Building an A+ Credit Score Presented By: Kyle L. Smith, Lender State Bank & Trust Company Understanding how your credit score works is the most important factor in improving your score. Three bureaus exist that measure your score; Experian, Transunion & Equifax. All three use a scoring system called FICO. FICO has become the global standard for measuring credit risk in banking, mortgage, credit card, auto and retail industries. Why are my scores different for the three credit bureaus? Most of the information collected on a consumer are similar for each agency, although there are differences. For example, one bureau may have unique information captured on a consumer that is not captured by the other two. A predictive FICO scoring system resides at each bureau. The scoring system is similar for each bureau. “A” quality credit will most likely be “A” quality all three bureaus. When there are differences, it’s likely the underlying data in the bureaus is different. Not all credit scores are “FICO” scores although 90% of all institutions use the FICO system. Make sure you are comparing scores of the system. Scores should be accessed at the same time. Passage of time allows for score differences due to model characteristics that have a time based component. Comparing outdated scores can be problematic. Something a week old is “dated.” Continued…. All of your credit information may not be reported to all three bureaus. The info on your credit report is supplied by lenders, collection agencies and court records. Don’t make the mistake of assuming each bureau has the same info regarding your credit history. You may have applied for credit under different names (ex. Bob instead of Robert) or a maiden name. This can cause fragmented at or incomplete files at the credit bureaus. Wrong information can cause someone else’s info placed on your report or vice versa. Lenders report updated info to the credit bureaus at different times, thus resulting in one agency have more up-to-date info than another. The bureaus may record, display or store the same information in different ways. What’s in my credit report? Although each credit reporting agency formats and reports the info differently, all credit reports contain basically the same categories of info. Your social security number, date of birth and employment info. These are not used in determining your score. The info comes from what you supply to a lender. Identifying Information: Name, address, SSN, DOB and info are used to identify you. This info is not used in scoring. Trade Lines: These are your credit accounts. Lenders report on you have established with them. They report the type of account (credit card, auto loan, mortgage), the date you opened the account, your credit limit or loan amount, the balance and payment history. Credit Inquiries: When applying for a loan, you authorize the lender to access your credit report. This creates an inquiry on your credit report. Inquiries stay on your report for two years. Public Records & Collections: Bureaus also collect public record info from the court systems, and info on overdue debt from collection agencies. Bk’s, foreclosures, suit, garnishments & liens. What are the minimum requirements for a credit score? In order for a credit score to be calculated, a report must contain the following minimum requirements: At least one credit account that has been open 6 months or more, at least one undisputed account that has been reported to the credit bureau with in the past 6 months, no indication of deceased on the credit report. If you share an account with a person recently deceased, this may affect you. What’s in my credit score? The score is calculated from several different pieces of credit data in your report. This data is grouped into five categories. Your score considers both positive and negative info in your credit report. These percentages are based on the importance of the categories for the general population. For particular groups—for example, people who have not been using credit long—the importance of these categories may be different. Importance of categories varies per person. Your credit score is calculated based on payment history, amounts owed, length of credit history, new credit and types of credit used. The importance of any one factor in your credit score calculation depends on the overall info of your report. For some, one factor may have a larger impact that it would for someone with a much different credit history. It’s impossible to measure the exact impact of a single factor in how your score is calculated without looking at your entire report. Even the levels of importance show in the score chart are for the general population and will be different for different credit profiles. What’s in your score? Payment History (35%): This is one of the most important factors in your credit score. The lender wants to know how you have paid accounts in the past. Amounts Owed (30%): Having credit accounts and owing money on the does not necessarily mean you are a high-risk borrower. You should keep balances on revolving lines of credit (credit card, etc.) low, ideally at 10% or less of the credit limit. Anything over this can decrease your score. Maxed out lines of credit severely decrease your score. Length of Credit History (15%): A longer credit history will increase your score. Your credit score takes into account: how long your accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts, how long specific credit account have been established, how long it has been since you used certain accounts. Types of Credit in use (10%): The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. New Credit: Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history. What’s not in my Credit Score… Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring based on these facts. Your age. Your salary, occupation, title, employer, date employed or employment history. Lenders may consider this information. Where you live. Any interest rate being charged on a particular credit card or other account. Any items reported as child/family support obligations or rental agreements. Certain types of inquiries do not count. These