I. Some Facts About Credit - If you have credit for at least six months, you SHOULD have a credit score.
- A complex scorecard, using approximately 40 components, grades your overall "credit picture," and gives it a score ranging from about 350-850.
- Your credit score is calculated each time your credit report is pulled.
- Thus, your score will change as soon as you change just one thing in your "credit picture."
- Your credit score is an "index of risk" to the lender. It tells the lender how likely you are to pay on time. If your score is too low, they may not approve you.
- Or, if it is mediocre, they may approve you, but charge you for a higher interest rate.
- Mortgage companies go by the middle score of the three major credit bureaus.
- Your score will vary with each bureau, because not all creditors report to all three bureaus and not each bureau uses the exact formula to calculate credit scores.
II. What Makes Up a Credit Score?- A. Payment history--35%
- B. Amount owed/Types of Credit--30%
- C. Length of credit history--15%
- D. Types of credit used--10%
- E. New Credit--10%
A. Payment History (35%)
- Payment history is based on paying bills as agreed and on time.
- The majority of the payment history is based on the most recent six months and the highest weight is on the highest pay history.
- For example, a mortgage loan would be rated first and then the next biggest payment, whether is is an auto loan or credit card with a high payment, would rate next.
B. Balances Carried (30%)
- Balances carried are rated based on the balance to limit ratio. It is best to keep the balance to limit ratio low. Let's take a look at an example:
- Let's say a borrower has two credit card accounts, one Visa with Citibank and one Visa with Bank of America, and both accounts have credit limits of $10,000 but, one is maxed out and the other has a zero balance.
- If the credit accounts are left as is, it will result in a lower credit score because balance to credit limit ratio is 100%.
- On the other hand, if the borrower spread the balance between the two accounts and owed $5,000 on each, the balance to credit limit ratio would only be 50% resulting in a positive affect to the credit score and would create a higher credit score.
- It is important to note, mortgage and/or installment loans do not require the same approach as they have less of an impact with the balances carried component.
- Pay your cards online before the statement closing date, since it's the statement information that gets reported to the bureau.
- Paying your bills before the statement closes, results in a lower balance to limit ratio. This helps people who use one card and charge all of their items and pay it in full monthly but the monthly reported balance is significantly less when you pay it this way thus resulting in a higher score.
- Please not that this excludes single payment American Express Cards as they are not reported as revolving credit lines.
- Also note that if you have a business American Express this is never reported to your personal credit bureau unless you have a late pay.
C. Length of Credit History (15%)
- Credit history simply means the longer the account has been open the higher the credit score.
- To achieve the higher credit score the accounts need to be paid as agreed.
- Additionally, many people have been advised to close accounts that they never use.
- Never close old credit accounts, especially if the accounts have a long history. I realize that this sends a different message than what we may be used to, but this can actually have a negative impact on the credit score.
- Today with some adjustments in the scoring models, those open credit lines without balances would not have such a negative effect.
D. Types of Credit Used (Mix of Accounts) (10%)
E. New Credit
- New and recent credit additions are counted as part of the ratio.
III. Inquiries
- Inquiries have several factors to consider:
- If shopping around for a mortgage or a car, borrowers have 45 days to complete their shopping spree. If all credit reports are pulled within a forty-five day periods, it will only count as one inquiry.
- If a borrower applies with one lender and decides to switch to another mortgage company both inquiries will only count as one as long as the second mortgage company pulls the credit report within 45 days.
- However, if the borrower is shopping for both a mortgage and an auto, one inquiry will count for each.
- Each inquiry made averages about five points. After 10 inquiries per year, inquiries will no longer affect the score.
A. Inquiries That Don't Hurt Your Score
- Several types of inquiries do not affect the credit score at all:
- When applying for a job, a job related inquiry does not affect the score.
- When submitting an application for insurance or to start a new utility account (e.g. phone, cable, etc.).
- When a lender automatically reviews your credit account to confirm that other accounts have been paid on time and credit limits are not maxed out.
- When an individual obtains a personal credit report through http://www.annualcreditreport.com/.
- And, when promotional pre-approved credit card offers are received in the mail.
IV. What's Not Included in a Credit Score- Race, color, religion, national origin, sex, age and marital status
- Salary, occupation, title, employer, date employed or employment history
- Where you live
- Interest rate being charged on a particular credit card or other account
- Child/family support obligations or rental agreements
V. Blemished Credit Can Be Costly
- Blemished credit can be very costly and can result in higher interest rates on mortgage loans, auto loans, credit cards, and insurance premiums.
- By taking steps to improve your credit score, you could save hundreds even thousands of dollars over the term of the loan.
VI. A Higher FICO Score Saves You Money
- The Loan Savings Calculator shows how FICO scores impact the interest you pay on a loan.
- Here's an example of a Stated Income Loan for a 30 year $300,000 mortgage, were you can see the differences in interest rates that could be charged based on FICO scores and the interest costs for lower FICO's.
