What is a Credit Score?
 
How to keep it perfect and what not to do:

Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant.

The score is a number that rates the likelihood you will pay back the loan.  Scores range from 500’s to 800’s.

FICO scores – which were developed by Fair Issac and Company, Inc. for each of the credit reporting agencies.
1.       Experian
2.       Transunion
3.       Equifax

Credit scores only consider the information that they are given by companies that report to them.   They do not consider your income, salary, down payment or demographic factors like gender, race, nationally or marital status.

Past delinquencies, derogatory payment behavior, current debt levels, length of credit history, types of credit and number of inquiries are all considered in credit scores.

Late payments will lower your scores – but it also depends on what you were late on.  A late payment on a mortgage weighs heavier than a late payment on a credit card or auto loan.

Weights:
  • 35% - previous credit performance
  • 30% - current level of indebtedness – current balance compared to high credit level on a particular line of credit
  • 15% - time credit has been in use – opening date of debt – the longer a line of credit has been opened – the better
  • 15% - types of credit available (installment loans – revolving  and debit accounts
  • 5% - Pursuit of new credit (number of inquiries)

When you are applying for a mortgage,  don’t go out and give several lenders your social security number as this will lead to them pulling your credit and lowering your score.

When you are looking for a car, the same thing happens.  You go visit a dealership and soon you will have several hits on your credit, again, bringing that score down.

The most important factor for a good credit score is paying your bills on time.  Even if the debt you owe is a small amount, it is crucial that you make your payments on time.

Don’t close unused credit cards as a short term strategy to raise your score.  Closing these accounts are instead lowering your credit score if you have had them several years.  Just put them away – put them in the freezer or cut them up and re order new ones when you want to use them again.  Just don’t close them.

Your credit score much contain at least one account that you have had open for six months or greater and at least one account that has been updated in the past six months to get you a credit score.

How to get a free credit report that is really free!!!

Thanks to a new federal regulation, the three big credit bureaus- now must give each of us a free credit report every year.  That’s great news!!!  Just by checking your credit report you can make sure that no one has stolen your identity or opened accounts in your name without your knowledge.

Use the approved FTC website only:  annualcreditreport.com or call 1-877-322-8228

6 sure fire ways to ruin your credit

Credit is issue to a consumer with the understanding that you will use it wisely and pay your bill on time.  Unfortunately, this does not always happen.
1.       Charge away!  Don’t worry about the credit limits.If you go over the approved limit – you will be charged for it.  They do notice and this could lead to interest rate hikes on this account and others.
2.       Mail payments in late.  Creditors will penalize you for a late payment in additional charges and potential increase in interest rate on the card and others.
3.       Charge things on your credit card because you need it now and can’t wait to save for it.  Don’t keep up with your neighbors.  Spending to impress doesn’t work and just keeps you paying double – maybe triple for the same item if you had saved and paid cash.
4.       Don’t take time to check your credit report.
5.       Be careless with your identity.  Give your social security number out to others.  There are only a few times that you will need to show or give out this very important number.
6.       Co-sign for others.  It is never easy to say no to a family member or friend, but allowing them to use your good credit and relying on them to pay their bills on time leads to diminished credit allowed for you and a potentially lower credit score for you if they pay late or not at all.

WHAT IS ALTERNATIVE CREDIT?

Alternative credit is used to pre-qualify someone for a home that does not have a traditional credit score or report at all.  For these customers it is important to seek out alternative monthly credit that is paid by a check or money order and the customer can prove that they have paid their bill on time.

Examples:
  • Car or renters insurance
  • Utilities
  • Cell phone – telephone
  • Gym memberships
Why do you need credit?

Without a credit score you will have a hard time proving that you are responsible with money and can pay your bills on time.  A lender wants to know that chances are good that you will be paying monthly on your new house note and not let it be paid late or quit paying and allow your new home to go into foreclosure.

Yes – you can pay your bills with money orders or cashier checks or even just cash … but that is not a good way to track your good payment history.  Getting a mortgage is dependant in your past history of credit and work and bills and money.

Ways to increase your credit score:
1.       If your credit is fully utilized – if your $1000 credit line is consistently at $1000 each and every month and you never seem to get it paid off – this will lower your credit score. You need to apply for an additional line of credit and more evenly distribute the credit so that not every card you have is at it’s highest acceptable limit.
2.       Keep the oldest accounts – if you are going to close accounts – make it the newer ones or ones that you have a lower limit on.
3.       Don’t co-sign for anyone – ever