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Credit Basics

For years, consumers have been left in the dark about true credit score factors, and how they affect one’s ability to get a loan. Now, with direct access to self-serve websites consumers are finally empowered to gain greater insight into personal credit, credit score myths, security against identity fraud and theft, and how to correct or improve a score. See the links below to have credit scores explained further.

  • What is a FICO Credit Score?
  • What A Credit Score Considers?
  • What FICO Scores Ignore?
  • What Can Affect Your Credit Score?

Credit scores, often called the FICO scores, is the statistical data developed by Fair Isaac and Company, which determines an applicant’s financial position and creditworthiness. A credit score usually ranges from 350 – 850. Only an estimated 1% of the American population has a FICO score above 800. The majority of Americans score in the 600 and 700s while the remaining bottom 20% of the American population scores below 600.
A credit score tries to predict future credit behavior, with an emphasis on whether the consumer is likely to become 90 days late on at least one trade line or account within the next 24 months.

What A Credit Score Considers
There are five main categories of information, known as “weight factors”, that credit scoring models evaluate. They are listed in order of importance and negative weight in the calculation of a consumer’s credit score:

Payment History – 35% (Were Payments Made On Time?)
An individual’s payment history carries the greatest weight. It makes sense, because a lender who is considering granting credit would want to know that the applicant has paid their past credit accounts on time.
The credit score considers the frequency and the severity of delinquencies reported on trade lines within the last 24 months as the primary indicator of future risk.
Payment history includes information from public records on tax liens, bankruptcies, suits, judgements, foreclosures, collections, etc.
Payment history includes trade line repayment history on many types of revolving credit accounts, such as Visa, Master Card, American Express, Discover and retail department store accounts.
Payment history considers installment loans such as mortgage loans, auto loans, finance company and student loans.
Payment history on Child support is not considered predictive of risk and is not used in the calculation of credit scores.
Number of past due items on file.
Number of accounts paid as agreed.
Note: Older negative items in the payment history will count less than those more recent items. For example, a recent or current 30 day late payment will hit the score harder than a 60 day late three years ago. In addition, the number of accounts that show no late payments has a positive impact. A good overall payment history will increase the credit score.

Amounts Owed On Accounts – 30% (Is The Debt Utilization Close To The Limit?)
A consumer’s outstanding debt utilization is a major weight factor and can be the area in the consumer’s credit profile most easily worked with in raising the consumer’s credit score.
A large number of open accounts with high balances can indicate a person is overextended and this will negatively impact the score.
The scoring system considers the total amount of available credit and weighs it against the total outstanding owed balances.
The scoring system considers the available account credit limit for each account and the percentage of amount owed on each account.
The number of accounts that have balances is considered. Too many accounts with balances can indicate overextension.
Credit cards that are maxed out, or worse, overdrawn on their limits, will have a very severe negative effect on the scores.
Amounts owed on installment loans compared to the original loan amount can affect scores.

Length Of Credit History – 15% (How long have your accounts been open?)
In general, the longer the history of open credit the more positive weight it carries in the file when compared to a consumer with a short credit history. When reviewing a credit profile for risk it is logical that the longer a consumer has been managing credit, the more accurate an assessment can be made regarding how they have managed that credit and how likely they are to manage that credit in the future.
The scoring system considers both the age of the oldest active account record along with the average age of all the accounts.
Look at the “date opened” column to assess when the credit was established. A short history could indicate some risk, but it would only be a concern if other negative factors exist.
The number of new accounts opened in the last year weighed against the time of the most recent inquiries could be indications of caution. These factors would be considered against the balance of the credit file.
Time since account activity.

Types Of Credit Used – 10% (Retail accounts, credit cards, mortgages, installment accounts and finance company accounts)
The credit scoring system will consider the overall mix of retail accounts, credit cards, mortgages, installment accounts and finance company accounts. The type of credit used does not weigh heavily on a score; therefore, it is not an effective tool to improve a credit rating. It will become more important on those files that do not have other information on which to base the score.
The score will weigh the types and number of accounts in a file. For example, someone who has three open finance company accounts and no major credit cards may indicate caution.

Inquiries / New Credit – 10% (How many new accounts have been opened?)
Inquiries are the most misunderstood, yet most talked about weight factor. This is interesting in light of the fact that inquiries have a minor impact on a person’s credit score and many, even though shown in the credit file, do not count against the score.

