SECRETS OF A CREDIT SCORE!

Credit Score

 

Everyday we hear about Credit Scores on the news, radio, on line and on tv.  We see ads for Credit Karma, Experian Boost, Free Credit Report.com. and others.  We hear a lot of noise about Credit Scores, but what is a Credit Score and why does It matter? Many of us know if you are buying a car, applying for a credit card or buying a home Credit Scores matter. Did you know that your Credit Score impacts car insurance, and a poor Credit Score may even hurt your search for a new job?

Your Credit Score helps financial institutions determine your overall credit situation. A Credit Score helps insurance companies, and employers determine your judgment and sense of responsibility. Bad credit can indicate irresponsible behaviors.    If your Credit Score is too low and you have poor credit, you will pay higher interest rates and receive unfavorable terms from lenders. You even may be denied the products and loan programs you desire.

The Secrets of a Credit Score.

If you do not know your credit score, you should visit one of online tools to help you get your Credit Score:   

You can get a Free Credit Report from all three bureaus once a year. This is an important feature as you can monitor your Credit Score independently.
 

What is a Credit Score?

A Credit Score can seem like the “Wizard of Oz”  What is behind the curtain? We know a Credit Score is important, but what determines our Credit Score? Your Credit Score is a three-digit number ranging from 300 to 900 depending on which of the three bureaus, Experian, Equifax or Transunion, calculating the Credit Score. The higher the Credit Score, the more credit worthy you are considered to be. The lower the Credit Score the more risky you are considered by the lender. If you have a higher credit score, you receive more favorable loan terms, lower interest rates and more options are available to you.

What is a good Credit Score? According to Experian Credit Score Ranges are:

  • Poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Very Good: 740-799
  • Exceptional: 800-850.

Many of us are shocked when we learn our Credit Score for the first time. We think “I pay my bills on time and I have lots of credit so my Credit Score is excellent.”  We are surprised to learn paying bills on time is not the only factor determining a Credit Score. In fact, you could pay all your bills on time and still have a low Credit Score!   What if I have a low Credit Score?  The first step is don’t panic.  A Credit Score is a snapshot in time, and you can take action to improve your Credit Score. Working with a  FDM Mortgage Professional can help you in this process.

There are three credit reporting agencies in the United States, which track and maintain credit based activity for American Adults. These bureaus, Experian, Equifax or Transunion, receive data  such as payment history, monthly payment,  current balances and available credit limit from creditors and provide this information to companies that “pull your credit.” The bureaus use several  different models to calculate your Credit Score including FICO, VantageScore and Insurance Score. The VantageScore is the most popular model used. You actually have more than one Credit Score.

 

What Determines A Credit Score?

The most common misconception is that Payment History is the only factor. The reality is Payment History, while the most important data point, represents only  35% of the Credit Score Model. A Credit Score is driven by 5 factors:

  1. Payment History: Represents 35% of your Credit Score. Do you make your monthly payments on time, or do you make late payments? Do you have outstanding delinquent payments?
  2. Amount Owed: Represents 30% of your Credit Score: This is often referred to as “Usage.”  Are your Credit Accounts close to the available credit limit? Even if you make all payments on time a high percentage of debt to available credit will significantly lower your Credit Score.  Pro Tip: You should keep your Credit Card balances below 30% of your total available credit.
  3. Length of Credit: Represents 15% of your Credit Score. The amount of time you have credit established! The longer you have established credit the more positive for your Credit Score.
  4. Type of Credit: Represents 10% of your Credit Score. Different types of credit impact your Credit Scores. Installment loans are favorable while Credit Cards tend to lower Credit Scores.  Pro Tip: Not all Credit Cards are the same. Visa, Mastercard, American Express and Discover are more favorable than Retail Cards such as Best Buy, Macy’s Home Depot.
  5.  New Credit/Inquiries: Represents 10% of your Credit Score.  The number of credit inquiries and new lines of credit opened will impact your Credit Score.

Each month creditors report on your recent activity with their account including Payment history, Current Account Balance, Credit Limit and the Length of Time the account was open. When you open a consumer account such as a car loan or Credit Card the creditor will report this data as well. This data is used by the Credit Scoring models when determining your Credit Score.

 

What Causes A Poor Credit Score?

Each credit scoring model has its own ranges. The Credit Score is based on the five factors discussed above. The factors that drive a poor Credit Score are:

  1. Late Payments especially recent late payments.
  2. Mix of Credit.  The type of credit you have makes a difference. Too many Retail Credit Cards or Retail Loans negatively impact your Credit Score.
  3. Unpaid accounts, Collections or Chargeoffs. These indicate you have not made payments as agreed, and the lender was not paid.
  4. Credit Usage how much of your credit is used. Do you push your credit to the limit?
  5. Too many recent inquiries. This is an indication you may have acquired new debt.
  6. Too many new accounts. This is a sign you may not be able to make planned payments due to too many accounts.
  7. A history of Bankruptcy and Judgements.

You may have a low Credit Score if you have very little credit history, or your credit history is nonexistent. If you have never opened or used a credit account, your credit report is going to be light. With little or no data it is difficult for a credit scoring model to determine a Credit Score.

 

 I Have A Poor Credit Score. What Do I Do Now?

If you have a poor Credit Score, you can take action to improve your Credit Score. A Credit Score is a snapshot in time. You can work to improve your Credit Score:

  1. Review your credit report to determine if the information on the Credit Report is accurate. Credit Reporting agencies make errors.
  2. File disputes to correct any errors you find on your credit report.
  3. Make all required payments on time.
  4. Maintain account balances below 30% of your total credit limit.
  5. Do not apply for new credit unless you need it. Even if the store is giving you 10% off.
  6. Limit the amount of accounts you open or apply for in short periods of time.
  7. If you have a limited credit history, consider a secured credit card.

Improving a Credit Score may take time, but is a worthwhile exercise. Your Credit Score may seem like just three numbers that are determined in secret, but they impact many aspects of our lives. Having a low Credit Score is unnerving, but with commitment, time and effort your Credit Score can improve.   A FDM Mortgage Professional can provide valuable insight on ways to improve your Credit Score.

 

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