The Big Deal Behind Credit Scores

Financing

Imagine you are sitting at a desk ready to purchase a home or a car. You put a lot of research into getting the model you want or viewing many homes to find your dream home. You’ve prepared all the necessary documents for getting a loan. The professional assisting you is going to look at your options for different interest rates, but they suddenly say that they are sorry but there has been a problem with your credit report.

You know that you have been spot on with your payments for the past years, but you have not checked your credit report in years. When you do, you find a couple mistakes that is causing you to carry around a bad credit score.

There is a reason that companies offer free credit score reports once a year, and if you check it every so often you can catch mistakes or even identity theft. People entering in the numbers can make mistakes with accounts, which means someone’s bad credit habits are being reflected on your report. A Credit Score is an estimate of credit risk based on a snapshot of your credit report at a point of time. It is your financial history that lets anyone that views it determine if they can trust you or if you are going to be a huge risk to them. Below is a graph that shows you how your credit score directly affects the interest rate you receive.

 A slim difference in scores adds up to a large amount of money in the long run.

THE REPORT: MORE THAN A CREDIT SCORE

On the report, you will see your identifying information such as your name, social security number, birthday, and address. There will be public records, collections, and bankruptcy information as well as payment history and trade lines. One section that people don’t really realize is on there is Inquires. These are different loan and credit applications within the last 2 years. Someone viewing your credit score can see if others have lent to you or denied you, and that will play a factor in their decision.  Any mistakes anywhere you will want to call and fix right away. Not every inquiry shows up, however. Credit checks that you make yourself, employment checks or unauthorized checks will not appear on the credit report.

There is always misconception in what shows up in your payment history. The information will be divided into different trade lines. Two examples of trade lines are an installment loan (home mortgage, car loan) and a revolving loan (credit cards and lines of credit). Basic account information and your current balance is an obvious one. Viewers want to see what kind of credit you have and how much at this moment. There is also a number for credit limit, highest balance, time the account has been open, and late payments by 30, 60, and 90 day increments. These are all factors that play into your credit score. Potential lenders want to know if you are consistent or risky.

The Credit Score Basics

Scores range from 300-850. Currently the average is 723. You score adjusts monthly because most of your payments are monthly. There are three National Credit Bureaus that collect information, and then give you a credit report. They will vary from each other.

Building a Good Credit Score

The key is stability. In addition to your credit report, lenders are also going to be looking at your income and employment history. Here are some tips on actions you can take to boost your credit score

1. Debt capacity is another critical aspect of your credit score. It is your current balance divided by your credit limit. The lower you can get this percentage the better. If you max out your credit card, this number will be %100 for that account. This will negatively affect your credit score, so pay down credit card balances to lower capacity.

2. Become a joint accountholder on someone else’s good credit. This may be difficult to find if you don’t have a family member with good credit, because your lower score will influence their good score.

3. Make sure to keep well-established revolving accounts open. Just because you don’t use your credit card, doesn’t mean that you should cancel it. Lenders want as much evidence as they can get and seeing that you can handle a credit card means that you are lower risk to them. If you pay it off each month or you don’t use it and there is nothing to pay off it will show up on the credit report as paid as in no debt.

4. Make payments on time. This is a big one because late payments can be more detrimental and stick around longer. A single late payment can reduce your score by 100 points and can stay on the report for up to 7 years.

5. Pay your utility bills. Utility payments cannot bring up your credit score, however, if you don’t pay your utilities, the debit will show up and negatively impact your score. This goes for tickets like speeding tickets as well.

When applying to Buy a House...

1. Thou shall not change jobs, become self-employed or quit your job.
2. Thou shall not buy a car, truck or van (or you may be living in it)!
3. Thou shall not use charge cards excessively or let your accounts fall behind.
4. Thou shall not spend money you have set aside for closing.
5. Thou shall not omit debts or liabilities from your loan application.
6. Thou shall not buy furniture.
7. Thou shall not originate any inquiries into your credit.
8. Thou shall not make large deposits without first checking with your loan officer.
9. Thou shall not change bank accounts.
10. Thou shall not co-sign a loan for anyone.

Helpful websites

Annualcreditreport.com- free report

Creditkarma.com- free score

www.transunion.com- order report, fraud

www.experian.com- order report, fraud

www.equifax.com- order report, fraud

www.myfico.com- info on fair Issac scoring system

www.truecredit.com- 3 scores and an analysis