The Credit Camp

FICO Credit Score Explained

It is a common misconception that you will be approved for a car loan as long as you have a good job so that you can afford the payments and if you have money for a down payment. Automobile finance companies and other lenders consider other factors when deciding whether or not to grant you a loan. One of those other criteria that they consider is your FICO or credit score.

Credit Rating

So having money and having a high salary does not guarantee that you will get the car loan you want. Your average credit score play a significant role when adjudicating credit and it is reviewed by everyone from banks to credit card companies. They use this numerical representation of your previous borrowing history to try to determine how likely you are to pay back a new loan, on time as agreed. This number is also sometimes referred to as your credit rating.

If you were late on payments in the past or you have missed any completely, this will negatively impact your credit score. The more serious the infraction the greater the effect it will have and the lower your score will be. If you have defaulted on any loans, had a vehicle repossessed, or declared bankruptcy then you will consequently have a very low credit score. The lower your score the more difficulty you will have when you go to apply for credit in the future.

Credit Bureau Reports

Each month, banks, credit card companies, automobile finance companies, and other lenders send a report to the credit reporting agencies such as Equifax, Trans Union and Experian, to advise them whether or not you paid your loan or credit card as agreed. These credit reporting companies consolidate the data and maintain a single record on all borrowers. That way when a new loan application is received by a lender, they can ask for a copy of this report. While past behavior is not a guarantee of how one will behave in the future, it is the best the creditors have to go on.

In addition to affecting your likelihood of approval, your credit score will also impact what interest rate you will be given. If you have honored all of your loan agreements and made your payments on time then you will have a high FICO score and you will be rewarded with a very low interest rate. Of course the opposite holds true as well. If you have a low score, but manage to still get approved for a loan (perhaps with a co-signer), then you can expect to pay a very high interest rate.

Other companies may use your credit score before approving you for their product or service as well. These can include utility companies, cell phone carriers, landlords and property managers.

How to Boost Your Credit Score

The average credit score ranges from 350 to 850. Having a score in the high 600’s to the low 700’s would be the least acceptable to be considered “credit worthy” by lenders. Of course you want to do everything in your power to boost your credit score and keep it as high as possible.

The first step to boosting your credit rating is to pay all of your monthly bills and debts on time. This means that when you receive a credit card statement and it has a “due by” date on it, then you must have your payment in their hands by this date. This is not the date that you can put your check in the mail, but the date by which the must have received it. Don’t wait until the last minute and risk your payment being considered late.

Make your payment even if the amount seems small or insignificant. I have seen clients who would receive a credit card statement with a $100 balance. The minimum payment would be $10. They would not bother making the $10 payment because they planned to pay off the whole amount the following month. While this may appear to make sense, the reality is that they credit card company would report that the borrower failed to make their monthly payment that month. Even though the payment was so small, it still counted and the customer’s credit score took a hit. All for 10 bucks.

Your credit score determines how easily you will be approved for credit and what interest rate you get if you are. It is a numerical summary of all of your past credit behaviors. If you want to get the best credit score possible or simply give your credit score a boost, make your monthly payments on time and do not overuse your available credit by maxing out the available balances.

Getting a copy of your online credit report is the first step in taking responsibility for your personal financial circumstances. Whenever you apply for a loan, mortgage or student credit card the lender will do a hard or soft inquiry with one of the three credit bureaus: Equifax, Trans Union or Experion. They will review how long you have had your various accounts open and whether or not there have been any late payments. They also consider how close your balances are to their respective limits.

This information is tabulated and converted to a number known as your FICO score. They then use this rating to determine first of all if you can be approved at all and then secondly how high your interest rate should be set. With so much riding on the information held by the bureaus, it is critical that it be as accurate as possible. Ordering a copy of your credit report online is the first step in ensuring that it is.

Banks love strong borrowers with a clean credit history. They will practically throw money at them with favorable terms and low interest rates. Knowing for certain what has been reported about you gives you a chance to correct any mistakes or other inaccurate information. It does happen that two individuals with the same name in a small town will inadvertently have there credit reports mixed up. The sooner these types of problems are identified the easier they are to fix.

