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