credit accounts obtained through banks, retailers, credit card issuers, etc. The report includes any public records such as judgments, tax liens or bankruptcy.
The credit report will also show inquiries: the names of companies who have obtained a copy of the borrower’s credit report for any reason. A consumer’s inquiry into his or her own credit report will not be reflected.
What will not appear on a credit report is any information pertaining to race, religion, personal assets, medical history or criminal record. Not all credit grantors report to all three bureaus. Some do not report to the bureaus at all. Because of this, some information may not be included or may differ in each bureau’s version of the report.
Payment History
Creditor grantors supply payment history on your credit file. This includes both open and closed accounts. Payment in full does not remove your payment history. The length of time information remains in your credit file is as follows:
Credit and Collection Accounts
• Open accounts paid as agreed may remain on your credit profile indefinitely.
• Negative credit history is removed after 7 years.
• Collection accounts remain 7 years from the date placed with the agency.
• Charged off accounts remain for 7 years from the date of last activity.
Court Records
• Bankruptcies remain for up to 10 years.
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Paid tax liens remain for up to 7 years from the date released; Unpaid tax liens remain indefinitely.
• Judgments remain for 7 years from the date filed
Reported Balances
Is the balance on the date the credit grantor reported the information. Credit grantors supply information on a periodic basis, so the balance shown may not be the balance you know it is currently.
Inquiries
Inquiries will remain for up to two years, will impact a person’s credit score for one year, and will only appear on a mortgage credit report for 90 days.
Credit Report Usage
The Fair Credit Reporting Act (FCRA) is the law that governs the repositories and credit reporting agencies. The Federal Trade Commission enforces the FCRA. The FCRA outlines permissible reasons for inquiring into a person’s credit:
• In connection with extending credit
• Review or collection of an account
• Response to a court order, in accordance with written instruction
• Insurance underwriting, or otherwise legitimate business need.
• Employment Purposes
• To determine eligibility for a license or other benefit granted by a government instrumentality.
Divorce Decree
A divorce decree does not supercede an original contract with a creditor nor does it release you from legal responsibility on any accounts. You must contract with each creditor individually and seek their legal binding release of your obligation. Here are some tips for divorcees:
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Communicate with creditors – ask the company to transfer the debt into one spouse’s name.
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If creditor won’t transfer debt – Close out all joint accounts – move balances from joint accounts to individual accounts, refinance mortgages and car loans; close credit cards to further charges.
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Keep joint bills current, even if it means picking up spouse’s share of the debt – if you don’t creditors will be less likely to release one party from joint liability.
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Get a copy of your individual credit report so you know exactly what debts are owed, and continue to check on a regular basis to confirm changes are made.
Credit Denied
If you have been denied credit, employment or insurance based upon a credit report, you have the right to receive a free copy of your credit report. You must provide to the repository a letter that proves you’ve been declined.
Disputes
You have the right to request any/all bureaus investigate any item you feel is being reported inaccurately. The repository will contact the creditor to confirm the data in their records. If the information is inaccurate, or if the creditor does not respond to the inquiry within the allowed 30-day time frame, then the information on the credit report will be corrected or deleted. You will be notified in writing upon completion of the investigation.
Your credit report will not be changed if the information is verified as accurate. Only inaccurate or outdated information can be removed from a person’s credit file. Accurate credit information, even if it is negative, must remain.
Beware of offers of “Credit Repair”. Only time can heal bad credit!
However, if you still disagree with the information reported you do have the right to add a dispute statement to your credit file. You can request the repository provide a revised copy of your credit report to any creditor that reviewed your file in the previous six months, or two years if the inquiry was made for employment purposes.
As Fair Isaac and Company (FICO) does not publish the formula/s used to determine credit scores: My sincere thanks to Southwest Credit Services, Inc. for sharing this information with all of us. It is only through their experience I am able to provide this data for you. It is deemed accurate to the best of their ability. It cannot be guaranteed by me or Southwest Credit Services, Inc.
