Are you aware that by knowing the ‘recipe’ that makes a score you can alter your decisions and take different actions to raise your score ?
The following information is from a lesson I provide to apartment dwellers who are anticipating buying a home in a couple of years, please share this with others who maybe facing such a challenge.
The first step is getting inside the credit world’s head and understanding which actions are considered in creating your score. This lesson is not directly on how to repair your credit, but with this knowledge you can change the kind of data that is being reported. I sincerely hope the following information helps you as much as it has proven to help others.
1. Know what your scores are NOW !
Mortgage lenders look seriously back over the previous 2 years, start now taking control of your finances. You can order all 3 FREE credit reports at: www.AnnualCreditReport.com NOTE: credit scores are NOT included in your credit reports pulled at www.AnnualCreditReport.com. You must order and pay for them separately, or order a triad consumer credit report that comes with all 3 credit reporting agencies and all 3 credit scores online.
Be sure to read the terms of agreement before ordering online credit reports. You want all three (3) major credit reports with all 3 scores, NOT just one or two. Not all creditors report to all three, so for you to see the entire picture of your credit file, pull all three.
DO NOT have a friend at the car lot, a banker or a lender pull your report for you, it could hurt your score. Remember you can pull your credit report every day if you wish and it does NOT hurt your scores.
2. What is a credit score ? A credit score is a 3 digit number based upon thousands of components, and averaged against your peers that tells a lender how much of a risk you are to him. A credit score is created at the same time a credit report is requested and the score can change daily.
To have a credit score you must qualify under the following rules: have an account shown as ‘open’ within the last six months, an account a credit has reported on by the creditor within the last six months, and have no narrative or indication of you being dead.
There are approximately 8 other scores used in combination to the credit scores from Experian, Equifax, and Trans Union. A lender uses these scores to determine his risk involved in lending you money or credit:
Collection Score: Once you are late, or your account is turned over to a collection agency use these scores to assess the likelihood that you’ll be able to pay them and sort their list of debtors accordingly.
Revenue Score: It gauges how much money your account is likely to generate for them.
Application Score: How much you earn, howling you’ve lived at your current address, and how long you’ve worked for your current employer.
Bankruptcy Score: The likelihood you will miss a payment in the next two years and that you’ll file for Chapter 7 liquidation or a Chapter 13 repayment plan.
Behavior Score: The overall analysis of your habits to determine the likelihood of your future actions.
Response Score: The likelihood of a consumer responding to an offer of credit.
Attrition-Risk Score: Predicts the likelihood you will stop using a card.
Transaction Score: These scores are run EACH time you use your plastic to determine whether you should be approved …or not.
3. What does Experian, Equifax and Trans Union consider when creating a credit score ?
Payment History: 35% of your credit score ! Your past and present payment history is broken down into 3 categories:
- Recency -The last time a payment was late.
- Frequency-The number of late payments.
- Severity – When there are repeated late payments: 30, 60, or 120 days are shown late and/or with negative narrative words: collections, tax liens, foreclosures, repossessions, charge-offs and bankruptcy.
Utilization Rate: 30% This is also referred to as ‘Debt-To-Credit Ratio’ where your revolving balances of debt are compared to the credit limits on your accounts. Closed Accounts hurt if a balance remains. The less debt you have the better ! 10% of your credit limit taken up in debt is EXCELLENT, 20% is OK. 30% is DANGEROUS, and 40% is BAD, BAD, BAD ! 50% of the credit limit used up in debt is suicidal !
Length or Age of credit history: 15% The age of the oldest account AND the average age of all your accounts that are open is computed. NEVER close an account, and use old accounts at least every 3 months to keep it active. An inactive open account does not score as high.
New Credit / Inquiries: 10% Considers how many accounts you applied for recently. How many new accounts you opened. How much time has passed since you last applied for credit, and how much time since you actually opened an account. The score counts mortgage, car loans and student loans apps. WITHIN 30 days as one inquiry . Inquiries are seen for 2 years in your file, but hard pulls by lenders only hurt your score for 1 year. With 6+ inquiries a lender sees you as a strong possibility for bankruptcy.
Type of Credit / Mix: 10% Having a healthy mix of revolving debt (credit cards) and installment loans (auto or mortgage) shows the scoring model and lenders you have a wider set of money management skills.
SPECTRUM RESOURCES has served individuals and families like yourself since 2002 with the mission to educate and assist those who seek financial self-sufficiency.
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