WHAT IS CREDIT?
A credit report is a collection of data about your debts and payment history. There are three major credit reporting repositories in the U.S.: Experian, TransUnion, and Equifax. Credit card companies, mortgage companies, banks, hospitals – anyone who extends credit – can send your payment information to one or all of these bureaus. In addition, courts will report any liens or judgments against you. They also list places of employment and various residences where you have lived.
WHY DO THE SCORES VARY SO MUCH?
Each of the three bureaus calculates a credit score based on the information they receive. For example, if you have a doctor’s bill that you never paid, the doctor may turn the debt over to a collection agency. The collection agency will notify one, two or all three of the credit repositories that you have a debt that went to collections. But some creditors report to only one or two of the bureaus, not all three. So Equifax may be notified that you are in collections while TransUnion and Experian know nothing about it. So your Equifax score might be 25 to 50 points lower than your other scores. The same goes with reporting good credit. The bureaus can only work with the information they are given.
A study conducted by the National Association of State Public Interest Research Groups discovered that 79% of all credit reports contain some type of error and 25% contain such serious errors that those individuals could be denied credit. Many people have other people’s information mixed in with theirs. That’s why it’s so important to look at all the names listed on your credit report (check the middle initial, too) as well as all the addresses. Highlight any names or addresses that are not yours.
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HOW IS YOUR CREDIT SCORE DETERMINED?
Keeping in mind that each bureau gives different weight to each category, here is a rough breakdown of the components that make up your credit score.
AMOUNT OF TIME CREDIT HAS BEEN IN USE: 15% of Score
People who have had revolving credit for less than 24 months are determined to be a higher risk (lowers your score) than people who have had credit for 48 months or more.
What this means to you:
1. If you are closing down credit cards or lines of credit, close the newest accounts first. Keep your oldest accounts active. The average age of your credit will go up, helping your credit report.
2. Every time you open a new line of credit, you lower the average age of your overall credit, bringing down your score.
TYPES OF CREDIT AVAILABLE: 10% of Score
The number of bankcards you have affects your score. The best number of cards to have is two. People with 0 or 1 credit card are higher risk, people with 3 – 7 cards have a slightly elevated risk and people with 8 or more cards are seen as a high risk. If you are carrying cards you don’t need, close the newest accounts and try to keep only two or three cards. However, don’t close out cards you’ve had for more than 48 months unless you really don’t use them.
PREVIOUS CREDIT PERFORMANCE: 35% of Score
This is the biggest factor in your credit score.
The risk factor is based on months since most recent major delinquency. A major delinquency is a 30, 60 or 90 day late on your credit report, collections, judgments, liens, bankruptcy, etc.
If you have had a delinquency in the past 0 – 11 months, you are viewed as a high risk. If it’s been 12 – 23 months since your last delinquency, the risk factor drops almost by a third. If you have gone more than 48 months with no delinquencies, you are seen as having little to no risk. Mortgage brokers do not want to see ANY delinquencies in the past 12 months on your credit report.
CURRENT LEVEL OF INDEBTEDNESS: 30% of Score
This is a measure of the ratio of total balances to total limits on revolving trade lines. For example, if you have three revolving accounts that are maxed out, you are seen as a high risk. If your balances are 19% or less of your limits, you are seen as a low risk. Once you hit 20% of your limit, your risk factor doubles. Your goal is to use less than half of the credit that has been extended to you.
PURSUIT OF NEW CREDIT: 10% of Score
If you’ve been shopping around for a credit card, car or mortgage, each inquiry hits your credit, usually for anywhere from 5 – 15 points. If the credit inquiries are made within a two week period for the same thing (three car loan inquiries or two mortgage loan inquiries, for example) only the first enquiry is supposed to take points off your report. Sometimes this happens, sometimes not. If you have four or more recent credit inquiries, you are seen as a high risk.
THE TRUE COST OF BAD CREDIT
Bad credit affects more than your bankcard and mortgage rates. The difference in interest rates between someone with perfect credit and someone with mildly damaged credit can average as much as 7% on a car loan. People with mildly damaged credit do not qualify for the 0% loans that car dealers tout. On a $20,000 car loan paid over a 5-year period of time, someone with good credit may pay 5% interest and someone with damaged credit would pay 12% interest. The payments at 5% would be $377.42; payments at 12% would be $444.89. Over the course of the loan, the person with damaged credit would pay an extra $4,048.00. On a home mortgage, the numbers are even scarier.
What many people don’t know is that their credit report determines homeowner, car health and life insurance rates. It can also determine whether or not someone can purchase insurance. People who have high risk credit scores are seen as high life and health risks. Take a look.
Homeowner’s Insurance Credit Scoring
As far back as the mid-1990’s, insurance companies began using credit information to arrive at a point system to determine whether or not to insure a homeowner.
For example: An accumulation of 5 points = No Insurance.
Bankruptcy last 60 months 5 points
Repossession in last 36 months 4 points
Behind in Child Support 3 points
Collections last 36 months 2 points each occurrence
Voluntary Repossession 2 points
Charge Offs 2 points
90 days late 2 points each occurrence
60 – 90 days late 1 point each occurrence
Bad Check 1 point each occurrence
Insurers say their models predict which consumers are more likely to suffer insurance losses. Insurance scores may be based on credit data as well as motor vehicle records, claims histories and other information required on the application. In March 2002, insurance companies were granted the right by law to be able to run a consumer’s credit twice per year. So if your insurance company is processing a new application and/or renewing an existing policy for you, they may make their determination based on your credit scoring.
HOW TO CONTACT THE CREDIT REPOSITORIES:
TransUnion LLC
National Consumer Relations Center
2 Baldwin Place, P.O. Box 1000
Chester, PA 19022
800-888-4213
www.transunion.com
Equifax (CBI)
P.O. Box 105793
Atlanta, GA 30348
800-685-1111
www.equifax.com
Experian (TRW)
P.O. Box 9595
Allen, TX 75013
888-397-3742
800-749-7576 (FLA)
www.experian.com
To get a copy of your credit report, you need to contact each of the three national repositories listed above. If you have been denied credit in the past 60 days the repository will provide a free credit report. Under the FACTA law, every US citizen can have one free credit report a year. All phone numbers are a 24-hour a day answering service.
For more information on credit and credit restoration, go to Credit Information Site.