Wednesday, May 2, 2007

Shedding light on credit scores.

Your credit rating will determine the interest rate you pay not only on consumer loans, but also the premiums on homeowners and auto insurance, and lately more employers are considering your credit history to determine your eligibility for employment. Over the years I have seen credit scores that have ranged from the 410's to the 840's. The FICO score is a formula used by the each of the reporting agencies but it will differ due to the information collected by each. The formula itself is a moot point but I will share its major components.

1) Payment History: Simple, pay on time every time. If you have not in the past the sooner you start the better. Public records such as a bankruptcy and foreclosure will hurt you the most. Judgements and collections will also take a big bite out of your score followed by slow pays. Derogatory information will carry less weight over time as long as you develop good credit habits going forward.

2) Capacity: The balance owed vs. the credit limit. Being maxed out will hurt you just as much as slow pays if not more. Ideally you would want to pay your balance each month. You also want to make sure you don't have too much credit available, but be careful if you decide to close any accounts, make sure it has a zero balance and is not one of your long standing accounts.

3) Longevity: The length of time your accounts have been established. You want to show a good payment history over a length of time. Rolling credit card balances every 6 months or so to keep the teaser rate might save you money but you are hurting your score in the long run.

4) Types of accounts: You will find trade lines categorized into 4 groups, Mortgage, Installment, Revolving, and Open-end accounts eg. mobile phone and utilities in some states. A good balance between the types of accounts is needed to keep your score up. Your history on a mortgage trade line will have a more positive impact on your rating while a signature loan with those nameless "financial institutions" will have a more negative one.

5) Inquiries: How many times in the last 12 months and for which types of accounts are you applying? Creditors are weighted by their type of credit they offer. Mortgage or auto inquiries within a 30 day period are counted as only one inquiry. Even more interesting an inquiry at a credit union will have less of a sting than an inquiry at that nameless "financial institution".

 Most importantly make sure that all the information on your credit report is accurate. You can obtain all three free at it will not include your score unless you opt to pay for it. Contact the creditors directly to dispute any incorrect information, if that doesn't help file a dispute with the agency reporting it. If you want to keep tabs on your score you can subscribe with any of the agencies for a monthly fee, shop to see which of the programs work fit your needs and goals. You also might consider purchasing score simulating software available and play with different credit scenarios. Monitoring your credit is beneficial for your wallet and will also alert you of any fraud. For more information visit these sites: Equifax, Experian, and TransUnion.