I have a lot of people ask me how to fix their credit. I am going to share with you the secret on how credit is scored and how to achieve a 780 or higher credit score!
I consider myself an expert on credit. I actually read the Fair Isaac’ Manual on how credit is scored. Since I read the manual in 2004 I have maintained an average FICO score of 770 – 810. The importance of credit is something that should be discussed in High School and/or College. The median FICO score in the US according to MyFICO.com is 723.
We live in a society where credit is weighed heavier than Gold. The difference in good credit versus bad credit is the difference between 0% financing on an auto loan and 21% for that same auto loan. The difference between good credit and bad credit is the difference between 18 months no interest, no payments for a Plasma TV from Best Buy or getting declined for financing.
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First, there are three bureaus who report scores: TransUnion, Equifax and Experian
Each of the three bureaus, use a similar scoring model to come up with a credit score. Fair Isaac & Company (FICO) is who created the software that TransUnion, Equifax and Experian use.
There are five parts to your FICO credit scores:
1. Your payment history – about 35% of a FICO score
2. How much you owe – about 30% of a FICO score
3. Length of credit history – about 15% of a FICO score
4. New credit – about 10% of a FICO score
5. Other factors – about 10% of a FICO score
In more detail:
Payment History – This one is fairly self-explanatory, make all your payments on time. If you make one late payment on a mortgage this can have a significant negative impact on your credit. I have seen a person with a 720 credit score drop down to a 660 score due to one late mortgage payment. Scores are quick to drop but slow to go up. Every 6 months that passes, you will regain 25% of your score. After 1 year you will regain 50% of your score. After 2 years, that late payment will no longer affect your credit score.
How Much You Owe – Keep all balances on revolving credit cards at or below 49%. Anything at 50% or higher is considered maxed out and will drop your scores. This means don’t play the 0% balance transfer game. Transferring balances may avoid a few dollars in interest but can hurt your credit. Hurting your credit score could cost you tens of thousands of dollars more in interest by not qualifying for a lower rate on an auto loan or home loan.
Length of Credit History – Don’t open up new credit cards. Don’t close out old credit cards. To calculate credit history add up the total number of months reporting on each card and divide by the number of cards you have. If you have one card that is 1 year old and one card that is 4 years old, your average years reporting would be 2.5 years. If you close your 4 year old card, your months reporting would drop to 1 year. If you then open a new credit card (0% balance transfer), now you have only 6 months of credit history.
New Credit – In the late 1990s the Federal Government implemented a “shotgun policy”. This allows you to “shop” for a mortgage, auto loan, furniture loan etc. without lowering your credit (14 day period, 30 days if you close a loan). This only pertains to one industry at a time however. You can have 10 different Lenders and Banks pull your credit for a home loan during a 14 day period without negatively affecting your credit. If you have a mortgage consultant pull your credit, then apply for a car loan, then a furniture loan, then a boat, and so on, you will negatively impact your credit score.
Other Factors – The magical “mix” of credit is what I refer to as "3-2-1". In the white picket fence world, a person will have 1 mortgage, 2 installment loans (furniture loan, car loan), and 3 revolving credit cards. Throwing off this mix can affect your score up to 10%. You don’t want to have 1 mortgage and 15 credit cards.
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How To Start Building Credit:
I was able to obtain my first credit card through Capital One. Capital One is considered to be a “higher risk” lender. You can expect to get approved with a low limit around $500. Remember to obey the 49% rule and keep a balance below 49% of your limit.
I heard that Citi also has some great first time credit programs.
Another option you have is a secured credit card. Banks like Washington Mutual, Wells Fargo, Bank of America, and others offer secured credit cards. These work by you securing collateral with the bank typically in the form of cash. If you put $1000 up as a secure deposit with the bank, they will in return issue you a $1000 limit secured credit card. This is a great way to start building credit. Once you have established credit with your bank, they will return your deposit to you. Once establishing credit the bank they may also offer you an “unsecured” credit card.
