2013 eBook Series
DYI: Credit Restoration & Management
Credit Score FAQ Here is some general information regarding credit scores. Hopefully this answers any questions you might have, and as always, give us a call if we can answer anything else for you‌ How can I check what my credit scores are? While we do not have access to your scores, there are many avenues to find out what they are. You can purchase additional reports with scores from each of the 3 main bureaus by calling the following automated ordering numbers: Experian: 1-888-397-3742 TransUnion: 1-800-888-4213 Equifax: 1-800-685-1111 There are many sites online where you can purchase additional reports and scores. Also, anytime your scores are pulled for any credit applications of any kind, you are entitled to know what those scores are, and the information that was used in calculating them.
Why is my credit score so important? The extension of credit in the United States has become increasingly important over the last decades. A result of this is that large national and international organizations now make the decision to lend money, and cannot have the same personal relationship with you that your local banker does. These organizations require a standardized, objective method to determine your credit-risk. Your 3-digit credit score gives them the tool to quickly filter applicants. What exactly does my credit score mean? Your score is a snapshot summarizing your credit profile at that exact point in time. It brings together all the other information on your credit, and places you in a particular category of credit-worthiness. Whenever you apply for anything like a mortgage, credit card, insurance, or even a job, the provider will look to your credit score first for an indication of how you compare with other applicants. Final decisions, rates, and other terms are all based heavily upon where your score is in the spectrum.
How is my credit score calculated? Credit scoring models are complex algorithms developed primarily by the Fair, Isaac Corporation. Fair, Isaac has been working on these models since the 1960’s, and is the namesake for the commonly referenced “FICO” score. The software models are built based on intensive statistical analysis of large samples of the U.S. consumer population. Consumer behavior and responsibility are compared to past reported history, to determine which factors are the most accurate indicators of future credit use. These factors are then weighted appropriately in calculating the overall score. Only information reported on your credit report affects the score; if it does not appear on your report, it isn’t considered. Each credit score is unique to a particular report; because the information on your credit reports changes frequently; your scores also change frequently.
Are there different types of scores? Yes. There are actually many different types of scores, but they are all based on the same information. Over time, the scoring models have become more accurate and more complex, expanded to include the increasing amount of information on credit reports. Many different software models exist, each placing slightly different weights on the credit information. Additionally, many different models exist for different uses: scores pulled at auto dealerships differ somewhat from scores pulled by mortgage lenders, or insurance underwriters. In this case, past payment history on a car loan is more important to the auto dealer than the mortgage lender, and so is weighted more heavily in the credit score. Fair Isaac licenses different models to different companies, including the main credit bureaus: the models used by Equifax are referred to as “Beacon” scores, those used by Experian as “FICO” scores, and those used by TransUnion as “Empirica.”
Why are my scores different? Because the information reported by the different credit bureaus is most often different to some degree, and because they all use slightly different models, the scores calculated will be somewhat different. Score differences of more than 100 points are not uncommon. There is no zero score; the most common ranges of scores are from 300-850. And as noted above, scores will differ, even if pulled on the same day, between mortgage reports, auto reports, 3in-1 online reports, etc.
Establishing a good credit history has never been as important as it is today. It's not just that you'll need good credit to get good interest rates when you're ready to buy a home or a car. Your credit history can determine whether you get a good job, a decent apartment, a deal on your cell phone and reasonable rates on insurance. If you're just starting out, you have a once-in-alifetime opportunity to build a credit history the right way. Here's what to do and what to avoid. Check your credit report You'll first want to see what, if anything, lenders are saying about you. That kind of information is contained in your credit report at each of the three major bureaus: Equifax, Experian and Trans Union. You're entitled to a free annual look at your reports from AnnualCreditReport.com. Credit reports are used to create your credit scores, the three-digit numbers that lenders typically use to gauge your creditworthiness. Lenders also may look at the reports themselves, as may the landlords, employers, insurers and utility companies who use credit to evaluate applicants. Another reason to check your report is that somebody else's information could be mixed in with your report, either through a credit bureau mistake or because of identity theft; i.e. someone using your personal information to open fraudulent accounts. If that's happened to you, you'll need to clean up your credit report before trying to apply for new accounts. The Federal Trade Commission's identity-theft site has information that can help. Open a checking account If you don't have a checking account, potential lenders become very skeptical about the way you handle you financial affairs. Many people do not have a checking account simply because they can't conceive the idea of paying service charges and trusting someone else to store their money. Let's face the truth, having a checking account says a lot about the way you handle money -- it gives you a credential. Although most lenders never bother to check -- just having a source where potential lenders can check to verify your financial position gives you a lot of credibility with that institution. Open a savings account. When potential lenders see a savings account on your credit application, it gives them a good feeling concerning the way you handle your financial affairs, regardless to how small of amount you have in your account. Always show a savings account on your credit application. Understand the basics of credit scoring You need to know that the two most important factors in your scores are:  Whether you pay your bills on time.  How much of your available credit you actually use.
