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Money Guide – Credit




The following is adapted from “Living in the Village: Build Your Financial Future and Strengthen Your Community” by Ryan C. Mack.

– Credit Scores Affect Your Ability to Get Loans, Apartments, or Jobs
– Credit Scores Range from 300-850
– FICO stands for Fair Isaac Corporation
– Payment History Accounts for 35% of Your FICO Score


– What’s a Good FICO Score
– How my FICO Score is Determined
– How to Achieve a 750 FICO Score
– Other Types of Scores Lenders Use

A woman wants to purchase a home and is denied a loan; a young college graduate is denied an apartment; a husband is told that he has to pay much more than he budgeted for a life insurance policy; a young man’s dreams are crushed when he doesn’t get a job…what is the common thread in all four scenarios; low FICO scores.

UNDERSTANDING YOUR FICO SCORE

A FICO (Fair Isaac Corporation) score is a three-digit number that gives lenders a fast, objective estimate of your credit worthiness. It determines the interest you will pay on your credit cards and even determines whether you will get that new apartment or mortgage. Knowing how to maintain a positive FICO score is essential to you financial journey. Your goal should be to have a score of 750 or above.

FICO Score Rating
750+ Great – should qualify for most prime-rate loans
720 – 749 Good – might not qualify for prime rates
680 – 719 Average – should be built up ASAP
620 – 679 Below average
619 and under Poor

There are five elements that determine your FICO score. They are listed below along with their weight of importance.
1. Payment History: 35%

2. Total debt to credit ratio (D/C): 30%
Let’s say you have total credit card debt of $3,000 split between two cards. Both cards are carrying a $1,500 balance but one has a limit of $2,000 and the other has a limit of $4,000. Your D/C ratio would be 50% ($3,000/$6,000) which means you’re currently using 50% of the total credit available to you. Continuing with the above example, say at the end of the month you decided to pay off Card A with the $4,000 limit and cancel it because the customer service rep frustrated you. DON’T DO IT! By canceling Card A you increase your ratio to 75% because you no longer have $6,000 in credit available, you have $2,000 of which you’ve already used $1,500 of it. Instead of canceling cards that you don’t want to use anymore, cut them up. It’s quicker ☺ and it doesn’t affect your score.

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3. Length of credit history: 15%
If you must cancel a card, make sure you cancel the newest one first. The Fair Isaac Corporation can use more points of data to determine your FICO score the longer your credit lines have been open.

4. New accounts and recent loan applications: 10%
This is the one everyone seems to know but there are several theories on how it works.
Let’s look at the different type of inquiries and how they affect your score.

Personal Inquiry– You can access your credit score as many times as you wish without consequence.

Soft Inquiry– When companies access your credit score, for promotional offerings or any other reason not initiated by you, the inquiries does not affect your score.

30-Day Grace –If you’re interest-rate shopping for an auto or home loan, all inquiries made within 30 days of one another will count as only one inquiry.

Hard Inquiry– This is where you get dinged. If you’re applying for everything under the sun to get free t-shirts, reward points or some other perk your credit score is being lowered each time.

5. Mix of credit cards and loans: 10%
Lenders like to see a good mix of installment loans along with your credit cards. Installment loans, like your car and house, show just how reliable you are, especially if payments have been made for an extended period of time in a timely fashion.

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CONNECTING THE DOTS: FICO SCORE & CREDIT REPORTS

Your FICO score is a summary of your behavior and is not the sole resource lenders use to determine your credit worthiness. Lenders will also review your credit report to help them understand your score. You may have a single delinquency from the past pulling your score down but have a terrific history of paying your bills on time. Your credit report will reveal this and may shift a lenders view of you.

There are three credit reporting agencies: Experian, Equifax and TranUnion. You can access your credit score once a year for FREE, by visiting www.annualcreditreport.com. Your credit score should be almost identical with each agency, but lenders don’t always report to all three agencies which in turn causes numbers to differ. Your score is calculated based on information included in the report; therefore, if a lender reported a missed payment to Experian and Equifax but doesn’t report to TransUnion, you may see a negative impact to two out of three of your scores.Although your scores may differ, the type of information provided in each report is the same. All three reports include the following information:
Personal Information
This includes your name, address, social security number, date of birth and employment information. This information is not used to determine the information listed on your credit report nor is it used in calculating your FICO score.
Accounts
These are your credit accounts. Lenders generally report the type of account you have
(mortgage, credit card, line of credit), the date you opened the account, your credit limit or loan amount, your account balance and your payment history.
Inquiries
This section will contain a list of lenders who have accessed your report within the last two years.
Negative Items
This section highlights the negative account information. You will also find bankruptcies, tax liens, garnishments, legal suits and judgments in this area of your report.

