THE TRUTH ABOUT CREDIT SCORES

By: Jack Olson

Many people reading this article think you have a pretty good idea of how credit scores work. But do you really? You would be surprised to learn that much of what you think helps or hurts your credit score will actually do the contrary or have no effect at all. There are so many rumors, lies, exaggerations and urban myths, when it comes to how exactly credit scores are calculated. You will be shocked to know that only 35% of your credit score is affected by your payment history. So what about the other 65%? What else besides payment history is affecting my credit score?

Given the fact that credit plays a huge roll in our lives as American consumers, don’t you think that credit education would be a primary concern for our youths? But you don’t learn this stuff in schools. You don’t learn this stuff when you open a credit card.

According to Nellie Mae survey, “21% of undergraduates with credit cards carry balances between $3000 and $7000.”

Credit card solicitors pay colleges “admission fees” to come onto campus, set up tables, and sell credit cards to students.

WHAT ITEMS ARE IN YOUR CREDIT REPORT?

• Identifying Information (name, address, date of birth, employment information. Updates to this information come from information you supply to lenders)
• Trade Lines (All of your credit cards and other accounts; date that you opened the accounts, your credit limit, high balance, current balance payment history etc)
• Credit Inquiries (Voluntary and involuntary inquires such as: Account Review Inquiries, Hard Inquiries, Promotional Inquiries)
• Public Records and Collections (Collections, BKs, Foreclosures, Suits, Wage Garnishments, Liens and Judgments)

ITEMS THAT ARE NOT INCLUDED IN YOUR CREDIT SCORE

Although this information may be reflected elsewhere on your credit report, it is not taken into consideration for your credit score.

• Your Age
• Race, Color, Religion, Nationality, Sex or Marital Status
• Occupation, Salary, Employer, Length of Time of Employment
• Location of Residence
• Interest rates charged to you on credit cards or other account
• Any item reported as Child Support or Rental History
• Certain Types of Inquiries (consumer initiated inquires or promotional inquiries)

WHAT GOES INTO CALCULATING MY CREDIT SCORE???

• What goes into your credit score can be grouped into 5 general categories
• The impact of each factor can verify due to different credit scenarios
  
  PAYMENT HISTORY (35% of your score)

• Payments made on time (Car loans, Mtgs, retail accounts, installment loans, credit cards etc.)
• Public Records (BKs, Judgments, Tax Liens, Suits, Wage Adjustments)
• Severity of Delinquency (length of time past due)
• Amount past due on accounts or collections
• Time sense delinquency or attachment of public record or collection
• Number of past due or derogatory accounts
• Account paid as agreed

AMOUNTS OWED (30% of your score)

• Amounts owed on Revolving accounts
• Amounts owed on all accounts
• In some rare cases, Lack of balances
• Number of accounts with balances
• Proportion of Balance to Credit Limits on Bank Revolving or other Revolving accounts
• Proportion of Balance still owing on installment accounts

LENGTH OF HISTORY (15% of your score)

• Time since accounts have been opened
• Number of recently opened accounts
• Time since account activity
• Proportion of new credit vs established credit
• Re-Establishment of new credit following adverse payment problems

TYPES OF CREDIT USED (10% of your score)

• Number if various types of accounts following past payment problems
• Number of various types of accounts (Credit cards, Retail Accounts, installment loans, mortgages, consumer finance accounts, etc.)

NEW CREDIT/INQUIRIES (10% of your score)

• Number of recently opened accounts
• Number of recent inquiries
• Time since inquiry
• Time since account opening

Your credit score takes into consideration all of these factors. In some situations, one factor can have a larger influence on one persons credit score. This depends on each individual credit situations and credit history. It is almost impossible to say exactly how much each factor will influence ones credit score due to the limitless possibilities.

ADVICE GIVEN BY CREDIT BUREAUS IN REGARDS TO HAVING AN IMPROVED CREDIT SCORE: “manage credit responsibly over time.”

PAYMENT HISTORY TIPS

• Pay your bills on time (Obvious. New late payments of collections have the large impact on the score. Only 30, 60, 90, 120, 150, 180+ lates report on your credit.)
• If you are past due for any reason, Get Current! (The longer you remain current and pay your bill on time, the higher you credit score will be)
• Paying off a collection or any other type of account will not remove it from your credit report.
• Be careful about closing accounts (this may result in losing valuable credit score points associated with that account)

AMOUNT OWED TIPS

• Keep balances low on credit cards and other revolving accounts (A general rule of thumb here is to keep your balances below 50% of the credit limit or high balance. In most cases it is beneficial to remain under 30% of the credit limit or high balance)
• Pay off debt instead of moving it around. (One of the most effective ways to improve your credit score is to pay down the balances on your credit cards or other revolving accounts. Owing the same amount but having fewer open accounts may result in a lower credit score. Keep as many of your revolving account below 50% of the credit limits of high balance. It may be beneficial to consolidate debt onto one account if you can get two or more account balances below 50% of the credit limit or high balance that were otherwise above that limit.
• Don’t open new accounts to increase your available credit. (This can backfire and actually lower your score. This is most likely due to that idea that new accounts may lower your credit score and add inquiries)