Credit inquiries requested by the consumer directly to a credit bureau or their website have no impact on the credit score.
Inquiries made by current creditors to manage the consumer’s existing account, by employers for the purpose of hiring practices or for generating pre-screened credit or insurance solicitation lists by the Consumer reporting agencies, do not affect the score.
Inquiries will show on the file for two years, although only inquiries in the preceding 12 months will affect the score.
The only Credit inquiry that will impact a credit score is an authorized credit request by the consumer for the granting of some type of new credit. Even then, not all of these inquiries will necessarily count in the calculation of the credit score immediately.
When using the newest FICO version, all “Like Types of Credit Inquiries” within a 45 day period count as only one inquiry in the calculation of the score. This applies regardless of how many of one type of inquiry is made during that 45 day period of time. This process is called “De-Duplication of Like Inquiries” (De-Duping). It allows the consumer to really shop for what is best for him or her without his or her credit score being negatively impacted.
In addition, there is a Mortgage, and Auto and student loan inquiry buffer. Fair Isaac has created this buffer in order to allow consumers to shop among various service providers.
Any time a mortgage, auto or student loan inquiry is made, the credit scoring system will buffer it for 30 calendar days. This means that this inquiry will not impact the credit score for the immediate 30 calendar days following the inquiry. This protects consumers and gives them the ability to shop for the best program and the best service provider without worrying about his or her credit score being hurt by multiple inquiries.
Only consumer authorized inquiries for new credit will affect the score. The impact of an inquiry can range from 1 to 50 points depending on what other credit information is present in the credit file. Generally, the impact is minor, so it is rare that a credit inquiry would cause any significant problems for a consumer with a marginal score. There is no set number of points allocated to a credit inquiry or any other piece of credit information stored in a consumer’s credit file.

The following factors are not taken into consideration by the scoring model:

  • Race, color, religion, national origin, sex, marital status, receipt of public assistance or the exercise of any consumer rights under the Consumer Protection Act.
  • Other types of scores may consider your age, but FICO Scores do not.
  • Salary, occupation, title, employer, date employed or employment history. Lenders will consider this information, as part of the overall approval process.
  • Geographic location.
  • Any items reported as child/family obligations or rental agreements.
  • Certain types of personal inquiries. Any inquiries from employers or insurance companies, or inquiries not made for the purpose of extending a line of credit (i.e. : pulling your own credit).
  • Any information not found in the consumer report.
  • Any information that is not proven predictive of future credit performance. A score considers both positive and negative information in the consumer report.
  • Late payments will lower a score but establishing or re-establishing a good pay record making payments on time will raise FICO scores.
  • A $10.00 late payment has the same effect on a credit score as a $100.00 late payment.
  • Pay On Time: The longer history a consumer has for paying his or her debts as agreed, the better. Any payments currently past due will have a huge negative impact on the score. Getting them caught up before they become 30 days late and staying current is critical to raising the score.
  • Credit History: Paying off a debt or collection, or closing an account won’t make it go away. A closed account will still show on the file and it will be considered in the credit equation and calculation into the score.
  • High Balances: Pay down credit card balances as close to zero as possible. Balances over 80% of high credit limit are very negative. Below 50% is better. Below 30% is better yet. Keeping balances between 0% and 30 % of the high credit limit is ideal. Better to have small balances under 30% of the available credit limit on several cards than one big balance over 30% on one card.
  • New Credit: A consumer should avoid opening a lot of new accounts especially if they have a relatively young credit history. New accounts will lower the overall age of the credit history average

Your score can improve by properly managing your credit over time, and following some key tips:

  • Confirming that information on your credit report is correct. In its final rule writing of the Fair and Accurate Credit Transactions Act (FACTA), the FTC encouraged consumers to regularly monitor their personal consumer report. To facilitate self-monitoring by consumers, the FTC mandated that every consumer may receive one free consumer report from each repository (Experian, TransUnion, Equifax), annually. Bu requesting a free copy of the credit file the consumer can review it for accuracy. Upon finding any erroneous information, they can then request the bureau validate the inaccuracies. The CRA has thirty days to confirm the information and correct or delete any errors on the file. To gain access to these annual free reports, consumers should visit www.annualcreditreport.com to obtain your free reports.
  • Pay down credit card balances as close to zero as possible. Balances over 80% of high credit limit are very negative. Below 50% is better. Below 30% is better yet. Keeping balances between 0% and 30 % of the high credit limit is ideal. Better to have small balances under 30% of the available credit limit on several cards than one big balance over 30% on one card.
  • A consumer should avoid opening a lot of new accounts especially if they don’t need it. Excessive credit inquiries can lower your score. It is better to ask for credit line increases on current accounts. The consumer can request a credit line increase without the vendor pulling a “hard inquiry”.
  • Don’t consolidate credit balances onto one card and close out all other cards to take advantage of low introductory interest rates. That will artificially skew the picture of the consumer’s debt utilization to a higher percentage, and combined with the inquiry of the new account can negatively impact your score.
  • Keeping a good mix of various types of credit in the consumer’s file is optimal for the score. Mortgage loans, installment loans, and revolving credit card accounts impact your score more favorably than finance company accounts. So if possible, avoid finance company type accounts, including “90-day” and “12 months same as cash” accounts.

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