eBOOKSImproving Your Credit Score 1-15-12

8/2/2019 eBOOKSImproving Your Credit Score 1-15-12

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How Did Credit Scoring Even Get Started?_____________________________________________________________________________________________________________________________________________________________________________________________

Lets Begin at the Beginning and Work From There.

ANY DISCUSSION OF HOW TO

IMPROVE YOUR CREDIT SCORE shouldbegin by explaining what the Credit Score is, how it

developed into such an important determinant of

your financial future, and how it is used by

companies you want, and need, to do business with.

Its hard to believe that a little three digit number canplay such an important role in your life, but it does in

so many ways, some of which you are probably noteven aware of (think employment screening!). Going

back as far as the beginning of commerce, merchants

and lenders have struggled with deciding who to

extend credit to. Most often they used unscientific

methods, such as whether or not the applicantsfamily was trustworthy, or if it appeared that you had

anhonest face, etc. In recent decades the concept ofCredit Scoring began to gain acceptance as a

scientific or quantifiable method to determinesystematically if an applicant was credit worthy. This

systematic approach was important, because startingin the 1950s when credit cards first became

commonly available the volume of credit applicants

began to explode. When the concept of Credit Scoring

first began to gain traction in the lending community,

each individual merchant and/or lender attempted to

develop its own system based on its own customers

only and studying the data in its own databases. This

approach was extremely costly, time consuming to

implement, and ultimately was not as accurate as it

needed to be because most lender/merchants did not

have a big enough database of customers to develop a

reliable and useful system.

IN THE 1960S AND 70s THREE

FACTORS CONVERGED to create what hasbecome the Credit Scoring system we know today,

FICO. Engineer Bill Fair and mathematician Earl Isaac

got together and created their groundbreakingcompany, Fair Isaac Co. (now simply known as FICO)

and began their groundbreaking work on the

mathematical side in developing the formulas behind

Credit Scoring. In this same time period the

companies, or predecessor companies, that we now

know as the Credit Bureaus, Equifax, TransUnion and

Experian were born, bringing together (separately

within each company) literally millions upon millions

of pieces of credit information, most contained on

paper ledgers or ledger card files. This information

was very useful, hypothetically, but could not bereadily harnessed until the third member of the

group made its big splash - the computer. The

introduction of main-frame computing, which was

available only to businesses (imaging that!)

beginning in the 1950s and 60s allowed FICO toapply its groundbreaking formulas to the data that

was aggregated (or gathered) by the Credit Bureaus.

Now businesses had the tool that they needed!


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1. Just What is a Credit Score?_____________________________________________________________________________________________________________________________________________________________________________________________

and Why is it so Important in your Financial Life?.

LETS START WITH

WHAT A GOOD

SCORE IS. A Good Score isbetween 700 and 739 and

currently about 14% of the

population falls into this

bucket. This probably doesntmean too much without the

point of reference of how the

scoring system works, so here

goes: A FICO score is a number

between 300 and 850 that

numerically represents a snap

shot in time of your creditpicture. Your FICO score is a

moving target and can changefrequently based on new

information being added to

your report and oldinformation being removed.

This is good news if you have a

bad credit score, since yourenot stuck with it forever, and

not so great news if you have a

very good credit score, because

you cant rest on your laurelsand slack off, or your credit

score could quickly decline.

Here is a listing of the buckets

that credit scores are divided

into; 1) 300 499, 7% of the

population falls here, this is the

poorest bucket, 2) 500 549,

9% fall into this bucket, 3) 550

599, 10% fall here, 4) 600

649, 10% are in this range,

5)650 699, almost 12%,

6)700 749, almost 16%,

7)750 799, almost 20%,7)800 - 850, 18%. These

buckets can be further

summarized into Categories:

Poor: 300 619Fair: 620 699

Good: 700 739Great: 740 759

Excellent: 760 850KEY POINT - Based on these

categories, lenders will decide

whether or not to loan youmoney, and at what interest

rate and terms!

NOW THAT YOU SEEwhere you may fall on thecredit scoring playing field

(assuming you know your

Score!) you are probably eager

to learn more about this most

important number. Your Credit

Score is typically calculated and

sold to potential lenders by one

of the 3 Credit Bureaus, whose

business it is to collect

consumer and business

financial information and sell

reports and tools back to both

consumers and businesses.

These 3 Bureaus and their

associated products areExperian (formerly TRW -

Experian/FICO Risk Model),

TranUnion(FICO Risk Score

/Classic) and Equifax(Beacon).

More confusingly, many

potential lenders use a

variation on the standard credit

report, adding their own

nuances to the calculation to

create their own custom or in-

house number, so - not allCredit Scores are created equal.

