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Mitch Rolsky
Mitch Rolsky - REALTOR®

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FICO CREDIT SCORES 101

You know your Social Security number, your ATM PIN, an access code here, a password there… But do you know the number that will cost or save you thousands of dollars? 

Fico Credit Scores 101Lenders use your credit score to determine whether you qualify for credit and if so, how much interest they’ll charge you. Insurance carriers and phone companies rely on the scores to decide if you’re a good credit risk. Even a prospective boss or landlord can turn you down if your score doesn’t measure up.  This one number, often times referred to as a FICO score because of the Fair Isaac Corporation that developed the the system, can impact so much in your world you should know what you can do, should do, or as important NOT do, to improve it.

You can get all 3 of your credit reports for free (1 x/year) at this site… www.annualcreditreport.com

760-850    A+  |  700-759    A  |  660-699    B  | 620-659    C  |  580-619    D  |  500-579    F

Before You Can Raise Your Score You Need To Understand The Factors that Determine Your Credit Score Include:
Measurement of your ability to Pay Bills – This portion is based on looking at the amount of money that you earn as it relates to the amount of money that you owe to creditors. The key here is that it’s as much about the ratio as it is about the amount you owe. Regardless of if you owe $5,000 dollars or $50,000 creditors are looking at how likely it is that you can pay the amount you owe off based on what you earn.  The higher the debt to your earnings the lower your score.

Collections – How many times has a creditor, that you owed money to, looked to an  outside 3rd party collection firm to help them collect the amount you owe. This could include the use of collection services or lawyers. Each time a collection company shows up on your credit report your score goes down a bit more.If you receive notice from a collection company make sure you resolve the issue, and keep the documentation before the 30 day window passes to prevent collection items from lowering your scores.

If you already have a collection account showing up on your credit report understand that just paying it off will NOT make it go away. It will remain for 7 years even if you pay it off. Most times if, before you pay the bill, you contact the collection firm and tell them that you will pay off the balance if they agree in writing to remove the items from your credit report odds are they will do just that to get the payment!

Late Payments – How many times in the past several years have you paid a bill 30, 60, 90 or 120 days late. This issue here is not about the amount of the bill as much as it is that it was paid late. While paying any bill late can hurt your credit scores, as you might expect, paying any bill 90 or more days late does the most damage. Most creditors will presume once you have passed the 90-day point even a single time that you are much more likely to do it again and the negative impact on your scores is huge.

Public Records– How many times has a creditor looked to the courts to help them collect a debt. This would also include liens filed by local, state or federal government to collect taxes or fees that are owed. Tax liens can have a serious impact on your credit scores for years to the point that even after the lien has been paid or released your credit score is still damaged.

Charge Offs – This occurs when someone that you owe money to gives up on trying to collect the amount you owe or the creditor settles with you for an amount less than the total balance. This indicates to creditors that you did not fulfill your contractual obligation and continues to hurt your credit score for up to Seven years.

Average Age of “Open” Accounts – This is exactly what you would expect. You take the average length all of your accounts have been open. The longer the average the higher your score.

Optimal Average Age – The longer the average time the better it is for your credit scores. An average length of 10 years or more is considered optimal. Keep in mind that if you have an account that has been open 15 years but you have been told it can hurt your credit scores to have too many open accounts. Since you no longer use this account you close it out. But, because the average length of the remaining accounts is less than 15 years the mere act of closing the account just lowered your average and thereby lowered your score.

Inherit History – If You don’t have a lot of credit history you can “borrow” it from someone else if they will let you.

There are two ways to do this. The other individual can cosign a loan with you, or you can be added to the other person’s credit card. Note: The other person need not actually give you the card or allow you to charge on the account. But, by doing this you inherit some of the other’s person’s score. Your FICO score becomes high through association in a matter of speaking.

This is the fastest, easiest, and best way to build credit. However it does have one disadvantage, if the person you are cosigning with has a bad credit score you are also affected. It can give you a head start, but you NEVER want to inherit a bad credit score, keep this in mind. It’s also good to know that credit scores do not “flow up hill.”  In other words if your credit is not good the act of being added as a co-signer on someone else’s card does not adversely affect them.

