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Credit Score Basics

June 24th, 2009    Subscribe To Our Feed

A credit score is a snapshot of your credit standing at a particular point in time. A credit report summarizes your credit risk based on your historical data while the credit score is a subjective evaluation of that historical data.  Lenders use this information to determine your level of risk and how likely it is they will be paid on time.

There are three major reporting agencies (Experian, Equifax, and TransUnion). Each agency reports their own credit scores so the scores can vary slightly between each agency.  Lenders will look at your overall credit worthiness.  In reality, is comes down to whether you pay your bills and pay them on time. Lenders will also check to make sure you are not overextending yourself financially.

Your payment history accounts for 35% of your total credit score.  The highest weight is given to the highest payment, such as a mortgage and then works down through smaller payments. Any type of bankruptcy, liens, collections and judgments will have a negative impact on your score.  Late payments and the number of times you were late on a payment will also have a negative impact.

The amount of credit you owe in relation to the amount of credit that is available to you accounts for 30% of your score.  You want to keep this ratio as low as possible for a higher score.  Typically, mortgages and installment loans are not factored into this ratio because they are not considered lines of credit.

The length of time you have been making payments on time or your credit history accounts for 15% of the total credit score.  A word of caution, if you have old accounts that you no longer wish to use but they have a long credit history don’t close them because this will wipe out a large chunk of your history.  Instead, use the account once or twice a year to keep the account active. That way all the history is retained.

The different types of credit such as mortgages, credit cards, student loans, and automobile loans that you have had accounts for 10% of the score.  If you have a Home Equity Line of Credit (HELOC) it will be treated as a revolving account unless it is over $40,000 then it will be treated as a mortgage.

Inquiries, which is when a lender requests your credit score, accounts for 10% of the total score. However, if you are shopping for a car and there are several dealerships that request information within a 45 day period, it will be considered as only one inquiry.  Only the first ten inquiries count each year.  When inquiries are made for a job, insurance or utilities, an account review, a promotion, or your own personal review, they will not affect your credit score.

The important thing to remember is that your credit score is a reflection of your actions. If you are 30 days late on a payment, your score can drop 50 points or more.  If you are 60 or 90 days late on a payment, your score can drop 100 points or more.  If your credit cards are maxed out or approaching the maximum available credit, your credit score will drop by at least 80 points.  Make good financial choices to keep your credit report healthy.

Credit Score - Myth versus Fact

May 26th, 2009    Subscribe To Our Feed

Myth: Closing a credit card I don’t use will improve my credit score.

Fact: Closing a credit card account will not necessarily boost your credit score; in fact it could potentially hurt your overall score.  If you’ve had a credit card account for several years, think twice before you close the account. Your credit rating is determined by the length of time you’ve had an account as well as the balance in relation to the account’s limit. Instead of closing the account, only use the credit card once every three to six months. This will keep the account active.

Myth: My credit score will be lowered if I check my credit report.

Fact: When your credit report is examined for a new credit card or mortgage, it is considered a “hard credit pull” and will stay on your credit report for six months and will also lower your credit score. However, checking your own credit report will not hurt your score and can be an excellent tool for you to use when making big purchases. The higher your credit score, the more likely you are to negotiate lower interest rates, which gives you more control over your personal finances.

Myth: My credit score can be affected by my age, race, gender, marital status, religion, income or location.

Fact: This is absolutely not true. Federal law prohibits credit scoring from taking any of those factors into account.  The only personal demographic information that is maintained by the reporting agencies is your birthdate.

Myth: Negotiating with my credit card or mortgage company will make my credit score go down.

Fact: If you are up to date with your credit card or mortgage payments then negotiating with your credit card of mortgage company should not affect your score.  However, to protect your score, try extending the term of your loan or negotiate a lower interest rate instead of trying to get the principal reduced.

Myth: If I pay cash for everything and never use a credit card or buy anything on credit, my credit score should be excellent.

Fact: If you don’t have a credit history and you never use credit than you can actually hurt your overall credit score. Companies that issue credit card will actually view customers with neither debt nor credit cards as a higher risk than someone who does have credit cards and manages their debt responsibly. The agencies that report your credit like to see a history of paying credit obligations on time.

Myth: A fine on an over due library book won’t show up on my credit report.

Fact: Wrong. Even a small library fine that has been turned over to a collection agency can lower your credit score by as much as 50 to 100 points. This also applies to unpaid parking tickets and utility bills. If you pay the debt before it reaches a collection agency than you should be okay.

Myth: My credit score will immediately be cleared if I pay off a collection account.

Fact: This is not true. A collection account remains on your credit report for seven years even if it has been paid. However, if you are current on your mortgage and credit card payment, than the collection account probably won’t drastically damage your overall credit score.

Myth: All the different credit cards such as Visa, American Express, Discover or a department store card are all the same when it comes to my credit rating.

Fact: You will want to stay away from store-brand credit cards. Approximately 10 percent of your credit score is based on the institutions from which the money is borrowed. Finance companies, often used by retailers who offer their own credit cards, are considered higher risk than banks. A large amount of credit cards that are backed by finance companies could negatively impact your credit rating.

Myth: It is okay if my credit card issuer lowers my credit limit because I never max out my credit limit; I always try and keep my balance around 75 percent of what’s available.

Fact: It can make a huge difference to you if your credit card issuer decides to lower your credit limit.  Most people will keep their credit card balance right under their available credit limit.  Thirty percent of your credit score is based on how much credit your use in relation to how much credit you have available.  Try to keep your balance on your credit cards below 35 percent of your available limit.