Steps to Increase Your Credit Score 100 Points
How, how do we improve your credit score 100 points in 45 days
1. Pay Past Due Accounts
- Pay all accounts that show a past due balance on your credit report. Past due accounts do not necessarily mean 30 days late, past due accounts can be one day late and show as past due on a credit report.
- This can severely hurt a credit score, with an average penalty of approximately 50 points! While this is not common practice, creditors are certainly within their rights to report this, this way.
- Pay all past due accounts as quickly as possible to increase the credit score.
- Past due accounts do not include judgements and collections. It is best not to pay judgements or collections when applying for a mortgage. Wait until the close of escrow, if possible, and pay them at closing.
- Paying judgements or collections could create a negative impact on the credit score a s the "recent activity" date will update if the account is paid.
- The collection will appear to more recent than it may have been which will cause a negative impact with the credit score.
- Review example below:
- FICO 1 Missed Payment - (25-60 Decrease)
- 670 610-645
- FICO Missed Payments & Bankruptcy (120-170 Decrease)
- 670 500-550
- FICO scores evaluate late payment information in a variety of ways in terms of the frequency of missed payments, the recency of the missed payments and the level of delinquency (how late the payment is).
- In this simulation, the impact on the score of missing a payment will depend on the current status and the level of the delinquency.
- For example, the impact will probably be more substantial if a payment is missed this month and the credit score is otherwise spotless or relatively clean.
- There will be less impact on the score if the credit report currently has multiple negative items.
2. Have Late Payments Removed or Mistakes Corrected
- Have late payments removed by contacting creditors and requesting to have any late payments removed.
- If your first attempt is not successful, try again and work your way up the ladder to a manager.
- Be persistent, as each time you phone a new representative will answer the phone.
- If you are successful and the creditor agrees to remove the late or correct mistakes, be sure to request a letter.
- The letter needs to be on the company letterhead of the creditor, needs to be signed by an employee and the letter must documents your name, address, account number and the specific late payment or late payments that should be removed or corrected mistakes.
- Obtain the name of the representative that you spoke with as well as contact number and extension in case you do not receive the letter and need to follow-up.
3. How Mistakes are Made
- When a credit report contains errors, it is often because the report is incomplete, or contains information about someone else.
- This typically happens because:
- The person applied for credit under different names (Robert Jones, Bob Jones, etc.).
- Someone made a clerical error in reading or entering name or address information.
- The person gave an inaccurate Social Security number, or the number was misread by the lender.
- Loan or credit card payments were inadvertently applied to the wrong account.
4. Increase Your Credit Limits
- Increasing you credit limits can increase your credit score.
- Every six months or so call each creditor and request an increase in credit limits.
- Be sure to request that the increase be made based on your great credit history.
- If the creditor insists that a credit report must be pulled, think twice before you agree as this will count as an inquiry and will have a negative impact on your credit report.
5. Become an Authorized User
- Now here is a great way to help a child establish credit without co-signing on a loan.
- Add them as an authorized user on your credit card.
- If you call your credit card company and ask them to add your child to your long standing established credit card (making sure its an account that has been paid on time with a low current balance to limit ratio) and the creditor asks for their social security number and issues the card, the credit you have established will be added to your children's credit history.
- They send the card to your house and you never give your child the card. Voila, your child has instant credit and you may not have to co-sign for that car loan!
- There is no risk as the credit card is mailed to the account holder.
6. Do Not Close Accounts
- Do not close accounts even if you have heard that old accounts that you not longer use should be closed.
- Keep accounts open and use accounts that have become inactive periodically. If you charge on the account be sure and pay the balance in full as soon as the bill arrives.
- Purchasing a tank of gas and paying it off will activate inactive accounts and report them current and in good standing.
- Closing accounts can actually lower your credit score, especially if the account has a long credit history.
Now Go Out and Improve That Credit
- To achieve a high credit score be sure to do the following:
- Borrow money when you do not need it.
- Keep the balance to limit ratio low; do not max out credit cards.
- If you have to use credit cards, be sure to spread it over several accounts.
- For a quick boost to your credit score, when a creditor removes a late payment and provides a letter, request a credit score.
- For a fee, in just a few days, your credit score will increase and this could help you obtain a better interest rate.
- Try to negotiate that the account will be paid in escrow or negotiate with the collection company to delete the account in its entirety if you pay it in full.
- Please note that your lender reserves that right to ask for this to be paid as a condition of your loan approval. Remember you won't get a FICO score boost until 6 months or more. Also remember, that collections and judgements remain on your credit report for 7 years.
This credit score information is supplied by Matthew Lewis from Greater Seattle Mortgage www.GreaterSeattleMorgage.com
Blogged by Crystal Wendekier, REALTOR--Keller Williams Realty North Seattle