Also, Credit Scores can be used

in non-financial decisions, such

as by landlords and employers.

This is extremely controversial,

but it does happen regularly

and is used for screening

purposes.


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2. Calculating Your Credit Score_____________________________________________________________________________________________________________________________________________________________________________________________

Knowledge is Power Power Yourself to a Better Score!

KNOW THE RULES

OF THE GAME AND

YOU CAN WIN BIG! Itsvitally important to know the

rules of anything you engage in,

especially if the outcome is

important to you. Well, unless

you are sitting on piles of cash

and will never have to seek

credit of any kind, rent

anything from anyone, or seek

employment, your Credit Score

should be extremely important

to you! Here are three

important factors that you need

to be aware of relating to Credit

Scores and how Lenders make

lending decisions; 1) You need

to have and use creditto havea Credit Score Classic FICO

models need at least one

account on your credit report

that has been open for six

months and one account thatsbeen updated in the past six

months, 2) Lenders use

decision tools beyond your

Credit Score to make decisions

many use employment

history and stability, your

income, your total monthly

debt payments as a percentage

of that income and other

factors, 3) Credit Scoring

models were created for

Lenders, not consumers scores were not created to be

easy to understand (definitely

not user friendly!). Many ofthe ways Credit Scores are

calculated are closely guarded

secrets.

BUILDING BLOCKS OF

YOUR CREDIT SCORE.Your Credit Score is calculated

by each Bureau based on the

information in the credit report

they maintain on you. The

basics of this report are yourname, address, social security

number. Also included are

groupings of data that are the

building blocks of your Score;

1) Your Credit accounts -

often referred to as trade linesthese accounts include credit

cards, loans and other types of

accounts, 2) Requests to

check your credit known as

inquiries and are categorized

into Hard and Soft in nature.When you apply for credit the

lender will view your credit

report, this is known as a Hard

inquiry and can impact yourCredit Score. Soft inquiries arecreated not as a result of you

applying for credit, but by thesimple fact that your credit

report has been viewed, either

by you, or by potential lenders

issuing you a pre-approved

credit offer. These softinquires

do not impact your Score, 3)

Public records and

collections this can includelender accounts that have gone

into collections, bankruptcy

filings, tax liens, foreclosures,lawsuits, judgments, etc. These

will impact your Score.

All of these Blocks are thenevaluated against a group of 5

Key Factors to determine what

weight to apply to them. This is

the Secret Recipe of FICO, butwell crack it next. I Promise!


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3. The Five Factors That Drive Your Credit Score_____________________________________________________________________________________________________________________________________________________________________________________________

May Stop You From Driving Off in That Nice Car!

THE FIVE PILLARS onwhich your Credit Score is built

actually make logical sense,

even to a non-expert. Each

Factor (see below) is weighted

differently by the FICO

calculations and theyre mixed

together in a formula with the

Building Blocks discussed in #2

above in a secret calculation toform your Credit Score. So even

though we cant exactlyreplicate the calculation that

derives your Scores, we can get

a really good idea how to

improve your Score and

maintain it at its highest

possible level. The Five Pillars

are listed here, in the order of

importance that FICOscalculations place on them; 1)

Payment History 35% of the

typical Score is based on this. It

makes sense because your

record of paying bills says a lot

about your credit-worthiness.

To give you some perspective,

FICO themselves tell us that

about half of all Americans

dont have a single late

payment on their credit reports

and only 40% have ever been

60 days or more overdue in the

past 7 years. When it comes to

this type of Negative Mark,

FICO focuses on these 3 factors;

a) Recency how recently didthe borrower have a negative

mark. The further in the past

the better, b)Frequency howoften does the person receive a

Negative Mark, c) Severity

there are levels of seriousness

built into the formula. For

example a 60 day late is worse

than 30 days late. Collections

accounts, tax liens and

bankruptcy are the biggest

black marks. 2) How much you

owe - AKA Utilization Rate.

30% of Score. This is basically asnapshot of what percentage of

your entire available credit you

are currently using. Too high a

utilization rate worries

potential lenders, since higher

utilization or maxing out your

available credit is a strong

indicator of potential problems.

3) Average account age

15% of your score. This is

basically the average age of all

accounts you have open. The

higher the average age the

better, as it denotes stability

and the ability to maintain good

relationships with your

creditors over time. 4) New

credit 10%. Under this factor

you are dinged for having toomany credit inquiries, as tends

to happen when you apply for

credit. How many accounts

youve applied for & opened aswell as how much time has

passed since the last

application & last new account

was opened are factors. 5)

Credit mix 10% of Score.

FICO is looking for a Healthy

Mix, and theyre vague aboutthis. The optimal mix contains

both revolving (credit cards)

and installment (mortgage,

auto loan) credit. It is believed

that a minimum of 3 major

credit cards, 1 installment

account and 1 mortgage loan is

the optimal mix.


