Understanding Your Credit Scores

Understanding Your Credit Scores

Having a high credit score can make your life so much simpler, affording you so many financial benefits in all walks of life. Earning lower rates on credit cards, mortgages, or any type of loan is at your disposal. It may even land you the JOB you interviewed for, employers now review your credit profile in addition to your qualifications. Despite all of these benefits, very few of us truly understand the benefits of the credit scoring system, how it works, and what you can do to improve your credit scores. Here's a few tips to help you better navigate the credit scoring jungle......

1. What exactly is a FICO score?  Fico scores originate from the Fair Isaac Corporation, a Minneapolis-based company that creates your FICO credit scores. All scores range from 300-850 points on the low/high end of the spectrum. There are a number of different scoring mechanisms on the marketplace today, but most banks and lenders ( 90 % ) use the FICO system to access a consumers credit history.
The scoring system serves two essential purposes. First, it organizes and analyzes your entire credit profile, uses a mathematical equation to issue you a 3 digit credit score. This is basically a risk model and determines what rate of interest you'll be charged by a third party lender. Secondly, by using this system, the lender can determine the “RISK” of default based upon your previous payment history and credit score. The higher the score, the less likely a default will occur, conversely, the lower the score, the higher the risk of default.

2. What is a good Credit Score these days? Before the mortgage meltdown a decent credit score was in the 600's. With the wave of foreclosures and defaults on all forms of credit that number is now considered poor. In order to access credit with little or no problems you need to be in the 700's and above. As of July 2010 according to FICO there were approximately 52 million Americans with a credit score below 600.

3. Do all of us have 3 scores, and why are they different? You can have multiple scores for a variety of reasons, the main reason is that most creditors don't respond to all three of the major bureaus, Experian, Trans Union, Equifax. In addition to that, all three have a slightly different variation of the scoring model. Each claiming the more accurate of information.

4. How is my score actually calculated? I'd like to tell you its easy to understand but its really complicated from a lay persons perspective. All three bureaus take your information listed below and it returns your scores.

  • Payment History-35%
  • Amount of debt Owed-30%
  • Length of Credit History-15%
  • Mix of Credit-10%
  • Inquiries or New Credit- 10%

Some common sense items to think about in regards to each of the categories.
PAYMENT HISTORY: Having late payments will hurt your score tremendously, it doesn't matter what the amount is, say for instance your 30 days past due on a $15 minimum payment to Capital One, it will impact your score just as severely as a $325 minimum payment. So be aware how important making your payments on time is when it comes to your scores.

YOUR DEBT: The system looks at your debt loads in different ways. For instance, the system doesn't look at your mortgage in the same light as your revolving debt. Having a mortgage payment of $1500 and a balance of $189,000 will weigh differently than 5 credit cards with a $1000 limit and maximum balances on each. Even though the minimum payment on all 5 is less than your mortgage payment the system will look at that unfavorably. So be careful on the types of debt you carry, but more importantly, the amount of debt in revolving accounts.

HISTORY:  The longer you have credit the higher your credit scores will be. Keep in mind that if you don't use a card doesn't necessarily mean you need to close the account. Actually having access to credit but not using it shows fiscal restraint and you are rewarded for it in the scoring system.

CREDIT MIX: They system looks favorably on you if you have a mix of credit. Revolving, installment, and mortgage. Paying all your bills on time, minimizing your balances, and time can raise your credit scores.

INQUIRIES: Monitoring your credit profile on your own does not reduce your credit score. However, some credit card offers may reduce your score up to 25 points, so be careful, and ask yourself, do I really need that 10% discount to open up a charge account? If you can pay cash, please do so. Remember, the system is designed to have your score high enough to access credit, but not high enough for you to pick and choose the type of credit you want to accept.

How can I raise my credit scores?
The single best way to raise your personal credit scores is to pay all of your bills on time. You can also improve your score by reviewing your credit profile, identifying errors within your credit profile, and forcing your creditors to VALIDATE those items according to the law. Our software will allow you to navigate through the maze that is the credit bureaus. We will provide you with a complete video training library, a written e-book, as well technical support. All in an effort to empower you to change your financial future. Questions or comments please feel free to send them via the BLOG.....     <http://www.turnscor.com/>