- Canceling old credit cards: If 15% of your credit score depends on length of credit history, it’s deemed a big mistake to cancel old credit cards. In addition, canceling an old credit card can worsen your debt ratio (makes up 30% of your score), if you have balances on other cards. Finally, if you don’t have credit cards older than seven years, do not cancel your oldest credit card.
- Late on payments: Since 35% of your score depends on payment history and only payments over thirty days late affect your score, it is critical to pay on time. One late credit card payment can drop your credit score by 20 points, missing a car payment can down your credit score by nearly 100 points and if auto payment is late by 90 days or more it can plunge another 25 points. Therefore, if you’re going to be late on any loan, contact your lender ASAP and work out a deal, most are very understanding. If that doesn’t work, borrow from your savings, family or friends to keep current or juggle payments a bit, but make sure you’re not too late on any one loan.
- Having too many open lines of credit: 10% of your score comes from the types of credit used. If you have a lot of revolving credit, creditors see you as a risk, as you have the potential to rack up a lot of debt quickly. Make it a policy not to open any store credit cards, and if you have some already cancel them once they’re paid off.
- Maxing out cards: 30% of your credit score depends on the ratio of credit card debt and limits. Therefore, maxing out cards will cause your credit score to drop, even if you keep up with the payments. Instead of charging more, focus on paying down cards.
- Avoiding credit cards: If you are avoiding credit cards, you should still consider getting one to start or improve credit history. Purchase gas with the card and pay it off in full each month. Having a solid credit score will be useful later when you are ready to purchase a home, car, etc., at lower interest rates.
- Requesting credit limit reduction: Never reduce your credit limit on cards, because it will affect your debt ratio and lower your credit score. Only set a limit reduction if it has a huge psychological value for you.
- Not researching a credit counseling service: If you intend to use a credit counseling service, find legitimate credit counseling services listed in the Yellow pages, Google, etc. and follow up with the Better Business Bureau for any complaints. Remember, your credit score will affect many of your financial moves for years, so do not skimp on research.
- Declaring bankruptcy: With new bankruptcy laws now in effect, people who would have gone forward with bankruptcy before the law now must go through credit counseling before filing bankruptcy. Bankruptcy can decimate your credit score for 10 years. Quite often, there are better solutions, such as negotiating with creditors and so forth.
- Playing credit card roulette: Rolling credit debt to other credit cards can seriously damage your credit score, if you are not an expert. If you make an error, your credit score could easily be blown up.
- Never checking credit report: Since 25% of credit reports contain errors (that are serious enough to deny credit), and identity theft is common today, therefore, it would be wise to get your free credit report from www.annualcreditreport.com at least once a year, and correct any mistakes on the report.
This is the final article in a series of articles on Credit Scores from the Money Book by Jeff Burch. To download a pdf of the entire series, click on the link below.
Improve Credit Scores:
Here are a few reasons why it’s in your best interest to improve credit scores:
- Lower your interest rates, auto insurance
- Speed up credit approvals
- Reduce deposits required by utilities
- Get approved for apartments
- Get better credit offers, car loan, mortgage, etc.
- Pay on time. If you can’t, notify your lender ASAP and work something out
- Get current on past due accounts
- Keep balances low (35%) on credit cards. High debt levels can hurt your score and other “revolving credit.”
- Apply for and open new credit accounts only as needed.
Length of Credit:
- Keep old accounts open if you’ve been a good borrower.
- Start building credit ASAP.
New Credit Category:
- When shopping for new credit, keep it all within 14 days or less.
- If credit history is bad you can improve credit scores by opening a new account and managing it responsibly.
Types of Credit:
- Installment debt (fixed monthly payments to eliminate debt) is “better” than revolving debt (open-ended debt).
- Certain finance company debts (buying product with retailer financing) can lower your score.
Have patience, because it takes time and discipline to improve credit scores.
This series of articles from the Money Book by Jeff Burch will continue tomorrow with an article titled Big Credit Mistakes To Avoid.
VantageScore is a new scoring technique, the first one that was developed collaboratively by the three credit reporting companies. This model provides a more predictive score for consumers, even for those with limited credit histories, which reduces the essential need for creditors to manually review credit information.
VantageScore features a common score range of 501-990 (higher scores represent lower likelihood of potential risk). A key benefit of VantageScore is that as long as the three major credit bureaus have the same information regarding your credit history, you will receive the same score from each. A different score alerts you that there are discrepancies in your report.
Historically, FICO has been the most well known credit scoring system. The information in your credit report is used to calculate your FICO credit score, a number generally between 300 and 850 that rates how risky a borrower you are. The higher your score, the less risk you pose to creditors. Your FICO score is available from www.myfico.com for a fee.
