The Credit Challenge

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.