LENGTH OF CREDIT HISTORY TIPS

• If you have a credit history that is not well seasoned, stay away from opening new accounts to rapidly.  (New accounts generally bring the scores down temporarily especially if you have a lack of credit or a lack of established credit history. Rapid account build up can be seen as a risk factor.)
• Re-Establish yourself after prior payment history problems. (Opening new accounts responsibly and paying them off on time will increase your credit score in the long term. This may not be a suitable strategy for increasing the scores in the short term)
• Try to avoid Consumer Finance companies when possible. Too many consumer finance companies can be seen as an adverse factor. What is a consumer finance company? It is a creditor known to lend to consumers with less than perfect credit history.

TYPES OF CREDIT TIPS

• Apply for and open accounts only as needed. (Opening new accounts is not a short term solution.)
• It is a good rule of thumb to have 5 open and active revolving accounts along with 2 installment accounts

CREDIT INQUIRIES

A credit inquiry will appear on your credit report when your credit report is pulled. There are many types of credit inquiries. Inquiries must be made with Permissible Purpose. You do not necessarily need to give a creditor or party authorization for them to have permissible purpose.

HARD INQUIRIES (These inquiries affect your credit score. When you apply for a mortgage, auto loan, credit card or other type of account, you authorize the lender to obtain a copy of your credit report. These types of credit inquiries when prompted by your own actions appear on your credit report and will impact your credit score.)

• Avoid an excessive amount of inquiries. (What is excessive? This depends on the depth of the credit profile. 5+ inquiries may be excessive for people with a lack of credit)
• If you are shopping for a mortgage or automobile and you know you will incur multiple inquiries make sure you have your credit pulled within in a short, focused amount of time. Depending on which scoring system you are dealing with, you may have a 15 day, 30 day or 45 day window to shop for and apply for credit for the purpose of obtaining a mortgage of automobile financing thus incurring inquires without the inquiries counting against you separately. The scoring system recognizes that you are shopping and will count the multiple inquires as a singular inquiry if it falls within the allotted time frame.

ACCOUNT REVIEW INQUIRIES & CONSUMER BASED INQUIRIES

• These types of inquiries do not affect your credit score. When you choose to pull your own credit report through an online resource such as TrueCredit.com or Myfico.com it is considered a consumer based inquiry and will not affect your credit score. Also, many of your creditors or collection agencies have the ability to pull your credit report to review your account activity. Credit reports pulled by a prospective employer when applying for employment will not affect your score.

PROMOTIONAL INQUIRIES

• In many cases a company will pull your credit report in order to send you pre-approved credit offers or other promotional offerings. These inquiries do not affect your credit score although there is much non-sense about an increase of credit scores upon prohibiting the ability of creditors to pull a promotional inquiry.
• To prohibit the ability of creditors pulling your credit report for Promotional purposes you must OPT Out by calling 888-867-8688

AVERAGE CREDIT STATISTICS (From Fair Isaac)

• Average consumer has 13 credit obligations
• Of these 13 items, 9 are likely to be credit cards and 4 are likely to be installment loans
• 40% of credit card holders carry a balance of less than $1000
• 48% of consumers carry less than $5000 of debt on all non-mortgage loans
• 37% carry more than $10,000 in non-mortgage related debt
• Typical consumer has access to $19,000 on all credit cards combined
• More than half of all consumers with credit cards carry a balance less than 30% of their total credit limits
• 14% of people are using over 80% of their total credit limits.
• The average consumer’s oldest account is 14 years old.
• 25% of consumers have credit histories longer than 20 years
• 1 in 20 consumers have credit histories less than 2 years old

REFORMS TO PROTECT AMERICAN CREDIT CARD HOLDERS

President Obama signs Credit Card Accountability, Responsibility, and Disclosure Act

WASHINGTON – Today, President Obama signs the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, marking a turning point for American consumers and ending the days of unfair rate hikes and hidden fees.

Americans need a healthy flow of credit in our economy, but for too long credit card contracts and practices have been unfairly and deceptively complicated, often leading consumers to pay more than they reasonably expect. Every year, Americans pay around $15 billion in penalty fees. Nearly 80 percent of American families have a credit card, and 44 percent of families carry a balance on their credit cards. To tackle these problems, the Administration moved swiftly with the Congress to enact reforms.

“With this new law, consumers will have the strong and reliable protections they deserve. We will continue to press for reform that is built on transparency, accountability, and mutual responsibility – values fundamental to the new foundation we seek to build for our economy,” President Obama said.