include consumer-initiated inquiries, promotional inquiries (lenders offering pre-approvals), or administrative inquiries (request made by lenders to review your accounts with them. Requests that are marked as coming from employers are not counted either. Any info not found in your credit report. Any info that is not proven to be predictive of future credit performances. Whether or not you are participating in a credit counseling of any kind. Do scores change that much over time? It’s important to know to note that your fico score is calculated each time it’s requested; either by your or a lender. Each time it’s calculated it takes into consideration the credit history available at that particular time. Your current profile – Have you opened a new credit card recently? This may affect someone less history more than someone with more history. The degree of reported change. Someone who always pays their bills on time will be affected very little by another note being paid on time. However, if a person files for BK or misses a payment the change will be substantial. How quickly info is updated. There is a lag between the time you perform an action and when it hits your credit report. How credit scoring helps me. People can get loans faster, without bias. Credit decisions are fairer. Lenders can focus only on the facts related to credit risk, rather than their personal feelings. Credit mistakes count less. Poor credit performance doesn’t haunt you forever. Past problems fade as time passes. More credit is available. It allows lenders to approve more loans giving them the ability to identify prospects who will pay their debt. Credit rates are lower. With more credit available, the cost of credit decreases. Automated credit processes make the process more efficient and effective. By controlling credit losses due to scoring, lenders can lower rates. Facts & Fallacies Fallacy: My score determines whether or not I’m approved. Fact: Lenders have many tools they use to approve applicants with the credit score being one of many. Lenders look at debt to income ratio, employment history and credit history. Even though your score may be high you can still be declined. Fallacy: A poor score will haunt me forever. Fact: Your score changes as new info is added. As time passes past mess ups will fade and will eventually disappear. Fallacy: Credit scoring is unfair to minorities. Fact: Scoring considers only credit related info. Race, sex, nationality and marital status are not considered. The Equal Opportunity Credit Act from considering this type of info when issuing credit. Fallacy: Credit scoring infringes on my privacy. Fact: Credit scoring evaluates the same info lenders already look at. Fallacy: My score will drop if I apply for new credit. Fact: If it does, it probably won’t drop much. If you apply for several credit cards within a short time frame multiple inquiries will appear on your report. This can equate with higher risk. Most credit scores are not affected by multiple inquiries into auto loans and mortgages within a short period of time. The system uses an algorithm that realizes that a consumer may be shopping for a loan. These are treated as a single inquiry. Loan Savings Calculator on a $200,000 mortgage. Example only. Credit Score APR Monthly Payment Total Interest Paid 760-850 3.968% $951 $142,412 700-759 4.19% $977 $151,672 680-699 4.366% $998 $159,103 660-679 4.579% $1023 $168,201 640-659 5.008% $1075 $186,864 620-639 5.552% $1142 $211,160 How to increase my score! Get on the road to improving your credit. Remember, stay on the path. Do not deviate no matter how loud your credit card screams at you from your wallet. “USE ME, JIM! USE ME! You know you want that 400 horse power toaster!” How to Improve my Credit Score Fixing credit is kind of like losing weight. There is no quick fix and it takes time. Quick-fix claims usually backfire so beware of claims to fix it quickly. The best advice is to manage it responsibly over time. Check your credit report. Now that you understand how your score is accumulated, pull your score. Avoid websites like freecreditreport.com. The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. Set-up payment reminders. As I have shown you, making your payments on time is a HUGE contributing factor of your score. Many online banking portals offer text and email reminders. Put reminders on your phone calendar. Write them on your forehead if you have to. Reduce your debt. Easier said than done, I know. Stop using credit cards. Use your credit report to make a list of all your accounts. Dig up your statements and write down all of your balances. Come up with a payment plan. Pay off the debts with the highest interest rates first. Be aware that paying off a collection account will not remove it from your credit report. It will stay for seven years. Amounts Owed Tips Remember to keep balances low (below 10%-if possible) on all credit cards and revolving debt. Pay off debt rather than moving it around. Balance transfer are a great way to reduce interest expense when paying down revolving debt, just be sure to continue to pay off the debt. Don’t close unused credit cards as a short-term fix to raise your score. Eliminating accounts can hurt your score. Don’t open unneeded accounts just to increase available credit. Length of Credit History Tips If you have been managing credit for a short time, don’t open many new accounts rapidly. New accounts will lower your average account age, which will have a large affect on your score if you have not had credit for more than five years. Applying for multiple credit cards in a short time frame deems you high-risk. New Credit Tips Do your rate shopping for a given loan within a focused period of time. Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off will increase your score with time. Remember to access your annual credit report from Experian, Equifax & TransUnion. Types of Credit Use Tips Apply for and open new accounts only as needed. Have credit cards—but manage them responsibly. In general, having credit cards and installment loans will rebuild your score. Someone with no credit cards tends to be higher risk than someone who has managed credit cards responsibly. Closing an account does not make it go away. A closed account will show up on your credit report and may be considered by the score. Additional Tips If you do not have a major credit, get one. ALWAYS PAY ON TIME. Reduce highest interest rates first. Keep your credit lines free. Only use revolving credit in emergencies. Have a good mix of credit cards & installment loans. Have a plan! Keep track of what is owed and when. Do not “wing” it. What if I find accounts are missing from my credit report? Unfortunately, this does happen. Some retail stores, gasoline companies and student loan lenders do not report the accounts to credit bureaus. If you are denied credit because of insufficient account history contact the lender ask them to report your account. I have seen accounts mistakenly go unreported including mortgages, major credit cards and auto loans. Contact the lender as well as the three major credit bureaus. This could come back to haunt you if not straightened out. How are credit report mistakes made? The person applied for credit under another name. (Ex. Bob instead of Robert) Someone made a clerical error in reading or entering a name or address info from a hand-written application. The person gave an inaccurate social security number or the number was misread by the lender. Loan or credit card payments were applied to the wrong account. If you find wrong info on your report contact the three major bureaus immediately to dispute the negative items. Fixing credit report errors---what to do. Contact both the credit bureau as well as the organization where the debt/account is held. Identify the incorrect information. The credit bureau will investigate the items-usually in less than 30 days. Include copies of documents that support your claim (save everything!). Clearly identify each disputed item. State the facts and explain why you dispute the item. Request deletion or correction. Send your request by certified mail with return receipt so you can document when the credit bureau received your dispute. Write to the appropriate creditor explaining that you’re disputing the information provided to the bureau. They investigation may not resolve your dispute. If that’s the case, ask the credit bureau to include your statement of dispute in your file and in future reports. If you tell the information provider that you dispute an item, a notice of your dispute must be included anytime the information provider reports the item to a credit bureau. Know your rights! The Fair Credit Reporting Act. You have the right to receive an annual free credit report from each bureau. You have the right to know the name of anyone who received your credit report in the last year for most purposes or in the last two years for employment purposes. Any company that denies your application must supply the name and address of the credit bureau they contacted. You have a right to a free copy of your credit report when your application is denied because of info provided by a credit bureau. If you contest the completeness or accuracy of info in your report, file a dispute with the credit bureau and with the company that furnished the info to the bureau. You have a right to add a summary explanation to your credit report if your dispute is not resolved to your satisfaction. How can I minimize the effect of a bankruptcy? The BK will be factored into your report until it falls off. It may take up to ten years for a BK to fall off your report, but the impact of the BK will lessen over time. If filing a BK, check your credit report to ensure accounts that were not part of the BK filing are not being reported with BK status. Make sure the BK is removed as soon as it eligible to be purged from your credit report. After a BK, the sooner you can begin to re-establish credit the sooner your score will begin to improve. Obtain a secured credit card and make your payments on time. As more time passes you will be able to obtain a traditional credit card. How long will a foreclosure effect my credit score? A foreclosure remains on your credit report for 7 years but its impact will lessen on your score over time. If all other obligations stay in good standing your score will begin to improve in as little as 2 years. Keep in mind a foreclosure is a single item. Do not make it worse by defaulting on other credit obligations. How do public records and judgments affect my credit score? Public records are legal documents created and maintained by Federal and local governments, which are usually accessible to the public. Some public records, such as divorces, are not considered by your credit score, but adverse public records, which include bankruptcies, judgments and tax liens, are considered by the credit score. Your score can be affected by the mere presence of an adverse public record, whether paid or not. Adverse public records will have less affect on your credit score as time passes, but they can remain on your credit report for up to 10 years based on what type of public record it is. Judgments specifically remain on your credit report for 7 years from the date filed. Judgments will almost always have a negative affect, if not directly to your credit score, then to your general stress level when you receive a formal court appearance letter and then have to deal with going to court. Before letting a bill or credit obligation get to the courthouse, see if there is an alternative that might work. Reach out to the person or company that you owe money to and see if some sort of arrangement can be worked out. If you are dealing with a collection agency or other company, they may be willing to work out a settlement with you that is equitable as it's almost always more efficient for them to work with you directly than through the courts. What are the different categories of late payments and how does your score consider them? Your credit score considers late payment using these general criteria; how recent the late payments are, how severe the late payments are, and how frequently the late payments occur. So this means that a recent late payment, could be more damaging to your credit score than a number of late payments