FICO SCORING SYSTEM
FICO score is based on your financial history as collected in your credit report. Creditors can use this score to evaluate whether you are able to pay a loan back on time. The higher the score the more likely you are to pay off a loan on time and the less of a credit risk you pose.
The FICO or credit score ranges are broken down as follows:
720-850 - This represent the best score range
700-719 - Able to obtain favorable financing terms
675-699 - This is still considered a decent score range
620-674 - May have trouble getting good credit terms
560-619 - May have trouble securing credit
500-559 - Time to work on improving your score
Although the exact formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following five components and the approximate weighted contribution of each:
- Payment History – 35%
(only includes payments later than 30 days past due)
- Amounts Owed – 30%
(credit card balances, etc. & credit limits, debt ratio)
- Length of Credit History – 15%
- Types of Credit Used – 10%
(installment, revolving, consumer finance)
- New Credit – 10%
(amount of new credit recently obtained)
This series of articles from the Money Book by Jeff Burch will continue tomorrow with an article titled Tips to Improve Credit Scores.
The largest and foremost Credit Reporting Agencies (CRA’s) are Equifax, Experian, and TransUnion. They are the main companies that collect, compile, and store information on individual consumers that allows them to produce a credit score. It is estimated that these agencies have credit information on almost 200 million Americans.
The CRA’s are constantly in contact with banks, credit unions, finance companies, and other lenders who continually update them on the status of an individual’s account. This allows them to track the payment status and balances of your credit cards, auto loans, and mortgages. In addition, the CRA’s hire teams of professionals to inspect court records to track down bankruptcy information, civil judgments, or tax liens.
After collecting and compiling the data, the CRA then applies a formula to determine each individual’s credit score.
What can hurt and lower your credit score?
- Late payments
- Having a high amount of debt or credit
- All derogatory information in your file
Most negative information will stay on your credit report for seven years, but Bankruptcy is held in your file for ten years.
HOW TO ORDER YOUR CREDIT REPORT & SCORE
The federal Fair Credit Reporting Act requires each of the major credit reporting bureaus to provide consumers with a free copy of their credit report, once every 12 months.
To order your free report, go through www.annualcreditreport.com or call 877-322-8228 (toll free).
If you space your free reports correctly you can get one every 4 months.
- March report from EXPERIAN
- July report from TRANSUNION
- November from EQUIFAX
Although your free credit report will allow you to check your credit report for errors, it will not tell you your credit score. To acquire your score, each CCR maintains a website on which they sell credit reports that contain your score.
Equifax: (800) 685-1111 - www.equifax.com
Experian: (888) 397-3742 - www.experian.com
TransUnion: (800) 888-4213 - www.transunion.com
This series of articles from the Money Book by Jeff Burch will continue tomorrow with an article titled Vantage Score and FICO.
This week at the Trans World Assurance blog we will feature a series of articles on building a good credit score from Jeff Burch's Survival Tactics Money Book. This book is written for members of the U.S. Military and is filled with useful strategies on how to stretch, save & spend your paycheck.
"Credit has become a significant part of many people’s financial lives. When purchasing a car or house on credit, your credit rating will be the number one factor in qualifying for loans from lenders. Having good credit will allow you to borrow money, but more importantly, at lower interest rates. Having a low score typically triggers higher interest rates that can cost you lots of money. Therefore, it’s in your best interest to have and maintain the best credit score possible. Because having a good score is important, it’s crucial to understand how the credit reporting system works." (Jeff Burch, Money Book)
The TWA blog articles this week will cover the following four topics:
- HOW THE CREDIT SYSTEM WORKS
- VANTAGESCORE and FICO
- TIPS TO IMPROVE CREDIT SCORES
- BIG CREDIT MISTAKES TO AVOID
Be sure to follow the blog all week, to read all of the articles an this important topic.
The 1940 (amended 2004) Servicemembers' Civil Relief Act (SCRA) helps members manage their personal civil affairs, so they can devote attention to their duties. In addition, the SCRA recognizes the sacrifices members make to answer their country's call to serve, although it may include difficult financial obligations.
The SCRA helps Soldiers in many ways, however, for the sake of this article; I will focus on a scant section of the SCRA that limits interest charged to members at 6%. The SCRA allows this lower interest rate only on debt incurred before a servicemember enters the service. Therefore, credit debt incurred after entry is not covered.
However, over the years, countless service members have gotten their credit debt reduced as low as 0%, even though they acquired that debt after entry.
How to use the SCRA after entry: The easiest way to lower your interest rate is to talk to your creditor through their customer service department. Some companies will be more than glad to assist you with your request, even if you do not qualify through the SCRA.