As you sit here reading this picture in your mind what you think your FICO score is. Then when you review your online credit report compare how close you were. If your credit rating is higher than you thought, you are obviously doing the right things, like making you payments on time and not over utilizing your available credit. If you score is lower than you expected, take some time to really understand why. Then make the necessary changes in your behavior to raise your score and start reaping the rewards that go along with it. If you do find a mistake when you check your credit report online, be sure to get it corrected as quickly as possible.

It’s true; highlimit credit cards can boost your credit score!

There are more reasons to get a highlimit credit card than simply being able to rack up a ridiculous amount of debt. In fact the limit of your credit card can have a significant impact on your average fico score. This is because the ratio of your outstanding balances to your available credit is one of the factors used by the credit bureaus to determine your credit score. Therefore if there are two individuals with the same amount owing on their credit card but one has a higher limit than the other, all other things being equal, that person will have a higher fico score.

No one knows for sure what the tipping point is for balance owing vs. credit limit, but obviously the smaller the percentage owing the better. This is a good reason to apply for the highest limit credit card you can get. This assumes that you possess the self control to be responsible with that much borrowing power readily available. If you feel that you would tend to spend beyond your means, then this strategy for lowering your fico score would definitely not be a good idea.

As a reminder, the higher credit score you have the lower interest rates you will be eligible for. Anyone looking for debt relief will want ensure they are paying as little in interest as possible so that they can have the majority of their monthly payment go to the principal.

Of course having highlimit credit cards has its own rewards, including the ability to purchase big ticket items on the spot, without first having to go to your bank to apply for a loan. See the perfect deal on a vehicle you have been looking for? You can pay for it in full on the credit card and then determine afterwards, the most cost-effective way to structure the financing.

Also be aware that some lenders take into account the maximum credit that you have available when you are applying for a loan, so if you have a credit card with a really high limit it could inhibit the amount that you can qualify to borrow later on. So you want to find the right balance between a high enough limit that you won’t like utilize a large percentage of it, but low enough that it won’t get in the way of being approve for other loans later on.

Are you spending more than you are making and tired of keeping up with all your payments? You are not alone. It is a fact of life that most of us want immediate gratification and make purchases in excess of the funds we have in our checking accounts. Buying on credit is the way most of us do this. We take out loans or use credit cards to compensate for the the lack of cash on hand to pay for what we want to own right away. If it is a given that we do this, then the saying “if you can’t beat ‘em, join ‘em” applies and we might as well borrow this money as cheaply as possible. This is where having a better than average FICO score really helps you out.

When applying for credit your FICO score is very important. In fact this is often the deciding factor in whether or not you will be approved as well as whether or not you will get a low interest rate.

You should never ingore your FICO score or underestimate it’s significance. Right from the beginning it is very important to pay all of your bills on time and ensure your are meeting all of your agreed upon obligations. Nothing will lower your credit rating faster than being late or missing payments. The more responsible you are with the credit you have then the higher your rating will be and the easier it will be for you to get additional loans in the future at the best possible rates.

A high FICO credit score means that you are a low risk, and that your past behavior indicates that you are most likely to pay your accounts as agreed.

Credit scores have different ranges. If you have a score in the the low 500’s then you need to take immediate action to reverse your current behavior. You will have difficulty obtaining credit at low rates. If your score is above 700 then you should have no trouble obtaining loans and/or credit cards at very favorable pricing. If your cedit score falls somewhere in between your success will fluctuate accordingly.

Aside from the different ranges, the FICO credit score is split into five categories: payment history, length, amounts owed, new credit, and the credit type. These categories and how you measure within them have a direct correlation to your credit score.

Your credit report will have data such as what accounts, how many credit cards, whether or not you have a mortgage, term loans, unpaid accounts, collections and whether or not you have filed for bankruptcy.

However there are times when your credit report will contain errors. For this reason it is important to regularly get a copy from one of the three major credit bureaus and check for any inaccurate information. You then must take the required steps to have this information removed as soon as possible. Because if you do have a low FICO score, the sooner you know, the better. The longer it sits on there then the more difficult it will be to clear up.