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How To Remove Collection Accounts:
First, you must realize that old accounts may appear because a collection company just failed to report to the Bureaus that an account was satisfied. The goal of a collection company is to get paid as they purchase your bad debt for pennies on the dollar.
If an account appears on your credit that should not be there then you should dispute that item. You must write a letter (calling won’t work) to each Bureau who is reporting the collection account (TransUnion, Equifax, Experian). Each time you write a letter to a Credit Bureau, they are required by Federal Law to open up a 30 day investigation. If they can’t prove that you owe the money, it will be removed from your report. Again, you must do this for each Bureau reporting the collection account.
If you actually do owe monies on a collection item, you may be able to “settle” for a lesser amount than what is actually owed. Sometimes finance charges and other miscellaneous fees make up the total amount owed. Your best option is NOT to enter into a payment plan. This can turn “old derogatory” accounts into “new derogatory” accounts and drop your scores. Your best option is to save up enough cash to settle with the Creditor in one payment. Many creditors will settle for anything from 50%-100% of the full amount owed. This action will immediately close out that collection account and help your scores instead of hinder them.
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Q. Does carrying a $0 balance improve my credit score?
A. No, carrying a $0 balance does NOT show creditors that you have the ability to manage credit. Carrying a "small" balance will show ability to maintain credit and pay the least amount in interest.
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Contact Information:
Equifax
P.O. Box 740241 Atlanta, GA 30374
(800) 685-1111
www.equifax.com
Experian
P.O. Box 2002 Allen, TX 75013
(888) 397-3742
www.experian.com
TransUnion
P.O. Box 34012 Fullerton, CA 92834
(800) 916-8800
www.transunion.com
I consider myself an expert on credit. I actually read the Fair Isaac’ Manual on how credit is scored. Since I read the manual in 2004 I have maintained an average FICO score of 770 – 810. The importance of credit is something that should be discussed in High School and/or College. The median FICO score in the US according to MyFICO.com is 723.
We live in a society where credit is weighed heavier than Gold. The difference in good credit versus bad credit is the difference between 0% financing on an auto loan and 21% for that same auto loan. The difference between good credit and bad credit is the difference between 18 months no interest, no payments for a Plasma TV from Best Buy or getting declined for financing.
------------------
First, there are three bureaus who report scores: TransUnion, Equifax and Experian
Each of the three bureaus, use a similar scoring model to come up with a credit score. Fair Isaac & Company (FICO) is who created the software that TransUnion, Equifax and Experian use.
There are five parts to your FICO credit scores:
1. Your payment history – about 35% of a FICO score
- Pay credit accounts on time
- Late payments
- Bankruptcies
2. How much you owe – about 30% of a FICO score
- Amounts you owe on all accounts
- Number of accounts with balances
- How much available credit you are using
3. Length of credit history – about 15% of a FICO score
- Longer credit history increases your score
- You can still have a high score if you show responsible credit management
4. New credit – about 10% of a FICO score
- Recently applied for or opened new credit accounts
- FICO scores distinguish between a search for a single loan and many new credit lines
- Do your rate shopping within a focused period of time, such as 30 days
5. Other factors – about 10% of a FICO score
- Mix of credit types
- Credit cards, installment loans and personal lines of credit
In more detail:
Payment History – This one is fairly self-explanatory, make all your payments on time. If you make one late payment on a mortgage this can have a significant negative impact on your credit. I have seen a person with a 720 credit score drop down to a 660 score due to one late mortgage payment. Scores are quick to drop but slow to go up. Every 6 months that passes, you will regain 25% of your score. After 1 year you will regain 50% of your score. After 2 years, that late payment will no longer affect your credit score.
