The Credit Challenge

There seems to be a cloud of mystery surrounding how credit scores work, and how you can boost your credit score as quickly as possible. There are many opinions available, but unfortunately, many are just not true. So, what is the most important factor in your credit score anyway?

Payment history is the most important part of a credit score.

According to myFico.com, “payment history” within you credit score includes:

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
• Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
• Severity of delinquency (how long past due)
• Amount past due on delinquent accounts or collection items
• Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
• Number of past due items on file
• Number of accounts paid as agreed

Most delinquencies on your credit aren’t reported to the credit bureaus until after they are 30 days late. This allows for a small grace period – which is supremely helpful to folks who aren’t adept at organization. Since you have this grace period, your credit score will not be damaged simply for being a few days late.

What’s valuable to know is that delinquencies which occurred within the past 2 years are of greater weight than older items. That means that if you see an item sent to collections, it might actually hurt you to pay it off during the loan process if it’s more than two years old.

Why? Because paying collections will decrease the credit score due to the date of last activity becoming recent. But if you do decide to pay off a collection, MAKE SURE that the creditor gives you a letter of deletion first.

If, however, you have any recent accounts with past-due amounts, paying them off immediately will help your credit score. Again, if you do decide to pay off a collection, MAKE SURE that the creditor gives you a letter of deletion first.

In credit repair, it is important not only to take notice of what you owe, but also the last active date of your accounts. Knowing this simple thing can keep you from causing your credit to bomb for paying off a collection account.

Many people are on the constant hunt to have a great credit score, or even improve the credit score that they have. Although this is a worthy cause, it is important to start your journey of obtaining excellent credit by understanding the way credit really works.

Once you are familiar with the way the credit report system works, you would be better equipped in how to dramatically increase your score, as well as maintain the high score you have managed to obtain.

So, what is the credit report system and how does it work. Great questions, and I am about to tell you just that.

First of all, your credit score is a number that represents your credit risk based on a number of different factors. These credit scores range from 300 to 850, and the national average is right around 675. The reason this number is so important is because it is a gauge that lending institutions use to determine the likelihood of you paying your debt in a timely fashion.

To get a little more specific, the score that you are given is based on the last 24 months of credit history, and using those historical facts, the credit report system determines the likeliness of you paying your account 30 days past due within the next 90 days. That sounds confusing, but it is really quite simple.

Here’s an example. If you are late on your payment this month, but haven’t been late over the last 24 months, your score will be impacted because the chances of someone having a late payment within the next 90 days is greater than someone who has never been late. However, the impact is far less than someone else who has been late several times within the last 24 months.

You can imagine that the higher your credit score, the lower credit risk you are and the more likely you are to be given credit at low rates. That is absolutely true.

Also, credit scores in the low 600s and below will often have problems obtaining credit, while scores of 720 and above will usually give you access to the best interest rates available. I like to say that once you reach a 720, you are like Noah, where the seas parted before him. Well, lenders will start parting for you!

So let’s also talk about how these credit bureaus arrive at your score. There are three main credit bureaus, Equifax, Transunion, and Experian, and each of them use different methods to arrive at your score.

Most credit bureaus use the FICO system, which comes from its developer Fair Isaac Corporation Company. This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field.

Using the FICO system, the credit bureaus and lenders are quickly able to see patterns in your credit, and then the system will provide them a score based on the finding.

Credit reports are compiled by the credit bureaus, which ultimately use the information from lending institutions and other agencies that provide your credit information to the bureaus. The type of information that is collected and factored into your score include the balance on your accounts, how many accounts you carry, the length of time that you have had established credit, the mixture of credit types, late payments, and credit inquiries.

As you can see, there are many factors that are included to determine your credit scores. There are also some important things to take note of. Your age, sex, and income do not count towards your credit score.

One can never know exactly how the credit scoring model works, however, the more information that you consume regarding credit, the easier it becomes to maintain excellent credit. Knowing this information is critical in not only establishing and managing your credit, but also repairing it.

I recently had someone ask the question, if you take out a new car loan, will your score drop?  That is a great question, and I’m sure you may be wondering this as well.

Here’s what I told him;

“There are a few factors to consider regarding your question.  The simple answer is that your score may drop within the first 45-60 days because it is a new account without any history yet until the first payment gets reported.

Now, the other factor that comes into play is the average age of your credit.  When you open a new account, you immediately give your credit a “younger age,” meaning the credit length becomes more shallow.

Here’s what I mean.

Lets say that you have the following accounts established:
Credit Card 1 – 5 years
Credit Card 2 – 6 years
Mortgage – 4 years
Home Equity Loan – 5 years

Well, the age of your credit is 5 (20 total years divided by 4 accounts) years of established credit, which is the average length of time that you’ve had these accounts.