The three major credit bureaus are Equifax, Experion and TransUnion.

Don’t settle for an average FICO score. This is your credit rating we are talking about and with so much depending on it you must take responsibility for it. No one else will do this for you.

Collection agencies are businesses that collect past-due bills and accounts receivable for other persons or businesses in exchange for a fee.  Collection agencies are referred to as third party agencies since they are not a part of the original contract between the merchant and the customer.  Debt collection agencies are utilized for collection of debt, collect nsf checks, collect past due invoices, collect medical bills, collect judgments and locate hidden assets including bank account searches.

Creditors typically hire a collection agency only after they have made efforts to collect the debt themselves, typically through letters and telephone calls.  Creditors typically send debts to a collection agency in order to remove them from their accounts receivable records; the difference between the amount collected and the full value of the debt is then written off as a loss.  Creditors may be able to garnish your wages in some states.

Debt collection agencies have a reputation for engaging in threatening behavior, harassment, and coercion.  Debt collectors who work on commission may be highly motivated to convince debtors to pay the debt, often to the point that they sound threatening to the debtors.   Collection agencies are required to provide a phone number which is free for the debtor to call.

Debt collectors have laws which control their activities.  Debt collection laws prohibit collectors from engaging in abusive behavior, and help open up the lines of communication between debtors and collection agencies.  Debt collection laws give you thirty days to dispute a debt.  

People may become debtors because of a lack of financial planning on their part or careless over-commitment.  Other people become debtors because of an unforeseen and uncontrollable event that disrupted their life.  Collection calls rely on repetition to motivate the debtor to pay.  As a debtor, remember you have the right to speak to the collector when it is more favorable for you.

There have been numerous questions regarding the impact of credit bureau inquiries on your credit score. Let me set the record straight.

Inquiries can be broken down into two types: hard inquiries and soft inquiries. Hard inquiries are made when you apply for a loan, mortgage or any other credit. These count against yourFICO score and remain on your record for up to two years. Too many hard inquiries will negatively impact your credit score. If you have a lots of hard inquiries on your report you appear to be a credit seeker to prospective lenders. The exception is when you may be rate shopping. All the hard inquiries within a two week period are counted as a single inquiry. This grace period allows for the times when you may be shopping for the best rate for a new loan or mortgage renewal. Multiple inquiries are generally not aproblem for someone with a high credit score, but if you are borderline it could have a serious impact on your ability to borrow or the rates that you are able to get.

The other type of credit bureau inquiry is called a soft inquiry. Soft inquiries are not factored into your FICO score. They are made when a company checks your credit report as part of a review or for the purposes of offering you a pre-approval. Also, when you check your own credit report it is considered a soft inquiry. There are various legitimate reasons why a business or even your employer my request a credit check and all of these do not lower your credit score.

Be aware of the differences between a hard and soft inquiry. When a company indicates they will be doing a credit check determine which type they will be doing. It is becoming more common for some banks to do a hard inquiry when you are simply opening a bank account. Others will do a soft inquiry. If your credit is borderline you may wish to avoid these institutions in favor those that will not do a hard inquiry.

The next time you get a copy of your credit report , which I recommend you do regularly, take note of the hard inquiries and soft inquiries you find. Have any companies pulled a hard inquiry needlessly? If they have take action on it right away. It is your score that is being affected.

A new method of rapidly boosting your credit score has developed called seasoned trade lines. Seasoned trade lines are credit cards or lines of credit that have high limits, low balances and an excellent, long repayment history. Private individuals, called investors, add your name to their credit line and “piggyback” as an authorized user. Within about 30-60 days these accounts will show up on your credit report and you can see an increase in your FICO score of anywhere from 30 to 180 points. The benefit of this is being able to get much lower interest rates on loans and mortgages or even being able to get approved at all.

There are a number of companies on the web that provide this service as middle-men; connecting individuals who wish to raise there credit score with individuals who are wish to rent theirs out. The fee for this service can run anywhere from $500 to $3000. At first glance this may appear steep, but after you consider how much money can be saved now by being able to get a lower interest rate on mortgages and other loans, it is put into perspective. Also there are plenty of eBay auctions now for this service which helps to keep prices in check.