How Much You Owe – Keep all balances on revolving credit cards at or below 49%. Anything at 50% or higher is considered maxed out and will drop your scores. This means don’t play the 0% balance transfer game. Transferring balances may avoid a few dollars in interest but can hurt your credit. Hurting your credit score could cost you tens of thousands of dollars more in interest by not qualifying for a lower rate on an auto loan or home loan.
Length of Credit History – Don’t open up new credit cards. Don’t close out old credit cards. To calculate credit history add up the total number of months reporting on each card and divide by the number of cards you have. If you have one card that is 1 year old and one card that is 4 years old, your average years reporting would be 2.5 years. If you close your 4 year old card, your months reporting would drop to 1 year. If you then open a new credit card (0% balance transfer), now you have only 6 months of credit history.
New Credit – In the late 1990s the Federal Government implemented a “shotgun policy”. This allows you to “shop” for a mortgage, auto loan, furniture loan etc. without lowering your credit (14 day period, 30 days if you close a loan). This only pertains to one industry at a time however. You can have 10 different Lenders and Banks pull your credit for a home loan during a 14 day period without negatively affecting your credit. If you have a mortgage consultant pull your credit, then apply for a car loan, then a furniture loan, then a boat, and so on, you will negatively impact your credit score.
Other Factors – The magical “mix” of credit is what I refer to as "3-2-1". In the white picket fence world, a person will have 1 mortgage, 2 installment loans (furniture loan, car loan), and 3 revolving credit cards. Throwing off this mix can affect your score up to 10%. You don’t want to have 1 mortgage and 15 credit cards.
-------------------------
How To Start Building Credit:
I was able to obtain my first credit card through Capital One. Capital One is considered to be a “higher risk” lender. You can expect to get approved with a low limit around $500. Remember to obey the 49% rule and keep a balance below 49% of your limit.
I heard that Citi also has some great first time credit programs.
Another option you have is a secured credit card. Banks like Washington Mutual, Wells Fargo, Bank of America, and others offer secured credit cards. These work by you securing collateral with the bank typically in the form of cash. If you put $1000 up as a secure deposit with the bank, they will in return issue you a $1000 limit secured credit card. This is a great way to start building credit. Once you have established credit with your bank, they will return your deposit to you. Once establishing credit the bank they may also offer you an “unsecured” credit card.
-------------------------
How To Remove Collection Accounts:
First, you must realize that old accounts may appear because a collection company just failed to report to the Bureaus that an account was satisfied. The goal of a collection company is to get paid as they purchase your bad debt for pennies on the dollar.
If an account appears on your credit that should not be there then you should dispute that item. You must write a letter (calling won’t work) to each Bureau who is reporting the collection account (TransUnion, Equifax, Experian). Each time you write a letter to a Credit Bureau, they are required by Federal Law to open up a 30 day investigation. If they can’t prove that you owe the money, it will be removed from your report. Again, you must do this for each Bureau reporting the collection account.
If you actually do owe monies on a collection item, you may be able to “settle” for a lesser amount than what is actually owed. Sometimes finance charges and other miscellaneous fees make up the total amount owed. Your best option is NOT to enter into a payment plan. This can turn “old derogatory” accounts into “new derogatory” accounts and drop your scores. Your best option is to save up enough cash to settle with the Creditor in one payment. Many creditors will settle for anything from 50%-100% of the full amount owed. This action will immediately close out that collection account and help your scores instead of hinder them.
------------------------
Q. Does carrying a $0 balance improve my credit score?
A. No, carrying a $0 balance does NOT show creditors that you have the ability to manage credit. Carrying a "small" balance will show ability to maintain credit and pay the least amount in interest.
--------------------------
Contact Information:
Equifax
P.O. Box 740241 Atlanta, GA 30374
(800) 685-1111
www.equifax.com
Experian
P.O. Box 2002 Allen, TX 75013
(888) 397-3742
www.experian.com
TransUnion
P.O. Box 34012 Fullerton, CA 92834
(800) 916-8800
www.transunion.com