Balance Types (3-8 Revolving Accounts & Balance by Installment & Real Estate) – The Credit bureaus like to see that you have an array of credit types.

Revolving Debt (Credit Cards and Home Equity Line -HELOC) – Major credit cards and department store credit cards are examples of revolving accounts. Revolving accounts generally have a minimum payment each month that usually includes an interest or service charge. These accounts provide a maximum amount that you can charge and the card allows you to carry a balance. The service charge or interest rate declines as the debt is paid off. Note: A charge card is different from a credit card; a charge card requires you to pay off the balance each month, while a credit card allows you to carry a balance and make minimum monthly payments. Having a strong revolving account payment history is important for those trying to establish a good credit history. Even if you don’t carry a balance and choose to pay off the balance each month, your credit rating will typically benefit from your use.

Installment Loans (Student Loans and Auto Loans) – Just like any other loan to the extent you have these accounts, pay them on time and to the extent it makes sense, when you pay them off early it helps your credit score. Keep in mind with Student loans that they are typically at lower interest rates. So while you want to always stay current and you want to pay them down as fast as you can you should look at paying off other dept faster if the other debt has higher interest rates.

Real Estate (Mortgage and HELOC) – Every time you purchase a property and pay that loan on time and ultimately pay it off your credit scores will benefit. Alternative financial Services (Pay day loans, Rent to own Agreements, Pawnshops, Refund Anticipation loans, sub-prime mortgages) – Most of these types of financing are not only very costly but they will negatively impact your credit scores.

Adding New Credit Accounts- Credit Scores like stability and predictability. So anytime you add new accounts it’s likely you will see a negative impact on your score of 10-20 points for 60 to 90 days.

Hard Inquires (3rd Party) – These are credit Pulls that you authorize. These could be for a new credit or charge card, car loans, home mortgages and refinances, New Home Equity loans or New Line of Credit loans, Renting a home etc. ALL of these items will ding your credit 1-5 points (Depending on who is pulling your credit) FOR EACH CREDIT PULL for 60-90 days.

Mortgage related pulls will ding you 3-5 points per pull. A Credit Card or an Auto Loan pull will ding you 2-4 points per pull. So when you are shopping for a new car or for a lender for a mortgage using an internet site like Lending Tree typically will “shop your credit” out to “get you the best rate.” But in both instances each lender will pull your credit to offer their quote and that one act of “shopping your account” can immediately drop your credit score for no reason whatsoever 20-40 points.

Do your own homework and identify the most likely lender for mortgages or car loans and then pull your credit ONE TIME in each case. If you need to look at additional lenders do so 1 at a time by YOU controlling who pulls your credit and why.

Soft Inquires (Existing Accounts)– These are credit Pulls that you your current lenders run typically every 30-60 days to confirm that nothing has changed in your credit worthiness since they last reviewed your account. If your credit scores have gone down the creditor might increase your interest rate or even close your account. Unlike Hard Inquires, that you authorize, these credit pulls do not ding your account.

Promotional Inquires (Credit Card Applications) – These are credit Pulls that occur because the 3 main credit agencies sell your your credit to lenders who might want to approach you about opening an account with them. Your credit scores are NOT dinged by these credit pulls.

You can stop these by going to www.optoutprescreen.com. If you just register here it will stop these “You have been Pre-Approved” Offers for 5 years. Note: If you print the form and send it in that will usually stop these inquires for Life.

As an example after a lender pulls your credit to do a pre-approval other mortgage firms can see that you authorized a mortgage firm which they know means you are probably looking to buy or refinance a home. So, these other mortgage companies may bombard you with mail, emails and phone calls trying to get you to take out a mortgage with them. While the promotional credit pull does not hurt your credit scores if one of these lenders is successful in getting you to have them look at you for a mortgage they will most times pull your credit again! That now becomes a HARD Inquiry because you authorized them lender to pull your credit and then your credit will be dinged!

