About Credit Scoring
Date: Mon, 04/25/2005 - 17:07
About Credit Scoring
* About 35% affects Payment History meaning any lates; collections; charge offs; bankruptcies; judgments; liens or the such will hurt the score. All is time based, the older the information the less it is contributing to the scores. Usually the first 2 most recent years is what is hurting the credit scores the most.
Example: A 5 year old collection will affect the score less then a 30 day late just a month ago.
* About 30% affects Utilization it is best to have several accounts with low balances distributed then it is to have fewer accounts maxed out. To figure utilization: Balance (divided) by Credit Limit = percentage. Lower then 40% recommended per account, the lower the better; this is by far the fastest means for increasing the over all credit score.
* About 15% affects Established History. The longer you maintain open accounts with creditors the better. When first starting out of course this is not easy; but this is where getting added as an Authorized User to another persons established credit comes in best. Remember that the contributor must have an account that has long history; clean payment record; high credit limit; and low balance. Also need to check with the creditor to insure that they have a policy to report authorized user accounts to all 3 major credit reporting agencies.
Note: Authorized user accounts are the best way to go; since you are not legally responsible for the debt rather then Joint or Co-Signer accounts. Also these accounts are usually easier to remove from the credit reports by either contacting the creditor and requesting termination of the relationship; or disputing through the CRAs.
Note: You will eventually want to drop relationship with these accounts as your own credit improves and you want to apply for major loans like mortgage. Reason for this, is that the mortgage lenders commonly make the mistake of figuring in these accounts to the debt to income ratios which can hurt your approval.
Recommended that when establishing these accounts - to turn over the extra card to the owner of the account. There is no reason to be using this account. Just ride the positive reporting and honor the individual helping you out in this matter.
This is not an account that you need to hold onto forever, eventually when you accomplish establishing your own credit, there will be a time when removing your relationship to this account will be in your best interest.
* About 10% affects Inquiries & New Credit Rule 1. Don't apply for credit unless you know you can get it or that you need to get it; unnecessary credit inquiries are going to hurt the scores - especially if your over all credit file is small to begin with.
Tip: When applying for credit pull your own credit report first (this is a soft hit and won't drop your scores) ok, with credit report in hand go visit your local banks or credit unions. Show them the reports; and don't allow them to pull a credit report of their own unless they can say for sure that you will be approved, this way you save your self unnecessary pulls on your credit report if they decline you. IF they say yes, you are approved, then they will need to pull credit report to seal the deal.
Mortgage & Auto industry has special rules for inquiries: all applications for credit resulting in pulled credit reports within a 14 day period of time will only count as one inquiry & will be suppressed from affecting credit scores for 30 days. So if you plan to go shopping for a mortgage or a car, do your research first picking what companies you want to apply with and do this all within a 2 week period of time so that the scores are not affected too much.
* About 10% affects Mix of Credit use different types of credit (revolving; installment; auto; mortgage...) evenly. Average recommended revolving accounts is no more then 3 or 4 credit cards, if you know you have too many, then maybe it is best to open up an installment loan to consolidate.
Note: Balance Transfers: These are great, but don't look good on the credit reports; because lenders are going to see this and most likely affect their approval, if they think you are an over nighter; just passing through until a better rate comes along. Ok, so what you do when using balance transfers is transfer all but approximately $50 from the accounts being consolidated. Then pay minimum for a few months until they are paid in full. This way the credit report will only reflect as agreed and the balance transfer notation won't show up!!! (I have tried this personally with pretty good results in the scores).
The best advice I can give is to make financially sound decisions; go with companies which will provide the best rates. Avoid personal finance companies if at all possible, this is not good financial planning since they charge near to credit card rates.
Also keep in mind what factors affect how much; so if you can get more for your efforts by breaking smaller rules, then do so for the scores to increase:
Example: Mix of credit (10%) having more than 3 or 4 credit cards; can be beneficial if you have good utilization (30%) on the existing accounts. So it can be some trial and error for trying different things to improve your credit.
Also remember the advice which a lender gives you is productive for getting a loan; but not always good for the credit scores. If they tell you to consolidate and close accounts be careful how you go about this, most people's compliance usually results in dropped credit scores. You are shrinking your overall available credit limit verses your balances... so remember you don't want to hurt the utilization by consolidating and closing accounts behind you.
