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About your Credit Score

At Credit Repair Consultants, we believe that consumers should be empowered with as much information regarding their credit as possible. We created this comprehensive yet easy to understand section on credit scores in order that you may be better equipped at improving and maintaining your good credit and understanding how creditors actually view you. This is the sane information that many other sites try to sell to you in the form of an e-book.

We provide this information totally free and will even email it to you for free if you wish.We realize that there are many myths circulating about “Credit Scores” so we want you to know the truth. When you are finished reading, you should know everything you need to know about your credit scores.First off, itis important to realize that most lending decisions nowadays are decided simply by looking at your credit score. Some decisions are even automatically generated by computer using preset credit score criteria. The days of lenders actually looking at the details of your credit report are long gone. Understanding how to obtain and keep a high credit score is vital to getting the credit you want and deserve.

In this section you will learn things like, what is a credit score, do I have more than one credit score, how come my credit score was different when I checked it and when the lender checked it, what it costs me to have a low credit score, how my credit score is calculated, how to improve my credit score, how to obtain my real credit score, important credit score facts, and even how to add positive accounts to my credit report and increase my credit score without actually having to qualify for new credit.

Introduction to credit scores

The company that created the scoring model used today by most lenders is called Fair Isaac Corporation and commonly known as FICO, for short. Fair Isaac Corporation is a California Company founded in 1956 by Bill Fair and Earl Isaac. They pioneered the field of credit scoring for financial companies. They have expanded their enterprise to cover decision systems, analytics and consulting.

When the three major credit bureaus calculate your credit score using software from FICO, they come up with what is commonly termed, your  “FICO Score”. Each credit bureau propriotizes their calculation of this score by giving it their own name. Equifax calls their version of the FICO score the “Beacon score”; Trans Union calls their version of the FICO score the “Empirica score” and Experian creatively calls theirs the “Experian, Fair Isaac score”. The “FICO score” is the score that over 70% of lenders will use to decide if you qualify for credit or not.

But beware, many companies, even the credit bureau themselves, have realized that there is lots of money to be made selling credit scores so they have created their own generic scoring models designed to get you to buy their version of a credit score model similar to that of FICO’s. They will try to sell you a number called a credit score, but not the credit score that your lenders will use. If it is not your FICO credit score it is probably not the credit score you want.  

What your credit score means.

The credit score rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit report, including payment history, length of account history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a 3-digit score between 300 and 850. There are other scores used by lenders and insurance companies (some of which are developed by FICO) such as Application and Behavior scores.  These other scores take other information into account.  Usually a lender will use a combination of your credit score along with other factors, such as income, debt ratio, or current assets when determining your risk. They all have the same objective, to determine the borrower’s potential risk. Regardless of whether the score was generated by FICO or a system based on FICO parameters, they all yield an industry standard 3 digit score. This score usually places you in one of 3 main categories.

Low Risk, Average Risk, and High Risk

Low Risk
If your credit score is above 680, you are generally considered a lower risk and should have no problem getting a good interest rate on your home loan, car loan, or credit card.

Average Risk
If your credit score is below 680, you are average or "sub prime" risk, and will likely be offered less than favorable interest rates and terms on your loans and credit cards. 

High Risk
Below 580 is a high-risk credit score. Although more difficult, you may still be able get a credit card but will likely be required to give a security deposit and be hit with high interest and fees. You can forget about most home loans and the majority of new car loans at this score. Below 580 is no place to be. You will pay much, much more for your credit transactions. You may even pay more for your insurance rates. A very low score can even prevent you from getting a job with many companies.

What it cost you to have a low score?

If you are financing or looking to finance a car, having poor credit can mean higher down payments and over 200% higher interest rate. The higher interest shows up every month in a higher payment.

This example is based on financing $25,000 for 60 months.

Credit Status

Rate

Payment

Over 5 years

Monthly Cost of
Bad Credit

Good

5%

$471.78

$0.00

$0.00

Mildly damaged

8%

$506.91

$2,107.74

$35.13

Damaged

12%

$556.11

$5,059.82

$84.33

Bad credit in auto financing can really hurt, but it is nothing compared to the cost of bad credit when a home is involved. A typical home can cost between $90,000 and $245,000 more in interest if you are buying the home with a low FICO score, as indicated below.

This example is based on financing $200,000 for 30 years, P.I. only.

Credit Status

Rate

Payment

Over 30 years

Monthly Cost of
Bad Credit

Good

5%

$1,073.64

$0.00

$0.00

Mildly damaged

7%

$1,330.6

$92,506.23

$256.96

Damaged

9%

$1,755.14

$245,339.76

$681.50

In fact, in general, those with bad credit throughout their life will pay approximately $250,000 more in interest as opposed to those with good credit. This is why it is so important to obtain and keep a high score.