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ACHIEVING AND MAINTAINING A FICO SCORE ABOVE 750

There are companies who promise to improve your credit score in 9 – 12 months. That sounds great until you find out they will charge you $700 to do it! To be in debt and pay money to raise your FICO score is like trying to drink water to stop from drowning-it only makes things worse. Follow these seven steps to improve your score on your own.
Step One: Basic Housekeeping of your Credit Report

  • 75% of all reports have errors. You are allowed to obtain one free report per year from each of the credit agencies (Equifax, Experian, TransUnion). Go to www.annualcreditreport.com and obtain your free copies of your reports.
  • Get rid of all small balances that you have forgotten about.
  • Delinquencies that are past your state’s statutes of limitations should be removed from your report. Credit Info Center has a chart to start your research on your state’s laws.
  • Use our Sample Dispute Form to challenge all claims that you feel are incorrect or file your dispute through the online forms available on each of the reporting agencies websites. Be sure to keep a copy of everything you submit to support your claim.

Step Two: Pay Your Bills on Time

  • 35% of your FICO score is your payment history. Paying your bills on time is the most important component of establishing a FICO score. Even if you can only pay the minimum make sure it’s submitted by the due date.
  • Use auto-payment to help ensure bills are paid on time. Make sure that you have an efficient budget to leave enough funds in your account to cover bill payments.
  • If you are apprehensive about auto-payments, then designate TWO Saturdays per month to wake up early and pay bills. Make sure that the Saturdays are not consecutive (i.e. 1st and 3rd Saturdays or 2nd and 4th Saturdays). You want to have two Saturdays each month, because this assures that you will not be late on any bills, such as credit card bills ,that have fluctuating grace periods.

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Step Three: Pay Down Debts

  • Carrying balances on your cards serves no purpose. Eliminate all balances on your credit cards as soon as possible.
  • Avoid being seduced by credit card companies with their special offers. You will never hear of anyone becoming a millionaire because their credit card company offered them frequent flier miles.

Step Four: Do Not Cancel Old Accounts

  • 30% of your FICO score is your balance/lending ratio. If you already have the account open, canceling that account can lower your FICO score.
  • 15% of your FICO score is your length of credit history. The older the account, the more weight it has on your FICO score. For instance, if you have a credit card that has ten years of history, you would want to keep that account open versus a card that has less than one year of history. Creditors like seeing a long track record, with which they can more effectively evaluate performance.

Step Five: Don’t Fear Credit Counselors

  • Going to a credit counselor or a credit consolidation agency is not viewed negatively by FICO.

Step Six: Steer Clear of Bankruptcy

  • 200 points can be automatically deducted from your score.
  • This will stay on your report for 10 years.

Step Seven: Be Patient!

  • Nothing happens overnight. This is a process that will take time.

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OTHER TYPES OF SCORES LENDERS LOOK AT

In addition to checking your FICO score, lenders may review other scores to get a more detailed assessment of your credit risk and behaviors.

Application Risk Score
Lenders may attach a weighting to each response on their application and use a scoring system to assign an overall risk. This number along with your FICO score may be used to make their decision.

Retention Score
How loyal are you? Do you frequently transfer balances or chase reward points? Credit card companies use these scores to determine what to bait you with.

Revenue Score
How much money do you make the credit card company? If you’re paying your balances off every month you’ll have a low revenue score because the credit card companies are not making much money. Shame on you for not giving them your hard earned money!

Collection Score
Are you one of those people who pays in collections for discounts? Lenders are keeping a close eye on your behavior. A high collection score gives them a mirror into the future. If you’re one who pays bills off in collection, lenders who give you credit will be very leery with the amount they extend and will probably charge you a higher interest rate.

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PROTECTING YOUR SCORE

After working so hard to maintain your scores, you have to protect them. With technology driving the future, you have to be extra careful how you share sensitive information. If when reviewing your credit report, you notice unfamiliar activity, take these four easy steps:

Step One: Contact all the three credit bureaus and ask that an extended fraud alert be immediately placed on your account. After this is completed, all creditors will be required to contact you directly before any new credit in your name is granted. Technically, if you only contact one bureau, they will immediately share this information with the other two; however, you should call all three to be sure. Below are the numbers for the fraud divisions of the three credit bureaus.

EQUIFAX: 1- 800-525-6285
TRANSUNION: 1-800-680-7289
EXPERIAN: 1-888-397-3742

Step Two: Close all accounts that have been fraudulently accessed or opened by calling the security department of the appropriate creditor or financial institution. When setting up new accounts, make sure that you also create different passwords for them. Be sure that all new passwords have a good mixture of letters and numbers to ensure their security.

Step Three: File a criminal complaint with your local police department. Even though you may never be able to catch the crook who stole your identity, that criminal complaint document will go a long way when cleaning up your reputation with creditors.
Step Four: Report the theft at the ID Theft Clearinghouse at 1-877-438-4338 or by completing an online complaint form. You will be advised on how to deal with credit-related problems that could result from ID theft. This hotline, as well as the ID Theft Website, provides you with a place to report the theft to the federal government as well as receive helpful information. They will also show you how to fill out an ID Theft Affidavit as well as provide you with other useful information.

Didn’t find what you were looking for in Money Guide:Credit? Send us an email at info@moneymovement.org and one of our experts will get back to you.



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