Friday, November 23, 2012

Understanding Your Credit Score

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. Credit scores may range from the 300 to 850 and is commonly referred to as a FICO score. This formula is used by the each of the reporting agencies which vary slightly and is why they use three merged reports when applying for a mortgage. EquifaxExperian, and TransUnion keep these formulas "secret" but they all share the same 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. Judgments 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 of 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 and ask them to correct any incorrect information. If that doesn't help you may file a dispute with the agency reporting it. Disputing accounts on your credit bureau can throw up red flags and may cause delays in your mortgage application due to lender guidelines. Please consult with a mortgage professional before disputing any information on your credit report if you are considering applying for a mortgage in the near future. Ask for letters from the creditor or agency and be sure you keep all documentation relating to the correction to serve as proof should the error turn up again. A rapid re-score is often used when timelines are short and you need a quick boost to your score to qualify you for certain mortgage programs. 

If you want to keep tabs on your score you may subscribe with any of the agencies for a monthly fee, shop to see which of the programs is suited towards your needs and goals. You also can also purchase score simulating software and play with different credit scenarios. If you are a Costco member I highly recommend you try their service Identity Guard which includes monthly monitoring with scores, fraud alerts, a score simulator, and identity theft protection all for a reasonable price. Monitoring your credit is beneficial for your wallet in the long run and will also help protect you from the devastating affects of any fraud. If you are trying to recover from bad credit because life happened the good news is all you need is a little discipline and time. 

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