On the other hand, lets throw in a new account.  Your age drops instantly to 4.2 years.  The more newer accounts that you have, the shorter your credit age is, which can reduce your credit score.

If you have plenty of long term credit history, then it really doesn’t make much of a difference. However, if you don’t, your score may drop considerably.”

Always keep this in mind when going for new credit.  Ask yourself “How many other accounts do I have?”  Will this new loan lower my score?”

Chances are, you may choose to hold off on the new loan and maintain your credit.

Understanding how credit is scored is a powerful way to establish yourself and your credit scores. Many people want to maximize their credit, however, they really don’t understand the very basics, which will hinder then when it comes to improving their credit.

The first thing that you should understand is that there are three main credit bureaus — Transunion, Experian, and Equifax — and each of these three give you a grade, or score, on your credit-worthiness according to what your creditors report to them. The creditors that typically report this credit information are for the following types of credit; mortgages, car loans, installment loans, student loans, credit card companies, collection accounts, bankruptcy and other public information, and a few others.

While each of the three credit bureaus may use slightly different variables to get to your score, the FICO scoring model is still the major credit scoring model that is used today.

What is FICO anyway? FICO stands for Fair, Isaac and Company, the group that designed the model.

According to the FICO model, here are the factors that determine your credit score:

• 35% – payment history
• 30% – amounts owed
• 15% – length of credit history
• 10% - types of credit
• 10% – new credit

Knowing this will help you make better decisions when it comes down to actions that you need to take to fix your credit score.

Knowing the components of your credit score is helpful, however, you will need your own copy of your credit report in order to start taking any action to fix your credit score. So, how do you get your hands on your own credit report?

Getting a credit report is quite simple, especially considering that you are entitled to obtain a free copy of your credit report every 12 months. However, getting your credit score can be much trickier.

Make sure any company you pay to send you your credit report is also sending you the credit score, so you know the exact number that lenders are receiving. Credit companies that give you access to your credit report typically charge extra to include your scores in your report. This is a good investment though, because you’ll know the temperature of your credit!

One service that I recommend is using Credit.com. They will send you a free copy of your credit report with your credit report with a membership. If you don’t plan on keeping your membership with them for some reason, you have to remember to cancel your membership within their 30-day period, and you only receive one of the three bureau’s reports.

Hopefully, you now have a better grasp on the importance of credit and your credit score, and knowing these facts will definitely put you ahead of the pack!

Identity theft has been a real epidemic as of late, and it can happen without you knowing about it. According to the FTC, 10% of people that have suffered identity theft said that the thieves managed to accumulate over $6,000 from them, and 5% said that the thieves were able to acquire over $13,000. As you can see, identity theft can cause many financial damages, and also completely destroy your credit.

In order to help protect you from this happening, here is a list of steps to take to protect yourself from identity theft and a shattered credit history.

1. Be cautious about disclosing your personal information and account numbers over the phone, online, or by mail. Be sure that you are dealing with a reputable company.
2. Carry only the ID or credit card that you will be using and keep the other ones in a safe place at home. This will minimize the damages and your time to report everything that is missing.
3. When you receive a new card, sign and activate it immediately. You can even sign on the back with ASK FOR ID rather than your signature.
4. Don’t carry your social security card around with you, leave it at home.
5. Shred your mail, especially those with account information, or even preapproved applications. Tearing them apart isn’t always enough.
6. Keep a detailed list of all your account information with account numbers and phone numbers in a safe place. If you happen to lose your wallet or purse, you have a way to contact them immediately and deactivate your cards.
7. Regularly check your credit report. This is most important because you get to see what credit activity you’ve had.

Make sure that you follow these 7 steps to make sure that you are protected.  Who knows, you may end up thanking me later.

If you take identity theft seriously, and your financial privacy even more serious, then I recommend LifeLock.  It is an identity theft prevention service, and it is so safe, the CEO posts his own social security number all over the place.  Find out more about LifeLock, but only if you take your credit and identity seriously.

When is the last time you reviewed your credit?  This is an important thing to consider, because millions of people are suffering from a low credit score due only to errors in their credit report.

Think about it, people are paying Credit Repair companies thousands each and every day to fix their credit score, but have never taken the time to check it themselves.  Chances are, you may have some errors on your credit that are keeping you from having the top credit score that you want and need.

So, what is it worth to check you credit score?  Considering that you can get your credit report for free once every 12 months at www.AnnualCreditReport.com, it would do you well to start there.  This will not give you a credit score however, but the most important part is to check all the information on your credit.

Some of things errors can range from paid accounts that still show a balance, to collections that don’t belong to you, as well as accounts that were included in a bankruptcy that still show active and open with a balance.

As you can see, simply taking a few minutes to get your credit and check for errors will save you tons of money.  Often, those people that are paying for credit repair services could have avoided it all together by simply checking their credit themselves for free.