The credit bureaus are aware of this method of rapidly boosting your credit score and are working on ways to counter-balance its effect. But as this is a lucrative business for those brokering the seasoned credit lines, they too are working to ensure that their services remain effective.

Improving your FICO score can help you get lower interest rates. In fact the FICO score is the most important factor lenders use to anticipate how you will repay a loan. FICO is an acronym for the creators of the score, Fair Isaac Credit Organization. “FICO” has became the popular name for their credit scoring system. FICO scores ranges from 300 to 850, with higher than 725 considered good and lower than 600 considered bad. However, there is no single “cutoff score” used by all lenders. Lenders obtain FICO scores from the three major credit reporting agencies. The best way to maintain a good FICO credit score is to handle your credit responsibly over time.

FICO scores can vary from day to day, but most are fairly stable. Getting your FICO score once a year would be sufficient to stay on top of how you rank. Knowing your score gives you the opportunity to take steps to improve it. It is better to work on improving yourFICO score before you suddenly need to apply for a loan. If you haven’t checked yours lately you can get a copy here.

There are a number of factors that affect your FICO score. These include the length of your credit history, missed or late payments, and credit usage versus credit limits. Public records (ie. bankruptcy) or collections will also impact your score. Many people worry excessively about the impact credit inquiries have on their score. FICO distinguishes between shopping for the best rate on a loan and someone who is an habitual “credit seeker”. This is based on the length of time over which recent inquires have been made.

For your three FICO scores to be determined, each report needs to have at least one account that has been open for six months. When adjudicating credit however, lenders like to see more credit activity over a longer period of time. While most lenders useFICO scores when approving credit, how each lender incorporates that information into the adjudication process will differ.

The only way to realiably improve your FICO score is to simply pay down what you owe, as agreed and on time.

Identity theft occurs when someone uses your personal information commit fraud.

You may not find out about the identity theft until you review your credit report or a credit card statement and notice charges you didn’t make. Sometimes you are contacted by a collection department, demanding payment for items you never bought. When the thieves use the credit cards and don’t make payments, delinquent accounts appear on your credit report. This results in a bad credit report and a very low credit score. It will then be difficult or impossible for you to obtain new credit for yourself. You often do not even find out about it until it is too late.

An Ounce of Prevention

LifeLock is the industry leader in identity theft protection. Their system is different because it is designed to prevent your identity from being stolen rather than reporting it after the fact. LifeLock backs up its service with a guarantee that they will handle any resolution of ID theft, with a $1,000,000 warranty. When you enroll with LifeLock you will get a credit report from the major credit bureaus and they will make sure you get these reports once a year. LifeLock requests on your behalf that fraud alerts are placed on your accounts. Once your fraud alerts have expired, LifeLock will ensure that they are renewed and continue to do so as long as you stay a client. They remove subscribers’ names from mailing lists for pre-approved credit applications to cut the risk of identity theft. They also get you removed from many junk mail lists. Click here to learn more.

Monitor Your Credit Report

The best way to discover identity theft is to pay attention to your statements each month, and check your credit report regularly. You can get a copy of your credit report from any of the three credit bureaus: Equifax, TransUnion, and Experian. Get your Equifax credit report here. Once you receive it, check to see if it contains any items you do not know about. Equifax also offers a credit monitoring program called Credit Watch

Some of the steps you must take after discovering the fraud include filing a police report, checking your credit reports, notifying creditors, and disputing any unauthorized transactions. Immediately report the situation to the fraud department of the three credit reporting companies.

Some victims lose out on jobs or are declined for loans because of their bad credit score. You can take steps to protect yourself, and not be a victim.

The unfortunate truth of identity theft is that you, the victim, are responsible for cleaning up the mess and re-establishing your credit. If not detected early, it may take you months or years to clean up the damage done to your credit rating.

We spoke last time about using credit cards to build your credit score. However if you do not have a credit score or if you have bad credit, it may be difficult to obtain a credit card to begin with. This is where a secured credit card can help.

A secured credit card is a credit card where you have provided cash to be held as collateral against the balance owed on the card. (more…)