that happened a long time ago. You may have noticed on your credit report that late payments are listed by how late the payments are. Typically, creditors report late payments in one of these categories: 30days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge off (written off as a loss because of severe delinquency). Of course a 90-day late is worse than a 30-day late, but the important thing to understand is that you can recover from a late payment prior to charge-off by getting and staying current with your payments. If however, you continue not to pay your debt and your creditor either charges it off or sends it to a collection agency, it is considered a significant event with regard to your score and will likely have a severe negative impact. It's important to always stay on top of all of your bills; your history of payments is the largest factor in your FICO score. There may be circumstances which cause you to be unable to keep current with your bills – maybe an unexpected medical emergency or losing your job. Before being late for any payment, we recommend that you reach out to your creditor; the creditor may be willing to work something out with you that you both can live with. If your creditors won't work with you, try to avoid having your account going so delinquent that the creditor sells your account to a collection agency or it becomes a judgment. Again, late payments hurt, but you can get current with them by paying them off – you can never again get that account current once it becomes a judgment or is turned over to a collection agency. How long will negative info remain on my credit report? It depends on the type of negative information. Here's the basic breakdown of how long different types of negative information will remain on your credit report: Late payments: 7 years Bankruptcies: 7 years for completed Chapter 13 bankruptcies and 10 years for Chapter 7 bankruptcies. Foreclosures: 7 years Collections: Generally, about 7 years, depending on the age of the debt being collected. Public Record: Generally 7 years, although unpaid tax liens can remain indefinitely. Keep in mind: For all of these negative items, the older they are the less impact they are going to have on your score. For example, a collection that is 5 years old will hurt much less than a collection that is 5 months old. Minimize effect on your credit score when applying for credit. When it comes to credit cards, always ask yourself "Why am I getting this card?". If your answer is need-based, such as needing credit for increasing expenses or wanting a lower interest rate to reduce monthly payments, then these may be perfectly legitimate reasons to open a new card. However, if you want a new card because it has a pretty logo or it's from your alma mater, then you might want to think twice. We recommend you only apply for new credit cards that you really need. When deciding if you need an additional card, it's also important to be aware of what's called credit utilization. After asking yourself "why you need more credit", then ask yourself "How much more credit do I need?" If you only need a small amount to pay additional bills for a few months, try contacting your existing credit card companies to get your credit limits raised first. Why is this a better option? While a request for an increased limit may count as an inquiry just like opening a new card would, it won't reduce the average age of your credit accounts, which is also important for your score. If getting the limit raised on an existing card isn't an option, then try to apply for the fewest number of credit cards so that the combined credit limit meets your needs. If you think you need an extra $5,000, try to get one card with a $5,000 limit rather than two cards each with a $2,500 limit. When applying for new credit cards, each application is counted separately as an individual inquiry on your credit report, and the more inquiries you have, the more that could hurt your score. Historically, people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports. So having more inquires makes you look more risky to potential lenders. Continued… Home & Auto Loans Rate shopping for a home or car is a smart practice, so your score won't penalize you for doing this. You might even want to check out what rates you can expect ahead of time. As you're rate shopping, multiple lenders may request your credit report to check your credit. We're aware this goes on, so your score doesn't even consider any mortgage or auto inquiries made in the 30 days prior to calculating the score. So, do your homework ahead of time, decide on the companies to get quotes from, and try to do all the rate shopping and get the loan within 30 days. Not only will the rates be easier to compare when the quotes are closer together, but it will have no immediate impact to your score. Given rate shopping for home and auto loans has no immediate impact, why do you even see an inquiry on your credit report? While home and auto loan inquiries may appear on your report, after the initial 30 days your score counts all those inquiries that fall in a typical shopping period as just one inquiry. So try to do your rate shopping within a matter of weeks as opposed to a matter of months to limit the longer-term impact as well. Preparing for next year NOW! Here’s what to focus on. Set goals for yourself: pay ALL your bills on time, don’t charge more than you can pay off each month, don’t get into the minimum payment zone, don’t open credit accounts you don’t need. Get out of credit card debt: set a repayment plan based on what you can afford to pay each month, prioritize your credit cards so you pay any card with past due amounts first, then pay more to the ones charging you the highest interest rates. Don’t fall back into the overspending pattern that got you in credit card debt in the first place. When buying a car ask the auto lender what your score needs to be to qualify for the loan you want so you know what score range to shoot for. Understand how your credit score is affected by your credit behavior and what factors are considered. Monitor your score so you know when your score qualifies for the rate you want.