In the Senate and throughout the campaign, President Obama called for measures to strengthen consumer protection in the credit card market. This legislation was made possible by the leadership of Chairman Frank and Representatives Maloney and Gutierrez in the House, and Chairman Dodd, Ranking Member Shelby and Senator Levin in the Senate. It builds on the strong first step taken by the Federal Reserve toward improving disclosures and ending unfair practices.

Principles for Long-term Credit Card Reform
* First, there have to be strong and reliable protections for consumers.
* Second, all the forms and statements that credit card companies send out have to have plain language that is in plain sight.
* Third, we have to make sure that people can shop for a credit card that meets their needs without fear of being taken advantage of.
* Finally, we need more accountability in the system, so that we can hold those responsible who do engage in deceptive practices that hurt families and consumers.

The Administration applauds the legislative efforts of both the House and the Senate. By working closely together, the House Financial Services Committee and the Senate Banking Committee were able quickly to enact strong protections that the President signs into law today. Below we highlight the critical elements of reform in this new law:

* Bans Unfair Rate Increases
* Prevents Unfair Fee Traps
* Plain Sight /Plain Language Disclosures
* Accountability
* Protections for Students and Young People

Key Elements of the Credit CARD Act of 2009

Bans Unfair Rate Increases: Financial institutions will no longer raise rates unfairly, and consumers will have confidence that the interest rates on their existing balances will not be hiked.

* Bans Retroactive Rate Increases: Bans rate increases on existing balances due to “any time, any reason” or “universal default” and severely restricts retroactive rate increases due to late payment.
* First Year Protection: Contract terms must be clearly spelled out and stable for the entirety of the first year. Firms may continue to offer promotional rates with new accounts or during the life of an account, but these rates must be clearly disclosed and last at least 6 months.

Bans Unfair Fee Traps:

* Ends Late Fee Traps: Institutions will have to give card holders a reasonable time to pay the monthly bill – at least 21 calendar days from time of mailing. The act also ends late fee traps such as weekend deadlines, due dates that change each month, and deadlines that fall in the middle of the day.
* Enforces Fair Interest Calculation: Credit card companies will be required to apply excess payments to the highest interest balance first, as consumers expect them to do. The act also ends the confusing and unfair practice by which issuers use the balance in a previous month to calculate interest charges on the current month, so called “double-cycle” billing.
* Requires Opt-In to Over-Limit Fees: Consumers will find it easier to avoid over-limit fees because institutions will have to obtain a consumer’s permission to process transactions that would place the account over the limit.
* Restrains Unfair Sub-Prime Fees: Fees on subprime, low-limit credit cards will be substantially restricted.
* Limits Fees on Gift and Stored Value Cards: The act enhances disclosure on fees for gift and stored value cards and restricts inactivity fees unless the card has been inactive for at least 12 months.

Plain Sight /Plain Language Disclosures: Credit card contract terms will be disclosed in language that consumers can see and understand so they can avoid unnecessary costs and manage their finances.

* Plain Language in Plain Sight: Creditors will give consumers clear disclosures of account terms before consumers open an account, and clear statements of the activity on consumers’ accounts afterwards. For example, pre-opening disclosures will highlight fees consumers may be charged and periodic statements will conspicuously display fees they have paid in the current month and the year to date as well as the reasons for those fees. These disclosures will help consumers make informed choices about using the right financial products and managing their own financial needs. Model disclosures will be updated regularly based on reviews of the market, empirical research, and testing with consumers to ensure that disclosures remain clear, useful, and relevant.
* Real Information about the Financial Consequences of Decisions: Issuers will be required to show the consequences to consumers of their credit decisions.
o Issuers will need to display on periodic statements how long it would take to pay off the existing balance – and the total interest cost – if the consumer paid only the minimum due.
o Issuers will also have to display the payment amount and total interest cost to pay off the existing balance in 36 months.

Accountability: The act will help ensure accountability from both credit card issuers and regulators who are responsible for preventing unfair practices and enforcing protections.

* Public posting of credit card contracts: Today credit card contracts are usually available only in hard copy and not in plain language. Now issuers will be required to make contracts available on the Internet in a usable format. Regulators and consumer advocates will be better able to monitor changes in credit card terms and evaluate whether current disclosures and protections are adequate.
* Holds regulators accountable to enforce the law: Regulators will be required to report annually to the Congress on their enforcement of credit card protections
* Holds regulators accountable to keep protections current:
o Regulators will be required to request public input on trends in the credit card market and potential consumer protection issues on a biennial basis to determine what new regulations or disclosures might be needed.
o Regulators will be required either to update the applicable rules, or to publish findings if they deem further regulation unnecessary.

* Increases penalties: Card issuers that violate these new restrictions will face significantly higher penalties than under current law, which should make violations less likely in the first place.

Cleans Up Credit Card Practices For Young People at Universities. The act contains new protections for college students and young adults, including a requirement that card issuers and universities disclose agreements with respect to the marketing or distribution of credit cards to students.