This part is all about knowing when to acquire credit and knowing when and how to properly let go of credit.
Wanted to clarify a bit on the credit scoring, need to understand that the scores which you see are not the same scores that lenders use when extending credit.
The credit reporting agencies are selling many different scores; produced by themselves as well as other companies out there; Fair Issac being one of the biggest ones out there.
Experian = Fair Isaac
Equifax = Beacon
TransUnion = Emperica
Now it gets even more complicated then this because each of these companies are breaking the scores down further into models.
Each model is tailored to meet specific industries needs, which will grade on key financial information that affects their business.
Mortgage Lenders
Personal Finance Companies
Credit Card Companies
Dealerships
Insurance Companies
And many more....
The scores which consumers get from the credit reporting agencies are just grading the credit report as a whole instead. So this is the reason why you might see a score of 650 but when the mortgage lender pulls they might see a score of 500.
This does not mean that you still can't use the scores and build upon them, each time you view the credit scores; there are reasons it will list as to why the scores was not better. This is what you use. Because you want to improve that area, then go back and see what else is suggested as needing improvement next.
When building credit it is in your best interest to overshoot your scores by 50 points to be on the safe side of what a lender might see, the scores don't always fluctuate as being lower on the creditor side either. I have seen people say well my score was 650, but the Dealership pulled a score showing 700! So you just never know what way they will go from one industry to the next.
Just got some new information on how the models are taylored to each industry & type of score used!
Will use two examples here to explain - please bear with me on this.
[list=1]
Bankruptcy Model -
The credit reporting agency - isolates and looks at all credit reports where people had filed bankruptcy. No other reports are used for this score model.
It is looking at the trends that led up to bankruptcy; trends during bankruptcy; and trends after the bankruptcy. It will pre determine what the common factors were among people filing bankruptcy and score you against this group to determine if you are a bankruptcy risk.
Credit Union Model -
The credit reporting agency - isolates and looks at all credit reports where people had done business with credit unions. No other reports are used for this score model.
It is looking at the trends most common among credit union members and scores you against this group to determine if you are desirable candidate to extend credit to.
So that is the difference between each of the scoring models created for each industry... it is what others before you have done already and what they anticipate you to do.
* About 35% affects Payment History meaning any lates; collections; charge offs; bankruptcies; judgments; liens or the such will hurt the score. All is time based, the older the information the less it is contributing to the scores. Usually the first 2 most recent years is what is hurting the credit scores the most.
Example: A 5 year old collection will affect the score less then a 30 day late just a month ago.
* About 30% affects Utilization it is best to have several accounts with low balances distributed then it is to have fewer accounts maxed out. To figure utilization: Balance (divided) by Credit Limit = percentage. Lower then 40% recommended per account, the lower the better; this is by far the fastest means for increasing the over all credit score.
* About 15% affects Established History. The longer you maintain open accounts with creditors the better. When first starting out of course this is not easy; but this is where getting added as an Authorized User to another persons established credit comes in best. Remember that the contributor must have an account that has long history; clean payment record; high credit limit; and low balance. Also need to check with the creditor to insure that they have a policy to report authorized user accounts to all 3 major credit reporting agencies.
Note: Authorized user accounts are the best way to go; since you are not legally responsible for the debt rather then Joint or Co-Signer accounts. Also these accounts are usually easier to remove from the credit reports by either contacting the creditor and requesting termination of the relationship; or disputing through the CRAs.
Note: You will eventually want to drop relationship with these accounts as your own credit improves and you want to apply for major loans like mortgage. Reason for this, is that the mortgage lenders commonly make the mistake of figuring in these accounts to the debt to income ratios which can hurt your approval.
Recommended that when establishing these accounts - to turn over the extra card to the owner of the account. There is no reason to be using this account. Just ride the positive reporting and honor the individual helping you out in this matter.
This is not an account that you need to hold onto forever, eventually when you accomplish establishing your own credit, there will be a time when removing your relationship to this account will be in your best interest.
* About 10% affects Inquiries & New Credit Rule 1. Don't apply for credit unless you know you can get it or that you need to get it; unnecessary credit inquiries are going to hurt the scores - especially if your over all credit file is small to begin with.
Tip: When applying for credit pull your own credit report first (this is a soft hit and won't drop your scores) ok, with credit report in hand go visit your local banks or credit unions. Show them the reports; and don't allow them to pull a credit report of their own unless they can say for sure that you will be approved, this way you save your self unnecessary pulls on your credit report if they decline you. IF they say yes, you are approved, then they will need to pull credit report to seal the deal.