It's essential that you pay all your bills on time, all the time. Set up automatic payments or reminder systems so that you're never, ever late. All it takes is a single missed payment to trash your credit scores -- and it can take seven years for the effects to completely disappear. You also don't want to max out any of your credit cards, or even get close. Keeping your credit use to less than 30% of your credit limits (10% is better) will help you get the best possible credit scores -- and should help keep you from getting over your head in debt, as well. Finally, you don't need to carry a balance on a credit card to have good credit scores. Paying your bill in full each month is the best way to keep your finances in shape and build your credit at the same time. Get added as a Joint Account Holder or Co-Signer to an already established account Having a co-signer can allow you to qualify for loans you might not otherwise get. The loan will show up on your credit report and, if you pay it off responsibly, will help boost your credit scores. If you default, however, you won't be the only one who suffers. The co-signer has basically promised to make good on this account, so any delinquencies will show up on her credit report as well. Being added as a joint account holder also has its risks, for you as well as the person giving you access to the card. If a parent adds you to their credit card, for example, the history with that account can be imported to your credit bureau file, giving you an instant credit record. If they have handled the account well, that reflects well on you. But if they haven’t, their mistakes would also become yours. You become responsible for any debt on the card, and it's difficult to get your name removed. Any late payments or other problems could make it harder for you to get future credit than if you'd established your history without help. Apply for a secured credit card If you can't get a regular credit card, apply for the secured version. These require you to deposit money with a lender; your credit limit is usually equal to the deposit. Screen your card issuer carefully. To be frank, there are a lot of bad companies this particular niche of the credit world. Some charge outrageous application/annual fees and high interest rates. Ideally, the card you pick would: Have no application fee and a low annual fee Convert to a regular, unsecured credit card after 12 to 18 months of on-time payments Be reported to all three credit bureaus. If the issuer doesn't report to the credit bureaus, the card won't help build your credit history!
Get a store card Gas companies and department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions. These cards don't do as much for your credit scores as a bank card (Visa, MasterCard, Discover, etc.), but they're usually easier to get. Again, don't go overboard. One or two of these cards is enough. Get an installment loan To get the best credit scores, you need a mix of different credit types, including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages). Once you use your credit cards responsibly for a year or so, consider applying for a small installment loan from your credit union or bank. Keeping the duration short -- no more than a year or two -- will help you build credit while limiting the amount of interest you pay. Use revolving accounts lightly but regularly For credit scores to be generated, you have to have had credit for at least six months, with at least one of your accounts updated in the past six months. Using your cards regularly should ensure that your report is updated regularly. It also will keep the lender interested in you as a customer. If you get a credit card and never use it, the issuer could cancel the account. Keep in mind the following tips: Don't charge more than 20% of the card's limit. Don't charge more than you can pay off in a month. You don't have to pay interest on a credit card to get good credit scores. It's much smarter to pay off your credit cards in full each month. Make sure you pay the bill, and all your other bills, on time. Establishing Credit For Your Kids Establishing credit is very difficult for young people, because they are in a "catch 22" situation; everyone wants them already to have credit but no one wants to be the first to extend credit. Therefore, the sooner you can help establish credit for your kid, the better it will be in the future, for your maturing child to receive a car loan or mortgage from a bank, when they need it most. Take the following actions to achieve the best credit score once you establish credit 1. Reduce current and future outstanding debt. 2. Reduce revolving and installment account balances below 25% of the High Balance/Credit limit 3. Pay all accounts that are reporting on your credit report at least 10 days in advance of the payment due date. 4. Never make a late payment on any account. 5. Pay all outstanding collections, charge off, profit and loss, judgments and Tax liens. When paying these accounts, try to get a deletion letter from the creditors.
Paying Collections Any paid or unpaid collection listed in the revolving accounts section of your credit report can lead to a significant deduction from your credit score. Call the collection company and ask: Does your company offer deletion letters if a collection is paid? If the collection agency does not offer a letter of deletion it still might be advantageous to pay the collection anyway depending on the age of the collection. The “collection paid” status is much better than a collection owing on your credit report Getting a Deletion Letter About 30% of all collection agencies will generate a “deletion letter” to show that your collection item has been removed from their system. The reason you need this deletion letter is because the credit bureau may continue to show the collection item for seven years even if your collector’s system no longer shows it Dispute High Balances Account balance information is often 60 to 180 days old, especially on automobile debt. For instance, let’s suppose you’ve been paying your car payment faithfully for two out of three years. Maybe your car cost $5000 and you’ve paid your loan down to $2000. However, the credit bureaus are reporting that your loan balance is still $4000. Car companies often don’t have upto-date “software” that updates your credit information on time. Since the loan balance data at the credit bureaus could be as much as six month old, you may not be qualifying for the loans you deserve because of high balances. The remedy is to dispute with three credit bureaus online or on the phone to update your loan balances on your credit reports. Even though the credit bureaus will tell you that this is a thirty-day process, many things are updated in ten, two or even one day. Get Payoff Letters for Paid Accounts and Fax Them to the Bureaus for Faster Results Often paid accounts still show balances on credit reports. For instance a previous client sold their house in Texas last fall and his first and second mortgage were still showing huge balances when he applied for a new home purchase loan. Because he already had three credit cards with balances, it was in his best interest to show his mortgage loans as paid off to show as little debt as possible. He called the payoff departments for both of the mortgage companies and requested payoff letters to prove those debts were paid. He then faxed these payoff letters to the credit bureaus in order to update the balances to zero. Pay before the Grace Period on Your Credit Cards If your credit card balance is over 50%-75% of your credit card limits, your credit score could be decreased by 50-80 points! Having high credit card balances is a real killer. It makes sense to pay down your balances, especially before you apply for credit. However, picture this: on your
credit card payment due date, your credit card company automatically sends the balance information to your credit bureaus via electronic information transfers. That means if you pay down your balance on or after the due date, even if within the grace period, the balance doesn’t show the decrease for a whole month longer. Pay before your due date (before the grace period) and you will have a better credit score.