Credit Score Mystery
If you are like me, the most effort you want to put into math beyond your school years is either calculating how much you can save on double coupon day or picking lottery numbers. But knowing a little math can really help you when it come to understanding, and more importantly, leveraging your credit score.
Understanding how your credit score is calculated, what impacts your score positively and negatively, how to build or repair your credit score and how it is used to make judgments about you can help you in many facets of your life but certainly when thinking about buying or refinancing a home.
As your go to real estate team, Team Lyon has put together a basic overview of Credit Scores and hopefully this will help clear some of the smoke and help you see a bit behind the curtain. Sometimes actions you think will help your score actually hurt it.
If you need more in depth assistance we can recommend a great credit counseling service to evaluate and consult with you on your specific credit report issues and deficiencies. If your credit is in need of restoration services we can advise a company that can assist with that as well. Remember, there is no quick fix and if someone tells you there is you may want to look elsewhere for legitimate services. Since building or repairing your credit takes time it is a good idea to make this step one of the earliest steps in your home buying process.
This article covers the following topics:
o WHAT IS A CREDIT REPORT AND A CREDIT SCORE?
o WHO MAINTAINS MY CREDIT REPORT AND CREDIT SCORE?
o HOW CAN I SEE MY CREDIT REPORT?
o WHAT DO THE FICO NUMBERS MEAN?
o WHAT ARE SOME MAJOR FACTORS THAT AFFECT MY FICO CREDIT SCORE?
o WHO USES MY CREDIT SCORE AND HOW DO THEY USE IT?
o WHAT ARE SOME BEST PRACTICES WHEN IT COMES TO MAINTAINING MY HIGHEST POSSIBLE CREDIT SCORE?
o HOW CAN I BUILD CREDIT WHEN I DON’T HAVE ANY?
o SOME TIPS TO REMEMBER
WHAT IS A CREDIT REPORT AND A CREDIT SCORE?
Your credit report is a collection of information about your credit use and your repayment history. Your credit score is a number based on your individual data as it relates to your credit profile and represents your creditworthiness.
WHO MAINTAINS MY CREDIT REPORT AND CREDIT SCORE?
Credit Reporting Agencies are private companies with no legal authority and are not a part of any government entity. They are in the business of selling credit information to creditors and lenders.
HOW CAN I SEE MY CREDIT REPORT?
By way of the Fair Credit Reporting Act, you are entitled to a free copy of your credit report once every 12 months. We recommend requesting a report for each of the 3 Credit Reporting Agencies (Transunion, Experian, Equifax) at different times during the year to maximize your free reports. You can go to this website to request your free report. https://annualcreditreport.com
NOTE: The report you get as a free report shows a 2 year history, but a lender will pull a 10 year history plus a FICO score. For more on FICO scores go to myFICO.com.
WHAT DO THE FICO NUMBERS MEAN?
FICO Credit Score ranges:
**740 is the magic number and ultimately the minimum number you need to have to get the most competitive rates when borrowing money**
720-850 – Excellent
700-719 – Very Good
675-699 – Average
620-674 – Sub Prime
560-619 – Risky
500-559 – Very Risky
WHAT ARE SOME MAJOR FACTORS THAT AFFECT MY FICO CREDIT SCORE?
o 35% of your FICO score is derived from your payment history
o 30% is derived from the amount owed
o 15% from length of credit history
o 10% from new credit and inquiries
o 10% from what types of credit you have
WHO USES MY CREDIT SCORE AND HOW DO THEY USE IT?
Lender and Creditors use your credit score and report to determine at what interest rate they are willing to loan you money if at all. Mortgage lenders as well as credit card companies and auto loans also use this to determine what rate you can get for an auto loan or credit card. In addition to rate it may also determine how much they require you to put down or if there is an annual fee to a credit card, etc. Utility companies like your natural gas company, may also use this information to determine monthly base charges and rate plans you are eligible for. It is not uncommon for insurance companies, potential landlords and potential employers to make decisions based on your credit score. So your credit score may have an impact on several facets of your financial wellbeing.
WHAT ARE SOME BEST PRACTICES WHEN IT COMES TO MAINTAINING MY HIGHEST POSSIBLE CREDIT SCORE?
o Try not to use more than 30% of your available credit. In other words if you have a credit card with a $1000 limit try not to have a balance over $300 on that card.
o Unless there are other mitigating circumstances, don’t close out old accounts as 15% of your credit score is derived from the length of time you have had accounts open.
o Keep “hard” credit inquiries to a minimum. Try not to have your credit pulled due to submitting a credit application more than 2-3 times a year. A “hard” credit pull is when you have applied for credit. A “soft” credit pull is when you pull your own credit or maybe a credit card company checks it to determine if they want to send you a new credit card application. If you fill out that application then they will likely do a “hard” pull at that time.
o Review your credit report annually and be sure all the information is correct. Dispute incorrect information including personal data and even limits on credit cards. If your report says your limit on a credit card is $1000 but you know it is $2000 and you keep about a $500 a month balance then you think you are below the 30% credit use but your credit report reflects about a 50% use, which can reflect poorly on you.
HOW CAN I BUILD CREDIT WHEN I DON’T HAVE ANY?
o You can become an authorized user on another person’s credit card account. But be careful. If that person makes a late payment or uses more than 30% of the limit it can actually hurt your credit.
o Apply for an installment loan (auto, mortgage, student loan, etc.) Be careful though because a 30 day late payment can drop your credit score by 80-100 points.
o Apply for trade line or revolving credit (credit card, retail store credit card, etc.) Be careful though because a late payment can drop your credit score by 40-50 points.
o If you cannot get a credit card due to not having existing credit, try opening a secured credit card account. Basically you put say $2000 in a saving account with the bank and they give you a credit card with a $2000 limit secured against that savings account.
SOME TIPS TO REMEMBER
o Try to have no more than 4 trade lines open at any one time.
o Before opening a trade line (credit card) ask the creditor 4 questions to determine if this is one of the 4 trade line accounts that will best enhance your credit.
1. When do you report to the Credit Reporting Agencies?
2. How frequently do you report to them?
3. Do you report to all 3?
4. Do you report Average Daily Balance or Statement Balance to them when you report
In a best case, if you are trying to build or improve your credit you want a creditor that reports to all 3 Agencies on a frequent basis. You also want to know if they use Average Daily Balance or Statement Balance so you can be sure you are staying under the 30% mark. If they use Average Daily Balance and you pay off the credit card balance in full when it comes due you may be well over the 30% usage. In that scenario you might want to make weekly or twice a week payments to cover what you charged that week so the average daily balance is under 30%. Or maybe you want to find a card that reports statement balance so you can just pay it off or below the 30% usage each month without hurting your credit. Of course, not ever having a balance over 30% at any time will also ensure you are maximizing your credit. Also, a creditor that only reports every 6 months may not help you build your credit in time to make that purchase you wanted to make in 4 months as they will not have reported your good credit habits in time for it to affect your credit score.