About Your Credit

Purpose of Credit Score
If You Need To Get a Credit Score
Calculation of Credit Score
Factors That Affect Scores
Bankruptcies and Collections
Establishing Credit History
Credit Report Companies
Common Myths

Purpose of Credit Score

The purpose of a credit score is to predict the likelihood that a person will get a 90 day late within the next 24 months. With the FICO model, scores will range from 300 to 850. The top 4 factors that affected the score will be listed under the score. The median credit score is 720. 15% of the population is above 790. 1% of the population is below 500.

If You Need To Get a Credit Score

  • One open trade line.
  • The tradeline must be 6 months old.
  • The tradeline must be updated by the creditor and sent to the a credit bureau within 6 months.
  • Your Social Security number cannot be associated with suspicious or fraudulent activity.

Calculation of Credit Score

There are 10 different profiles that people are put into to score their credit. Eight of those profiles are for those with good credit. Two of those profiles are for those with bad credit (someone who has had a 90 day late). The worst of the 2 bad profiles is for those with public records.

Factors That Affect Scores

35% Payment History
30% Balances
15% Credit History
10% Type of Credit
10% Inquiries History

Payment History

  • Recency
    • 0 - 6 Months - Very Bad
    • 7 - 23 Months - Bad
    • 24 Months - This is when the score will start to improve
  • Frequency
  • Severity

Balances

  • Considers balances on revolving accounts not installment loans.
  • Revolving balances greater than 50% of the limit will affect the score adversely.
  • Revolving balances greater than 75% of the limit will severely affect the score adversely.
  • It is generally better to have some small balances than to have all zero balances.
  • American Express has no high balance limit. They report the higher of last month's balance or the current month's balance as the high credit limit.

Credit History

  • Length of time someone has had credit.
  • Age of oldest tradeline.
  • Number of new tradelines.
The ideal number of tradelines is 3-5 depending on the length of time someone has had credit. Opening new accounts affects the calculation for how long someone has had credit.
  • 1 card for 10 years = 10 year history
  • 1 card 9 years, 1 card 1 year = 5 year history
    (Total of 10 years / Total of 2 cards)

Type of Credit


Ideally, there should be a healthy mix of revolving and installment accounts. The credit score will reflect all accounts - open & closed. A home equity line will be treated as an installment account rather than a revolving account in some cases. The high credit limit is a factor. When a home equity line is treated as installment debt, the ratio of balance to limit will not have an adverse affect.

Inquiries


5 - 7 inquiries per year is an acceptable amount. Each inquiry will reduce score between 5 and 15 points, depending on overall credit profile. Some inquiries (such as finance company installment accounts) can reduce score by as much as 20 to 30 points.Promotional inquiries do not hurt score.

Bankruptcies and Collections

When there are public records, the score is determined mainly by the recency of the public record.The percentage of tradelines that are part of the bankruptcy affects the score. Scores can improve during bankruptcy if payments are made timely on the other tradelines that are not part of the bankruptcy.Credit scores can go down after a judgment is removed because it shows as recent activity for a public record item. Also, the other credit items could then be more heavily weighed. Suggestion: Pay collections or judgments at closing.To remove collection item from credit report: get a letter from the original creditor stating that the account should never have gone to collections.Even if a debt is assigned to one spouse in a divorce agreement, if the account was originally opened as a joint account it will reflect on the credit reports of each person. To mitigate potential tarnishment of credit, the spouse not responsible according to the divorce agreement should send a letter to the credit bureaus stating the arrangement supported by a copy of the divorce agreement.Bankruptcies will stay on the credit report for 10 years. State tax liens will stay on the credit report for 7 years after they are satisfied. Public records will stay on the credit report for 7 years.

Establishing Credit History

A secured credit card is a way to get credit when there is a problem in the credit history. Because of the collateral that is pledged, there is usually not an inquiry to obtain the account.Becoming an authorized user on someone else's card will establish a history for the authorized user. Each party is then liable to have their score affected by the others use of the account.

Credit Report Companies

First American Credco1-800-255-0792
Kroll Factual Data1-800-929-3400
Credit Plus, Inc.1-800-258-3488

Common Myths

Myth: If you catch up on your late payments, it won't show up on your credit report.
Fact: False! Each time you make a payment late you run the risk of the creditor reporting the late payment to the credit bureau. If you catch up, your credit report must show that you are caught up-but it will also show that you were late. And as a result your credit will suffer.

Myth: If you pay a small amount by the due date, it will be counted as a full payment.
Fact: False! You must pay the minimum amount required by the due date. Otherwise you creditor may report the payment as late.

Myth: If you have a good reason for not paying, it will be overlooked.
Fact: False! Contact your creditor if you experience a crisis, like losing you job or becoming seriously ill. You may receive a grace period or a payment plan from the creditor but never assume such an agreement is automatic.

Myth: Bad debts go away after they are paid.
Fact: False! Because credit reports provide a history of your credit, bad debt charge-offs and late payments can stay on your credit report for seven to ten years. You can, however, provide your own explanation of the situation for inclusion in the report to be received by future creditors.

Myth: You're not responsible for debts on joint accounts or co-signed accounts if they are not your purchases.
Fact: False! Any time you are a joint account owner or co-signer, regardless of whether you've paid your share, both parties can be held completely responsible for the payment. It's important to refinance after a divorce since any late payments on a joint or co-signed account will show up on your credit report.

Myth: It's hard to get a copy of your credit report.
Fact: False! You have the right to see what is in your credit report. A copy of your credit report may be free or may cost you a small amount of money. Call us to find out how you can get a copy of your credit report.

Myth: If you have credit problems, your credit score will not improve for seven years.
Fact: False! You can improve your credit score over a shorter period of time because recent entries to your credit report carry more weight!

Source: Freddie Mac, Don't Borrow Trouble - CreditSmart