How Credit Scores are Calculated

The methods of calculating your FICO credit score may differ slightly depending on the credit bureau. When obtaining your credit score from one of the Credit Bureaus it is important to understand that your score is not coming directly from FICO, rather it is adapted to each credit bureau’s report and is given its own name:

credit scores

Equifax = Beacon Score

Trans Union = Empirica Score

Experian = Experian/Fair Issac Score

 

Your credit score is derived from your bureau data and is calculated each time it is requested and is not a permanent part of your credit file. Accordingly, it will change every time data on your credit reports change and may be slightly different each time it is requested. Since each credit bureau usually reports different information, your credit score from each credit bureau will also be different.

However your credit score is calculated, it will always take into consideration many factors or categories of information. No one piece of information determines your credit score and all of these factors are interrelated with one another. As the information in your credit report changes, the importance of one or several factors may change in your FICO score. Lenders may look at many things when making a credit decision, including your income and the kind of credit you are applying for. However, your FICO score does not reflect these facts, as it only evaluates the information retained by the credit-reporting agency.

Its difficult to say exactly how the credit score is calculated as FICO does not reveal the details of their model. We do know that it is largely based on the following factors.

1. Payment History (Previous credit performance) = 35%

2. Outstanding Debt (Current level of indebtedness) = 30%

  3. Amount of time credit has been in use (Credit history length) = 15%

  4. Recent Inquiries (Pursuit of new credit) = 10%

  5. Types of credit experience and credit in use = 10%

 

1. Previous Credit Performance (Payment History) 35%

A lender wants to know what your payment history is like. Have you paid everything on time, are you late on anything now, etc… Your payment history is usually the most important factor used in calculating your score. In fact, even just one 30-day late payment can have a tremendous negative impact on your score. This “negative history” is exactly what Credit Repair Consultants are dedicated to improving for you. Each time a negative item is removed from your credit it should have a positive effect on your credit score.

Here is more information on what the score looks for:

  • Payment history on your accounts. These include credit cards, retail accounts (department store credit cards), installment loans, finance company accounts and mortgage loans.
  • Collection items and Public records—this includes judgments, bankruptcies, suits, liens, collection items and wage attachments. Most of these are considered quite serious, although older items will count less than more recent ones.

  • It’s all in the details. This includes specific details on late and missed payments. Negative information/late pays are determined using three factors.
    • Recentness - How long ago did the delinquency occur?

How old is the late pay? A 30-day late payment made just a month ago will affect your score much more than a 90-day late payment from five years ago.

    • Severity - What level of delinquency was reached?

How late was the payment made? 30 days, 60 days, 90 days or worst of all, is the payment still outstanding.

    • Prevalence - How many credit obligations have been delinquent?

The amount of negative items as compared to your total amount of available credit is another small factor. For instance, 5 accounts showing 3 late payments is much worse than 10 accounts showing 4 late payments. One of the biggest sub factors is how many accounts show no late payments. A good track record on most of your credit accounts will increase your over all FICO score substantially.  

Note: Note that paying an account that was previously delinquent or in collection does not make that account disappear from your credit report.

2. Current Level of Indebtedness (Amount Owed) 30%

Are your cards max-ed out? High balances, or more precisely, balances that are close to your credit limit can negatively affect your score.

The creditor wants to know, Can the borrower pay me and still afford to pay his other bills? These are the types of questions that most borrowers want to know and the answers are almost as important as your previous credit history.

  • Total amount owed on all open accounts. Paying off your credit cards in full every month does not mean that they won’t show a balance on your report. Your total balance on your last statement is generally the amount that will show in your credit report.  
  • Specific types of accounts, such as credit cards and installment loans are scored differently and in conjunction with the overall amount owed on all open accounts. This also factors into your balance on each specific type of account. For instance; you have a credit card with a very small balance and no late pays. Even though the balance is low, this still looks very good as it shows that you are able to manage your credit responsibly
  • How many accounts do you have open and how many have balances? A large number of open accounts, even with small balances, can indicate higher risk of over-extension. This is weighted in your FICO score but most lenders leave it to their discretion as they have access to your income amount. For the most part though it is good not to have too many credit card accounts. Closing credit accounts will not raise your credit score and may actually hurt your credit score.
  • How much of the total credit available to you, are you using? In other words, are you close to maxing out?  For example, if you have a credit card with an available credit line of $1000 dollars and you have a current balance of $850.00 or more, then you are nearly “Maxed out”. Several credit cards or other debts with balances approaching the credit limit will affect your score negatively. Even if you have made your payments responsibly. Your FICO score will factor your overall ratio of debt to your overall limits.

