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Credit Education
Understanding your credit is the first step to improving your credit score. Getting the facts straight about credit repair can be a daunting task. Misinformation abounds which encourages consumers to feel as if they're stuck with poor credit even though affirmative legal steps can provide relief. Understanding your consumer rights is the first step toward improving your credit rating. By law, the creditor must prove the accuracy of what you are disputing within 30 days. If they don't, it simply is removed from your credit report. If you have evidence that something is wrong, simply submit the evidence and they will have to remove the inaccurate data within 30 days or prove that it's accurate. The Credit Report and Score Market can be very confusing to the average consumer. We have broken down the market below in order to explain in simple terms how the market works. Remember, credit scores have a huge effect on your finances by controlling the interest rate you pay on all your debt. (Mortgages, Car Loans, Credit Cards, etc.)
The Raw Information - The Three Credit Agencies and Your Credit Report
Equifax, Transunion, and Experian all collect consumer finance information from creditors. The creditors can be credit cards, banks, insurance companies, and even your local gym or video rental store. Some creditors report to only one agency, while others report to all three. The reason you may have three different credit reports and credit scores is because not all creditors report information to all three agencies.
What About Credit Scores?
This is where things get a bit more complicated. Based on the information at the three agencies, Fair Isaac calculates a FICO score for the data at each agency. Perspective lenders such as car dealers and mortgage companies will look at your FICO score before deciding to offer you a loan, and even what interest rate to offer you. The fact is you really have three FICO scores at each agency. Therefore, you don't really know which score they are going to pull. Some lenders may use all three credit scores and then select the middle as an average (this is referred as your tri-merge). While other lenders [usually auto lenders] might only use one.
Great, what about Credit Score that each agency provides?
Since each agency has to pay Fair Isaac every time you want your score, they have created their own internal "Credit Score". These scores are an approximation of your real FICO score, however they are not your actual FICO score that a lender will see. They do this so they can give you a score, but not have to pay Fair Isaac for the real thing.
Great, what about the government annual free credit report?
After consumers made complaints about the credit report market, the government mandated that each agency had to provide a free report to anyone once a year. However, this free report does not provide any credit scores, which you will be charged additional fees. Since we can't calculate much about our score based on our report, this is of limited value to the average person. You might be able to clean things up on your report, but since you have no idea what your score is you might be wasting your time.
Understanding Your Credit Score
What does your score mean?
This rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between about 300 and 950. There are other scores used by lenders and insurance companies (some of which are developed by FICO) such as Application and Behavior scores. These other scores take other information into account. Usually a lender will use a combination of your credit score with other factors when determining your risk. They all have the same objective, to determine the borrower's potential risk. Regardless of whether the score was generated by FICO or a system based on FICO parameters, they all yield an industry standard three-digit score. This score places the borrower in one of three main categories (we named the third one ourselves.)
Prime, sub-prime, and poor
If your credit score is above 680 you are considered a "prime borrower" and will have no problem getting a good interest rate on your home loan, car loan or credit card.
If your credit score is below 680 you are considered "sub prime" and will likely pay a much higher interest rate on your loan.
A credit score below 560 is a poor score. At least that is how most lenders and credit issuers perceive it. You can still get a credit card but you will likely be hit with a security deposit or high acquisition fee. In addition to that your interest rate will likely be 22 to 23%. You can forget about most home loans and the majority of new car loans at this score. Below 560 is no place to be. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates. A very low score can even prevent you from getting a job with many companies.
How are credit scores calculated?
The methods of calculating your FICO may differ slightly depending on the credit bureau. When obtaining your score from one of the credit bureaus it is important to understand that your score does not come directly from FICO. It is adapted to each bureau and is given its own name: Equifax uses "Beacon", Trans Union uses "Empirica", and Experian uses "Experian/Fair Isaac." These scores are also referred to as your "Bureau Scores."
Since your score is derived from your bureau data it will change every time your reports change. However, when your score is calculated it will always take into consideration many categories of information. No one piece of information or factor determines your score. As the information in your credit report changes the importance of one or several factors may change in your FICO score. Lenders look at many things when making a credit decision including your income and the kind of credit you are applying for. However, your FICO score does not reflect these facts as it only evaluates the information retained by the credit reporting agency.
What factors affect your credit score?
There are five factors which are used in credit scoring calculations that determine your overall credit score.
Previous Credit Performance (Payment History) 35% A lender wants to know what your payment history is like. Have you paid everything on time, are you late on anything now, and so on. Your payment history is just one piece of information used in calculating your score, although it can be the most important.
Current Level of Indebtedness (Amount Owed) 30% How much is too much? Can the borrower pay me and still afford to pay his other bills? Not necessarily. Having available credit can actually help your ratio of debt to available credit. These are the types of questions that most borrowers want to know and the answers are almost as important as your previous credit history.
Amount of Time Credit Has Been In Use (Length of Credit) 15% Generally speaking the longer the credit history the better your score. However, this factor only makes up 15% of your total score so even young people, students or others with short histories can still score high overall as long as the other factors show good. If you are new to credit there is little you can do to improve this part of your score. Open an account and be patient.
Pursuit of New Credit (10%) Credit is much more popular today. Just look at the number of credit card offers you get via the internet and in the mail. Consumers can now shop for credit and find the best terms to meet their needs. Each time someone runs a credit check on you it creates an inquiry.
Fair Isaac has changed some of its calculations to account for these new trends. Specifically, they treat a group of inquiries - which probably represents a search for the best rate on a single loan - as though it was a single inquiry (note: this only applies to auto or mortgage loan inquiries.) For example: auto loan inquires that are within 14 days of each other only count as one inquiry.
Types of Credit Experience (10%) A healthy mix of different types of credit, installment loans, retail accounts, credit cards and mortgage. This score is not normally a key factor in determining your score but it can help a close score. Its not a good idea to try and open different types of accounts just to try and make this factor better. It will likely reduce your score in other areas. You should never open accounts you don't intend to use.
What type of accounts you have, and how many, can make a big difference. The optimal ratio of installment versus revolving accounts depends on your profile and differs from person to person. One factor that seems to have significant influence is your percent of open installment loans. Too many can lower this portion of your score.
Improving your credit score
Now that you know how your score is calculated you can begin making changes to your current financial planning. The best things you can do are simple.
- Pay your bills on time. Sounds simple but this is the biggest thing you can do to keep your score high. Delinquent payments and collections have a major negative impact on a score.
- Keep your balances low on unsecured revolving debt like credit cards. High outstanding balances can affect a score.
- The amount of your unused credit is an important factor in calculating your score. You should only apply for credit that you need.
- Make sure the information in your credit report is correct. If its not dispute it with the credit agencies and/or with the creditor directly.
- Removing negative items on your credit reports has the biggest impact on your FICO score. Generally negative items stay on your reports for seven years but you can hire a professional credit report repair service to do it for you.
How do we make credit repair easy?
Ever since the Fair Credit Reporting Act made credit repair possible, the credit bureaus have been working to make it complicated and difficult. Our twenty-five plus years of experience fighting the bureaus have helped us develop a vast arsenal of tools and strategies to make credit repair easy and effective-the way it should be.