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4. Improving Your Score - Common Myths andMisunderstandings.

_____________________________________________________________________________________________________________________________________________________________________________________________

Knowing What Doesnt Work Can Be Just as Important!

MYTHS TEND TO

DEVELOP around thingsthat are not easily understood.

This couldnt be truer than inthe case of calculating a Credit

Score. Since the process of

calculating a Score is notcompletely known (secrets

again!), myths have cropped up

about how to improve your

Score, many of which can be

actually damaging to your

Score! Heres a Top Five list ofMyths and Misunderstandings;

1) Closing credit accounts

will help your Score Thishurts in a couple of ways; a) it

lowers the total credit availableto you and therefore raises

your Utilization Rate, b) it

lowers the average account age

across all of your accounts. This

is particularly true if you shut

down some of your older

accounts. 2) Asking your

Creditors to lower your

available credit limits helps

Again, this will raise yourUtilization Rate, meaning you

will be using a higher

percentage of your available

credit than before your limits

were lowered. 3) Your Score

can be hurt by checking your

own credit report This is adangerous Myth because it may

limit how often you check your

credit report, which you should

check often(once a year at a

minimum) The experts at FICO

understand this necessity, and

have chosen to ignore your own

inquiries. (Important youmust get your reports from a

Credit Bureau or service

affiliated with a Bureau orMyFICO.com, or your inquiries

may indeed hurt your Score!)

4)Shopping for the best rate

can hurt your score the FICO

formula creators again took

this into account, they

understand the need to shop

for the best rates, particularly

Auto loans and Mortgages. The

FICO formula ignores all

mortgage and auto loan

inquiries made within a 30 day

period and lumps them

together as 2 transactions only

(one mortgage, one auto). This

lumping process only happens

if you actually close a loan, sodont apply and then not followthru this could hurt your

score. 5) You dont have touse credit to obtain a good

Score - This is completely

untrue, as you can probably see

from what youve read already.The Credit Score process is

based on judging how well

people manage the credit that

is extended to them, so havingno credit extended or very little

leaves the FICO formula very

little to work with. Even if you

hate the concept of using credit,

you should use the minimal

possible credit mix and manage

it carefully to maximize your

Score.


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.

5. Everyday Habits for Credit Score Maximization_____________________________________________________________________________________________________________________________________________________________________________________________

Make Creating & Maintain a Strong Credit Score Routine!

AS WITH MOST

THINGS, theres a right wayand a wrong way to go about

maximizing your Credit Report.

The best way to obtain and

maintain your maximum Score

is to follow good credit habitson a regular basis, which I will

explain to you here. The # 1

principle of maintaining a high

Score is being familiar with

your credit report, which is the

basis of your Credit Score. You

are entitled to one Free report

from each of the 3 Bureaus

each year, which you can get at

www.annualcreditreport.com.

This site was established based

on federal law and is

maintained by the Credit

Bureaus. Once you have your

report(s) do the following;

1)Make sure the identifying

info is correct wrong info

could mean that your data is

being mixed with someone

elses, 2) Review all creditaccounts look for; accounts

that arent yours, delinquenciesthat arent yours, any negative

items that are more than 7

years old, debts that your

spouse may have incurred prior

to you marriage, any other

incorrect info, such as debt that

should have been wiped out

due to a bankruptcy filing. Any

problems found should be

disputed via the form that is

included with each credit

report. 3) Scrutinize all

Inquiries. Look for Hard

Inquiries (those where you

applied for credit) that are

older than 2 years old, andthose that you did not

authorize. 4) Review your

Collections and Public

Records Look for a)Bankruptcies older than 10

years, b) lawsuits, judgments,

or paid tax liens that are older

than 7 years, c) duplicate

collections, like a loan that is

listed under more than one

collection agency, any negative

info that is not yours. 5)

Dispute all errors your

credit report should come with

a form for disputing any errors

found by mail, or online

depending on how you ordered

the report. Credit bureaus are

required by law to investigate

any mistakes you bring to their

attention and report back to

you within 30 days. This often

works, but is an imperfect

system, as old errors previously

removed can reappear youneed to stay on top of the

process. Other techniques

include; Pay your bills on time,every time. Pay down your debt

decreasing your UtilizationRate is huge; it represents 30%

of your Score! Dont close creditcards or other revolving

accounts this reduces youravailable credit and hurts your

score. Apply for credit

sparingly, Hard Inquiries hurt.
http://www.annualcreditreport.com/http://www.annualcreditreport.com/http://www.annualcreditreport.com/


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6. Turbo Boost Techniques!_____________________________________________________________________________________________________________________________________________________________________________________________

Get a Quick and Sustainable JUMP in your Credit Score!