As a general rule keep your balances below 50% of your limit or, if possible, pay the cards off altogether. If you have to choose between paying $1000 on three cards or paying off one card with a $3000 balance, pay off the one card. Another helpful tip- don’t forget to request a credit limit increase every six months, or whenever your credit card company allows you to qualify for one. This will give you more “available” credit and the ratio between your credit limit and what you owe will be lower. Please note, you must have the discipline to not use your new available credit or you may not only due more damage to this ratio, but you may become overextended.

    • By the way, if you already feel that you may be overextended on your bills, contact a credit professional. We suggest calling a certified and knowledgeable credit counselor toll free at 1-866-FIX-A-DEBT or visit http://www.debtconsolidationofamerica.com for free information from a reputable, honest and non-profit credit counseling service that can have your payments and interest lowered. It does no good to repair your credit if you will not be able to keep it in good standing.

3. Amount of Time Credit Has Been In Use (Length of Credit) 15%

The longer your accounts have been open, the better your credit score. This factor only makes up about 15% of your total credit score, however, so even young people and recent immigrants can still score high overall as long as their other factors are good. If you are new to credit your best bet is probably just to open an account and be patient. There is one technique that you may be able to use, however. We will discuss it in detail later. Just understand that the credit score takes into account these factors:

  • How long your credit accounts have been open or the number of months you have been in the credit bureau’s file. 

  • The age of your oldest account and the average age of all your accounts.

  • How long it has been since you used certain accounts as well as the mix of older and new trade lines.

4. Pursuit of New Credit (10%)

Credit is much more popular today. Just look at the number of credit card offers you get via the mail and the Internet. Most consumers can now shop for credit and find the best terms for their situation. But every time you apply for credit of any kind, you create an inquiry on your credit report. Too many Inquiries negatively affect your score. Inquiries within the last six months are especially damaging and most inquiries will remain on your report for up to 2 years. Research shows that opening several credit accounts in a short period of time does represent greater risk and can lower your overall credit score. Fair Isaac Corporation has realized that several inquiries may be made when a consumer is shopping for one auto loan or mortgage. Recent adjustments have been made in the scoring process to account for what is referred to as “rate shopping” in these categories. A grouping of auto or mortgage inquiries — which probably represents a search for the best rate on a single loan — is treated as though it was a single inquiry. For instance: most auto loan inquires that are within 15 days of each other only count as one inquiry. And most mortgage inquiries that are within 30 days of each other only count as one. Your score takes all these factors into account:  

How many new credit obligations have recently been assumed? Opening several credit card accounts at the same time can look bad. What FICO is looking for is “To what extent is this consumer trying to open new credit accounts?”
  • How recent were these efforts? How long it has been since you opened a new account.
    Primarily these factors:

o        Number of inquiries in last six months

o        Number of trade lines opened in last year

o        Number of months since most recent inquiry

  • There are no good inquiries. Inquiries are typically seen as a request for credit and thus are factored as if you are searching for credit. Every time you fill out one of those credit card applications to get a free t-shirt, you are also getting a free inquiry. Every time you fill out an online application for a credit card, or other type of loan, you are getting an inquiry. Too many inquiries looks bad. While there are no good inquires there are some inquiries that are considered neutral and are not factored into the score. These inquiries are most often known as:
    • Consumer initiated. A request for your own credit report shows as a consumer inquiry. When you run a credit check on yourself.
    • Pre-Approval or PRM.  If a potential lender has viewed your credit reports to determine whether they want to offer you a loan, these are not factored into your score.  However, once you fill out a credit application, your full report will be reviewed and a “bad” inquiry will appear on your reports.
    • Periodic Review or AR.  Many lenders will periodically review the credit reports of their current customers to see if there have been any major changes to their credit reports.  If the lender discovers that your credit score is now too low for their standards, they may close your account or lower your limits. These inquiries created as a result of the periodic reviews are not supposed to be factored into your credit score.

As you can see from the below table, inquiries appear in different ways depending on the length of time between inquires and the type of Inquiry.

Type

Number
of Days Ago

Number of Inquiries

Notes

Dept. Store

68

1

Applied for 1 department store card

Mortgage

65

1

Two mortgage apps within 30 days of each other counts as only 1 inquiry

Mortgage

56

Auto

25

1

 

Auto

9

Not counted at all if within 30 days of first inquiry.

These two don’t count at all as they were within 30 days of the first app and within 15 days of each other.

Auto

7

Bankcard

5

1

 

 

How inquiries are computed is somewhat complex. The above table is meant as a basic guide but does not cover all the different calculations. As a reasonable measure you should avoid unnecessary inquiries. The system is designed to take into account rate shopping but things like applying to credit card offers will add inquires to your file. 