Example: The Company may have a motto of, "Keep customers happy. Give them what they want, and make them loyal customers." Otherwise, get lucky, and find a helpful service rep who is willing to work with you.
Remember, even at lower rates, creditors still make millions of dollars. While companies may play along with you invoking the SCRA, the results may vary.
Example A: One customer service rep said her company had no special interest rates for the military; however, if their credit rating was in good standing, the company would lower its fixed rate and even drop to 6% if the member went to war.
Example B: Another service rep seemed well versed with the SCRA, at least on the behalf of the customer. When asked about military discounts, she replied, "Have them send us a copy of their orders, and we'll lower their interest rate to 6% under the SCRA." Furthermore, the fixed rate would continue until members left the service. In addition, when asked about debt accumulated after enlistment, she replied, "That applies to all balances."
Therefore, in both examples, the offers were more generous than the legal restrictions of the SCRA.
What if creditors do not agree to lower rates: Do not give up! Call another customer service rep. Usually, there are several service reps within a company; therefore, you might find one that will work with you. However, if you are not making any headway, then ask for the manager. The manager may agree with your request to lower the interest rate. In addition, you will further your chances of a rate reduction, if you are courteous and not demanding over the phone, especially, since creditors are not obligated to lower debt that you accrued after enlisting.
What else can I do to lower interest rates with my creditors? When re-enlisting, send a letter (see below) to your creditor that invokes the SCRA, including re-enlistment paperwork. As a public relations gesture, your creditor may lower your interest rate on debt accrued from your past enlistment, but expect to be billed at current rate of interest for any future transactions.
Sample letter: First, call your creditor to let them know that you will pay 6% while in the service, and cite the SCRA as your authority. However, if this does not work, send creditor this letter, and attach a copy of your proof of enlistment with it:
A sample letter is included in the PDF of this article that is
available for download. Click the button at the end of the article.
To learn more about the SCRA, visit:
Credit can be a valuable financial tool that allows you to purchase items, while promising to pay with future income. However, in order to use credit, you must first establish a credit history that ensures that you are capable of paying current or future obligations. There are several ways to establish credit (some very costly). The three examples below are by far the easiest and least expensive to establish or even re-establish credit.
How to establish a credit history
1. Establish a savings account through a credit union.
2. Deposit $100 into your new savings account.
3. After the transaction, find a loan officer and ask for a $100 secured loan against your savings account.
IMPORTANT: Inform your loan officer that you want the loan payments to stretch for at least 1 year, and reported to the credit bureaus. If the loan goes unreported to the bureaus, you will not build any credit history.
WARNING: Repayment plan of the small loan may vary depending on credit union policy.
4. When the loan officer hands you a check for $100, deposit it into your savings account.
5. One year later. The loan is paid-off. You have established or re-established credit. You now have $200 plus interest in your savings account.
■ Secured Credit Cards: Secured credit cards help build or re-establish credit; yet can pay for goods and services much like any credit card. However, a secured card requires a deposit that may range from a few hundred or thousand dollars. Usually, a bank will pay interest on your deposit, but you may have to pay application and processing fees, sometimes totaling hundreds of dollars.
Before applying, ask what the total fees are, and whether they will be refundable if denied credit card. Typically, a secured card has a higher interest rate than an unsecured card.
NOTE: If you are a credit union member, inquire about a secured card there. Almost half of all credit unions offer secured cards to their members. Some credit unions offer lower interest rates and waive annual fees.
For more information visit:
■ Establish your own credit history: Approximately 100 million Americans have little or no credit history with the "big three" credit bureaus. While millions of these consumers earn steady incomes, and meet regular payment obligations, there has been no easy way for mainstream lenders to evaluate them as potential borrowers…until now.
PRBC (Payment Reporting Builds Credit) is a national credit bureau that captures consumers' history of paying rent, utility, and other recurring bills not reported to traditional bureaus. They enable business partners to help their consumers and small business customers to build a credit file automatically as they pay their bills, or by verifying self-reported payments they have made in the past. Their service bridges the gap between consumers seeking credit and lenders seeking to qualify them.
Patented Innovation: PRBC has been qualified as a "Community Development Service" for Financial Institutions, by the Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, and by the State of New York Banking Department. The FHA (see http://prbc.com/popup/fha-letter.php) and Sallie Mae (see http://prbc.com/popup/fannie-quote.php) accept PRBC reports.
To learn more, visit:
http://prbc.com or call 877.772.2123.
To learn more about establishing credit, visit:
(For more strategies on how to stretch, save and spend your paycheck see Jeff Burch's Money Book.)