Balance to Limit Ratios (30%) – 150 points of the total 500 points is based on the amount of what you owe as it relates to the total available limits. So if you have $1,000 limit and owe $300.00 your ratio is optimal. Note If you have 10 dollar limit and owe 3 you will get the same optimal score or conversely having a $1,000,000 limit and owing $300,000 will get you the same optimal points for this section.

 5 easy things you can do to help increase your score related to the Balance Owed Ratios:

If you have access to balance transfer accounts that allow you to shift balances from one account to another charge card this can help get closer to the 30% optimal Balance against the limit.

 

The catch is that often times these offers require you to spend additional dollars within a certain period or to pay off the transferred balance by a certain point or have a similar clause as Capital One does that if your credit scores go down then your rate increases. Also. if you use these cards and the interest rate on new purchases is unusually high you should understand that when you make a payment on the account those payments are applied FIRST to the older transferred amounts that have a lower rate and the new purchases are subjected to the higher than usual interest rates.

 

So, if the offer checks out and you are sure you won’t get caught in one of these traps to charge you a higher than usual rate these can be useful tools.

The best scenario is to pay down your balance to reduce your balance to limit ratio. Alternatively, since this portion of the FICO looks at your balance to limit ratio the mere act of raising your limit will typically help your score in the long haul. Still most creditors will pull your credit before raising your limit. So while in the long run this might be a good approach there will be an immediate ding to your credit for the next 60-120 days because of the portion of your FICO score that looks at new debt.
Your Creditors will report your balance to the credit bureaus on one random, but consistent, day each month. And, each creditor can report on different days. Understand that when they report to the credit agencies, combined with your Due Date which for most drives when you pay your bill each month, can directly impact your score. As an example if you have a Charge card with at 1000 balance that you max out each month… but you also pay off the balance in full each month then your balance to limit ratio should be as good as it gets. But, if your bill is due on the 20th (another random date based on when you opened the account) and you pay it on the 19th in full, but the charge card reports to the bureau on the 18th (2 days before you pay it off) then the charge card is never reporting that you paid of your bill in full each month but rather that your balance is 1000 on a 1000 limit.. in other words you are doing everything exactly as you should but your credit is being impacted as bad as it gets short of being over your credit limit!

 

So how can you fix this? Call all of your charge cards and creditors and ask them to tell you exactly what day they report to the credit bureaus. Make sure you press for a specific date and don’t accept the “first week of the month” or the “middle of the month.” Once you know when they report ask the credit card to shift your payment due date. In this example instead of having the due date be the 20th you want your due date to be the 16th (2 days before they report) and then you pay by the 15th.

 

This simple change could cause the credit cards to report a zero balance on the 1000 limit vs the 1000 balance on the 1000 limit and all you did was pay your bill a couple of days earlier.

As mentioned above the amount of balance that you show against the credit limit is what drives how many of the possible 175 points you get for this portion of the FICO score. That said some charge cards either don’t have a limit like American Express or other cards like Capital One may not report the  balance to the credit bureaus.

 

When this occurs, no balance is reported, then the credit bureaus will calculate the scores based on your limit being the same as your balance that means they are always showing you as being maxed out on your limit which results in the lower scores. So consider how much you really like the AMEX card and call Capital One and any other credit cards that are not reporting your limit and insist that they update the credit bureaus each month with your credit limit.

 

So, you might wonder why a credit card does not supply this information and why you have to require it. Often times credit cards will offer you an introductory interest rate that is lower than typically available. But they stipulate that if your credit changes that your rate reverts to a higher, typically much much much higher than usual rate. Hopefully you can see that it’s in the credit card’s interest in this situation to cause your credit score to decrease so that they can raise your rate. And the mere act of not reporting your actual limit shows you as being maxed out on your card which will hurt your credit scores.

Home Equity & Line Of Credit Accounts. If these accounts are secured by real estate then they should not be reported like a charge card debt but rather with the mortgages. So, review your report and make sure these are not being reflected as if they are charge cards with high balances vs the original loan amount aka your limit.