Recently, I was on a forum pertaining to credit and I came across someone who had their credit score dramatically decrease.  Can you believe that his score dropped 100 points in about a months time?

Like many people, he was trying to pay off his derogatory accounts in preparation to buy his home, and he wanted to do everything possible to increase his credit score.  He went ahead and paid off his old accounts, and then wondered why his score dropped.  Well, here’s what I told him, and I hope that you use this advice yourself:

“The reason that your credit score dropped can quite possibly be because of your car loan being paid off early or the target account reporting while you have a maxed out balance, but those aren’t the biggest factors.

The biggest factor is that when paying old derogatory accounts, you always, always always have to be conscious of the last time they reported to your credit report.

Here’s an example. Suppose you have a collection that was from 3 years ago. You definitely owe on it, however, since it reported two years ago or more, it doesn’t do anything for your credit score to have it there, neither good nor bad.

So, in an effort to get it off your credit, you contact them and pay them off. OOPS, you now have new recent activity on your credit from these derogatory accounts that weren’t hurting your score anymore, and your score drops, because it is very recent.

So, where your credit score was rated without that collection, now immediately it is rated with this old collection that is now current.”

So, in reflection to that answer, the main thing is that it isn’t always a good idea to just go ahead an pay accounts off.  Your credit score may in fact go down.  I hope you can see the importance of seeing when the last activity date is on your credit accounts, because it can give you huge consequences!

On my last post yesterday giving you some credit repair tips by knowing about credit inquiries, I mentioned to you about credit ’scare tactics’ that some lender use.

Why do I call it credit scare tactics?  Well, here’s how you may have experienced what I’m talking about.

You go to your local car dealer to buy a car.  You find a car that you like, so you sit down with the sales person to work out the numbers.  They ask you for your personal info to access your credit, just to make sure you can actually buy the car. 

So, here’s what happens next.  They come to you and tell you about your credit, but say to you “We are giving you a great offer, so buy this car now.” 

You say, “Well, I want to see my other options”

They say, we don’t suggest that because your credit score may drop and you will lose out on the offer we are giving you for this “special financing.”

All of a sudden, you are caught in surprise, and feel desperate pressure to buy now, because you don’t really want to lose out.  So, you forfeit the right that you have to shop around so that you don’t lose this great opportunity.

This often happens when getting a car loan or a home loan. 

So, is there any truth to this?  Absolutely NOT!!!!

You have a right to shop around and the credit agencies permit it as well.  Like I mentioned on my last post, auto loans and mortgage inquiries are allowed within a 14 day window from the first inquiry.

So, if you are looking to get a car (really, a car loan), you can literally check out one dealer, get your credit run, find out that they are offering you, and then go to another place that same day, or the next day, or any day within the next 14 days, and you will not be penalized for pulling your credit multiple times.

(If you didn’t read the last post, click here: Credit Repair Tips)

So, now you know that you do have the right to shop around, but just remember that you only have a 14 day window, so make sure you use your time wisely.

The next time someone tells you not to leave without buying because shopping around damages your score, leave immediately, because there is no truth to that, unless you take more than 14 days.  Shop around for the best for you, not them!!!

There are many people that tell us that pulling your credit and having credit inquiries will always damage your credit score.  Well, I want to shine some light on the subject, because that is not always true.

Before we can debunk the credit inquiry myth, it is important to know that there are two types of credit inquiries.  Although this system for inquiries isn’t new, many people don’t want to talk about it because of two reasons: 1. they just don’t know better, or 2. they want to keep this information from you in order for their scare tactic to work on you (which I will get into on another post).

So, let’s get right into it. 

The first type of credit inquiry is a soft credit inquiry, or soft pull, because you are the one requesting your own credit.  When you request your own credit, there is absolutely no damage to your credit or credit score whatsoever.  The reason is simple.  How can you properly monitor your credit if you get penalized every time you access it? (You are monitoring your credit, aren’t you?)

So, you can actually access your credit every month to check for errors or new account history or whatever, and your credit score will not decrease. 

There, the secret is out!  But before you get too excited about this, I also have to mention to you that lending institutions, whether you are applying for a mortgage, a car loan, or a credit card, will not use your credit report for your safety and theirs.  It all comes down to accountability. 

If I brought in my own credit report to you, and asked you to lend me $200,000 for a house, and you didn’t check my references, but solely went off of what I provided you, would you lend me the money?  Chances are, you wouldn’t.  Well, believe it or not, there are still people out in this world that forge documents to get what they want. 

On the other hand, when the bank pulls your credit, their name, account number, and contact information appears on your report, so they know for certain that the information that they have is real.  But, more importantly, if they falsify anything just to get your loan through, they get the lawyers after them, not you.  Don’t worry though, this doesn’t happen too often, but you should know about it anyway.