 

  5. Types of Credit Experience (10%)

  Having a healthy mix of different types of credit accounts, such as installment loans, retail accounts (like store cards), major credit cards (Visa and MasterCard), and a mortgage is what is considered by this part of the score. This is usually not a key factor in determining your credit score but it can help a close score. It’s not a good idea to try and open different types of accounts just to try and make this factor better. It will likely reduce your credit score in other areas. You should never open accounts you don’t intend to use anyway.  Your credit score will take into account:

  • What type and how many accounts you have. The optimal ratio of installment versus revolving accounts depends on your profile and differs from to person. One factor that seems to have significant influence is your percent of open installment loans. Too many can lower this portion of your score.

Improving your Score.

Everything in this section covers information intended to help improve your credit score. Lets summarize what needs to be done.

  • Pay your bills on time. Sounds simple, but this is the biggest thing you can do to keep your score high. Delinquent payments and collections have a major negative impact on a score. If your payment is not going to be on time, make sure it is not 30 days late.
  • Keep your balances low on unsecured revolving debt like credit cards. High outstanding balances can affect a score.
  • The amount of your unused credit is an important factor in calculating your score. You should only apply for credit that you need.
  • Use a reputable credit repair, like Credit Repair Consultants, to help repair negative outdated, misleading, inaccurate, incomplete or unverifiable information on your credit reports. Look for a company that does not charge for “time” like a monthly fee or annual fee, but rather will only be paid after providing results. Research shows that the longer you stay with the credit repair process the better results you will be able to achieve. Just remember that it probably took years to get the negative information on your credit report. As a general rule, you should be prepared to stay with the process for one year, unless completed before then.  

FICO Facts

  • Routine credit checks, called AR’s (Account Reviews), from companies that you have existing accounts with should not cause damaging inquiries.
  • Checking your own credit report or credit score will not lower your credit score.
  • The type of loan that you are applying for makes a difference in the credit score that they will accept; 660 may be fine for an auto or home loan but may be risky for a credit card company because the consumer is more likely to make his car or mortgage payments before paying on a credit card if he is in a financial bind.
  • Low balances = better credit score and Zero Balances = even better.  If given a choice between paying several cards down or paying one off, pay the one off.
  • Once your credit score is at 740 or above there is no point in trying to improve it, you have good credit.
  • Your average balance on credit cards and how many of your cards are over 50% of their limit are both factors in your credit score.
  • Pay down your cards but don’t necessarily close the accounts (that would effect your credit balance to credit limit ratios and may lower your score).
  • Public records are all considered equal for the score so a tax lien is just as bad as a bankruptcy on your score.
  • Although Income is not factored into bureau scores, it may be part of an application score. Depends on the lender.
  • PRM Inquiries (Promotional) created by lenders who wish to offer you credit do not affect your score.
Rarely Known Techniques (adding positive accounts to improve your score)

One technique that you may be able to use to add positive accounts to your credit file, even accounts that have been open for longer than you’ve actually had a credit file established, is done by being added as an Authorized User on somebody else’s credit card.

When you are added as an Authorized User to a credit card account, that Credit Card Company will usually report the entire history of that account on your credit report exactly as it appears on that of the owners. As an “Authorized User” you are not the party responsible for payment of the account and as such, your credit (or lack thereof) is not a factor in receiving the card. In fact, your credit is not even checked, so there is no inquiry. If you have a willing friend or family member, having them add you as an Authorized-User can have a considerable positive impact on your score. You never have to use the card yourself. In fact, you can even cut it up and throw it away once it arrives and your bad or good credit will never effect that of the primary account holder.

A word of caution though: since the entire history of that Authorized account is reported on your credit exactly as it reports on that of the owners, you must be sure that it is an account that does not have any late payment history and, more importantly, does not become late at any time while you are an authorized user.

Another very interesting means of adding a positive tradeline to your credit report may not require you to do anything different than you may already be doing. If you are one of 40 million renters in the United States , you normally do not receive any “credit” for making your payments on time. As a matter of fact, it’s usually your landlord that is receiving a positive payment history on his mortgage with your hard earned money.

With our revolutionary and exclusive new Rent Reporting program we can report your rent paymentson a monthly basis to all three credit bureaus as positive home payment. You deserve to receive “credit” for your payments and with Rent Reporting you develop a positive tradeline that establishes your ability to make payments on your home. We may even be able to report retroactively for up to 24 months.

This is a must have for anybody that is renting and/or planning on purchasing a home in the future. To get started reporting your rent, or for more information, call Credit Repair Consultants toll free at 877-402-7334 or visit www.rentreporters.com.

How do I obtain my credit score?

You may order your FICO score with your credit report online directly from Fair Isaac Corporation ( FICO ). There you can buy your up to date credit scores and credit reports for all three credit bureaus individually or all at once.

Beware for “Credit Score” offers from other websites, even the credit bureaus websites themselves. Many times these are not real FICO scores and are only generic scores that are designed to get you to buy their version of a scoring model similar to that of FICO’s.

 
About Credit Repair Consultants
 
 
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