Mortgage & Auto industry has special rules for inquiries: all applications for credit resulting in pulled credit reports within a 14 day period of time will only count as one inquiry & will be suppressed from affecting credit scores for 30 days. So if you plan to go shopping for a mortgage or a car, do your research first picking what companies you want to apply with and do this all within a 2 week period of time so that the scores are not affected too much.
* About 10% affects Mix of Credit use different types of credit (revolving; installment; auto; mortgage...) evenly. Average recommended revolving accounts is no more then 3 or 4 credit cards, if you know you have too many, then maybe it is best to open up an installment loan to consolidate.
Note: Balance Transfers: These are great, but don't look good on the credit reports; because lenders are going to see this and most likely affect their approval, if they think you are an over nighter; just passing through until a better rate comes along. Ok, so what you do when using balance transfers is transfer all but approximately $50 from the accounts being consolidated. Then pay minimum for a few months until they are paid in full. This way the credit report will only reflect as agreed and the balance transfer notation won't show up!!! (I have tried this personally with pretty good results in the scores).
The best advice I can give is to make financially sound decisions; go with companies which will provide the best rates. Avoid personal finance companies if at all possible, this is not good financial planning since they charge near to credit card rates.
Also keep in mind what factors affect how much; so if you can get more for your efforts by breaking smaller rules, then do so for the scores to increase:
Example: Mix of credit (10%) having more than 3 or 4 credit cards; can be beneficial if you have good utilization (30%) on the existing accounts. So it can be some trial and error for trying different things to improve your credit.
Also remember the advice which a lender gives you is productive for getting a loan; but not always good for the credit scores. If they tell you to consolidate and close accounts be careful how you go about this, most people's compliance usually results in dropped credit scores. You are shrinking your overall available credit limit verses your balances... so remember you don't want to hurt the utilization by consolidating and closing accounts behind you.
This part is all about knowing when to acquire credit and knowing when and how to properly let go of credit.
Wanted to clarify a bit on the credit scoring, need to understand that the scores which you see are not the same scores that lenders use when extending credit.
The credit reporting agencies are selling many different scores; produced by themselves as well as other companies out there; Fair Issac being one of the biggest ones out there.
Experian = Fair Isaac
Equifax = Beacon
TransUnion = Emperica
Now it gets even more complicated then this because each of these companies are breaking the scores down further into models.
Each model is tailored to meet specific industries needs, which will grade on key financial information that affects their business.
Mortgage Lenders
Personal Finance Companies
Credit Card Companies
Dealerships
Insurance Companies
And many more....
The scores which consumers get from the credit reporting agencies are just grading the credit report as a whole instead. So this is the reason why you might see a score of 650 but when the mortgage lender pulls they might see a score of 500.
This does not mean that you still can't use the scores and build upon them, each time you view the credit scores; there are reasons it will list as to why the scores was not better. This is what you use. Because you want to improve that area, then go back and see what else is suggested as needing improvement next.
When building credit it is in your best interest to overshoot your scores by 50 points to be on the safe side of what a lender might see, the scores don't always fluctuate as being lower on the creditor side either. I have seen people say well my score was 650, but the Dealership pulled a score showing 700! So you just never know what way they will go from one industry to the next.
Just got some new information on how the models are taylored to each industry & type of score used!
Will use two examples here to explain - please bear with me on this.
[list=1]
The credit reporting agency - isolates and looks at all credit reports where people had filed bankruptcy. No other reports are used for this score model.
It is looking at the trends that led up to bankruptcy; trends during bankruptcy; and trends after the bankruptcy. It will pre determine what the common factors were among people filing bankruptcy and score you against this group to determine if you are a bankruptcy risk.
The credit reporting agency - isolates and looks at all credit reports where people had done business with credit unions. No other reports are used for this score model.
It is looking at the trends most common among credit union members and scores you against this group to determine if you are desirable candidate to extend credit to.
So that is the difference between each of the scoring models created for each industry... it is what others before you have done already and what they anticipate you to do.
Credit scoring is perhaps the most sought after topic in our for
Credit scoring is perhaps the most sought after topic in our forums.
Thanks for coming up with a nice article on it.
Mike