The other part of soft inquiries is when you get a pre-approved offer from credit cards in the mail.  They have in fact taken a look at your credit, however, since you didn’t request it of them, it doesn’t damage your credit either. It is only when you solicit a loan that requires a credit report to be pulled that you may see your credit score decrease.  As a matter of fact, when you access your own report, these “soft” inquiries from companies will all be listed out for you, so you can see who has accessed your information.

That brings us to the second type of credit inquiry, which is the hard inquiries.  I’ve already touched on these, but let me get a little deeper into them.  These are the inquiries that you get from applying for credit cards, insurance, school loans, mortgages, auto loans, installment loans (like furniture), and other types of credit.

Since this is for commercial use, and you are looking to obtain credit with these companies, these are the damaging ones.   Now, if you have only pulled your credit once or twice in 6 months, you have no worries.  However, if you apply for 2 or 3 credit cards a month, your score can potentially drop even 80 points in a short period of time.  Be careful and smart about applying for credit.  If possible, spread them out over time, but only if you really need them (which many times you don’t).

Finally, there are two last points that I want to make in regards to hard inquiries.  If you get crazy on the credit applications, there comes a point where the credit score will stop going down, because the maximum damage has already been done.  So, let’s say that you pull your credit a million times in 5 days, that wouldn’t do more damage than pulling it 100 times in 5 days, because you’ve already exhausted all the damage that can be done with credit inquiries. There are other factors that can lower your score, but in that case, additional credit inquiries will not.

In addition to that fact, mortgage and auto loans operate a little differently as well.  For these two, you have a 14 day window which you can shop around for a mortgage or car loan without any further damage.  So, if you are shopping for a mortgage, you have 14 days to look around and multiple companies can access your credit without any damage to your score.  The same goes with an auto loan.  You just can’t flip flop, and apply for a mortgage and within 14 days apply for a car thinking that you will not get penalized, because that would be 2 inquiries since car loans and home loans are different kinds.

Hope this was helpful, and stay tuned so that you can find out more about the inquiry scare tactics that a lot of lenders use.

Credit repair is something that you hear about all the time.  First of all, there are credit repair companies.  Then there are credit repair kits.  There are many things out on the market that supposedly make the process of credit repair fast and easy.

In my time working with clients over time, there are have been many excuses why they haven’t taken any steps to repair their credit, however, there are 5 key things that have been consistent over the last 7 years.

1. Lack Of Knowledge – Because we’ve been served so many different ways to achieve good credit, it is obvious that people seem more overwhelmed because of not having the right knowledge about credit or how to improve it.  The first step is understanding how credit really works.  There are 5 key factors which determine your credit score, but sadly, even some professionals don’t really know this precise formula.
2. Different Opinions and Perspectives- Many people that I’ve spoken to have different perspectives on how and what to do to have excellent credit.  This is mainly because the people that we go to learn about credit don’t really know themselves.  So, if we get false information about credit, guess what?  We will pass on the same inaccurate information to others.  Every time, the right info gets diluted and becomes completely false.
3. Not Establishing A Plan To Improve Your Credit- You’ve probably heard the saying “If you fail to plan, you plan to fail.”  Well, that also applies to increasing your credit score and working on your credit repair.  There are a number of steps that it takes to boost your credit score, but often, people just shoot from the hip, or take a blind shot into the wind, without properly planning the steps necessary to increase your score.  It is very important to establish a plan because then you know that you are making progress, and you will also provide yourself with accountability to stick to the goal!
4. Can Be Overwhelming- At first, credit repair may look overwhelming.  After all, the task of going from a 537 score to a 700 seems like a huge undertaking.  The simplest way to achieve this and not feel suffocated is to break down your plan into smaller, manageable tasks.  Instead of paying down 5 credit cards so that they reach a 30% balance compared to the credit limit, focus on paying down the smallest one.  Once you do that, move on to the next one, and so forth.  This can give you motivation to continue and also make you feel like you are moving closer to the goal.
5. Lack Of Money or Time To Improve Credit- Let’s face it.  In order to repair your credit, you will either need time or money, or even both.  The more money you have available to do it, the less of your time it would take, and vice versa.  Again, making small adjustments can get you well on your way to credit repair.  First, is there anything that you can cut off from your spending that you can redirect to your debt?  Also, do you have an hour or two that you can schedule with yourself to review your credit and send out any letters to the creditors?  These are small things that you can begin doing to make a difference in your credit score.

As you can see, if you know what some of the road blocks are from improving your credit, then you can plan accordingly and make adjustments when necessary.

What are some of the things that are hindering you from improving your credit?  Feel free to leave comments or questions here and I will be sure to answer them.