GOOD HABITS DO

NOT MAKE FOR FASTimprovements, unfortunately.

They are one powerful tool for

solid, sustained improvement

gained over time, but the

techniques outlined here can

give your Score a quick and

meaningful boost. Perhapsyoure in the midst of applyingfor a mortgage and need a

higher Score. Dont be temptedto go to a Credit Repaircompany who will most likely

rip you off. Try these 4

Techniques first and see if they

dont add 50 to 100 points toyour Score quickly! 1)Transfer

Balances This is the easiest

and quickest way to raise yourScore. Simply chart all of your

credit cards, listing the current

balance and their Credit Limits.

If you have cards with balances

over 30% of their Credit Limit,

and have other cards that are

not near to 30% of their limit,

try to balance out your cards

by transferring amounts from

the cards over 30% to those

under 30%. Dont push onecard over 30% to do this,

obviously. This only really

works if you have adequate

available credit to properly

balance the majority of yourcards at the Optimal Utilization

rate of 30% or less 2) Increase

card limits If, after Step 1you still have cards that are

over the 30% Optimal

Utilization rate, call your card

companies and request an

increase in your Credit Limit.

Your goal is to get as much

credit as is necessary to be

under the 30% Utilization rate

on ALL of your cards. It is

extremely important that you

do not use your new credit that would defeat the purpose

and leave you deeply in debt. 3)

Pay down your balances. This

is a great idea in general, but

this Tip requires you to go

about it a little differently.

Normally you might attack the

card with the highest interest

rate and try to pay down that

one to save money on interest

paymentsbut since your goal

is to raise you Score, the best

method is to pay down the

cards that have Utilization

Rates of greater than 30%.

4)American Express to the

rescue! If you have an Amex or

any card with no preset

spending limit, this step isextremely powerful. Heres thelogic: these cards have no

Credit Limit - key data thatFICO uses to calculate your

Score. In place of this FICO uses

your highest reported balance as

your credit limit. If you Amex

bill is the same each month this

could work against you, since it

will look like you are Maxing

Out your card every month. Toturn this in your favor, you

need to artificially inflate your

Amex bill for one month (no

wasteful spending!) to 3 times

your previous highest balance.

Now, pay it off & keep your

spending to previous limits!

Instant Optimal Utilization!


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How to Keep Your Score Healthy_____________________________________________________________________________________________________________________________________________________________________________________________

the Care and Feeding of a Good Credit Score.

LIKE THE NEED TO EXERCISE AND

EAT RIGHT, much of the advice I am aboutto dispense in this closing section will be

acknowledged as necessary, but will often be

ignored. Regardless, I will put it out there for the

dedicated few of you that can discipline

themselves thru their spending and bill paying

habits. Following these tidbits of advice can help

you to survive lifes ups and downs and help youmaintain an even keel amidst the choppy

financial seas. 1) Pay off your credit card

balances each month ideally you should not

use revolving credit, or credit that does not needto be paid off each month. This is what gets so

many people in trouble. If you cant disciplineyourself to do this with your Visas and

MasterCards, lock them up in a safe place (dontclose the accounts!) and use only an American

Express card this you must pay off each month.

This advice will not only help you to optimizeyour credit score, it will help you to save tens, if

not hundreds, of thousands of dollars of interest

in your lifetime! 2) Have an Emergency Fund I

know this can be a difficult thing to do in todayseconomic climate, but having one can be the

difference between disaster and a close call not

only in terms of helping to maintain your Credit

Score by not missing important payments, but in

terms of more important things, such as meeting

your mortgage or rent payment. I recommend

keeping your emergency fund in an FDIC insured

savings account and not to mix it with any other

spendable money. 3) Have enough insurance

Health insurance primarily. I know this is not

easy with the cost of Health insurance these days,

but this should be a top priority, particularly if

you have a family (kids can really tend to get sick

or injure themselves, its one of their more

endearing qualities!). Also, make sure you haveproper coverage on Auto and Home policies.

These can really help prevent you from being

blind-sided by unexpected expenses sometimesin the form of lawsuits they protect you from! 4)

Dont overspend when buying a home - It is

extremely hard to walk away from a DreamHome because it busts your monthly budget, I

knowbut living with a busted budget monthafter month is painful as well and can lead to

affordability problems that can affect your Credit

Score and worse. Stick firmly to your(conservative) budget when shopping for a home.

In the end, a good Credit Score and good overall

financial habits go hand in hand. If you practice

conservative financial habits that include proper

budgeting, discipline in your spending and limit

your use of credit to a manageable amount, not

only will you be on your way to a stress free

financial life, but to a Great Credit Score as well!!

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