Myth: I don’t make enough money to have a really good credit score.

Fact: Your income has no effect on your credit score.  Paying your debt in a timely manner, monitoring your credit report to track how often you’re applying for credit cards and loans and making sure you keep your oldest credit card open so it remains in your credit history are the ways to establishing a good credit score.

Develop a Budget

April 18th, 2009    Subscribe To Our Feed

Budgeting is the process of setting spending targets that help you stay within your income level.  Developing a budget is an excellent way to track and control your expenses.  Budgeting is the cornerstone of saving. A personal budget will allow you to identify areas where you can save.

A monthly budget often works the best since most of our bills are paid monthly such as rent, mortgage and utility bills. You want to take into account all of your expenses for the month which should include trips to the video store or your favorite coffee shop. These items alone can easily add up to more than $100 per month.

Try to keep accurate records so you’ll have a good comparison of budgeted costs versus actual costs.  This is where you can find extra cash that can be saved or invested.  For example, if you budget $500 monthly for certain expenditures and you consistently only spend $400 on those expenditures, you have identified a source of saving $100 per month.

The key to a successful budget is to be honest with yourself about your expenses and keep accurate records.

Credit Card Changes During 2009

March 27th, 2009    Subscribe To Our Feed

Read the fine print on your credit card accounts.  You might notice that interest rates have increased or a monthly fee has been added. Credit card companies across the country are making changes to their terms and many of the changes are not good for the consumer.

Credit Card Changes #1 - Interest Rates:
Credit card interest rates have generally increased for all major card issuers and some have even doubled or tripled for consumers who pay their bills on time. Card issuers have increased the interest rate by a minimum of 1% and some have gone even higher.

Credit Card Changes #2 - Fees:
Credit card issuers make billions of dollars every year through penalty fee income.  Fees include items like balance transfers, cash advances, and also charging individuals who have large balances but little account activity.

Credit Card Changes #3 - Credit Limits:
Many credit card issuers are lowering credit limits. This is an area to really watch because some issuers have cut limits to amounts lower than the balances owed which triggers over-the-limit fees on some accounts.  Also, lowering credit limits can immediately lower your overall credit score if you carry a balance on that account. Always try and keep your balance at thirty percent or lower of your available credit limit to maintain a good credit score.

Credit Card Changes #4 - Rewards:
If you have a credit card that issues rewards you might notice that the rewards have been cut or lowered.  Rewards such as Citi’s Thank You Rewards and AmEx’s Delta Sky Miles have been cut. Some introductory rebates and gas rebates have been lowered by participating card issuers.

Check your monthly statement carefully to see what if any changes have been made to the terms of your credit card. You can still use your credit card but make every effort to pay off the balance at the end of the month or make every payment on time to avoid unnecessary charges.

Understanding Your Credit Score

March 17th, 2009    Subscribe To Our Feed

Some people get confused between the difference of your credit report and your credit score. Your credit report is a history of the type of borrower you have been. Your credit score is a subjective evaluation of your credit history. Lenders use this information to determine your level of risk and how likely it is you’ll pay them back on time.

Credit score, credit rating and FICO score are often used interchangeably and basically they are different terms for the same thing. The three major reporting agencies (Experian, Equifax, and TransUnion) each report their own credit scores. It’s not unusual for these three scores to vary slightly for each other. The more responsible you are with credit, the higher your credit score will be.

Your payment history accounts for 35% of your credit score. The highest weight is placed on your highest payment. So for example, if your mortgage is your largest payment that will have more weight than a smaller payment. Late payments will have a negative impact on your credit score.  The severity of the negative impact depends on how much time has passed and the number of times you’ve been late on that account. Always try to pay your bills on time.

Your debt to available credit accounts for 30% of your credit score. You want this ratio to be no higher than 50% of your available credit and it is preferable to keep this ratio to under 30% of your available credit. This ratio applies to lines of credit such as credit cards and does not typically apply to mortgages or installment loans.

How long your credit history is accounts for 15% of your credit score. If you have a long history of making your payments on time you will have a good credit score.  One thing that can hurt you is if you close old accounts that you’ve had for years and made payments on time. Closing old accounts wipes out all your payment history for that account. If you have older accounts that you’ve managed efficiently, than keep them open and use them once every six months or so to keep them active.

The types of accounts or mix of accounts makes up 10% of your credit score.  Credit bureaus like to see a mortgage, an auto loan, and three to five credit cards. If you have a Home Equity Line of Credit (HELOC), it will be treated as a revolving account unless it is greater than $40,000, in which case it will be treated as a mortgage.

How many inquiries you have for your credit score account for approximately 10% of your credit score.  Each time an inquiry is made points will be taken off your overall score. However, multiple inquiries for things such as a mortgage or a car loan within 45 days will be considered that you are shopping around and will be treated as one inquiry. Inquiries for a job, insurance or utilities, an account review, a promotion or your own personal review won’t affect your credit score.

Being 30 days late on a payment can damage your credit score by at least 50 points. Being late by 60 or 90 days, or being late 30 days on multiple accounts will lower your score by at least 100 points. Having a debt to credit available ration higher than 50% can negatively affect your credit score by as much as 100 points. Remember that every financial choice you make can and will affect your credit score.

Best Credit Card Deals

March 5th, 2009    Subscribe To Our Feed

Best Credit Card Deals - Low Interest Credit Cards:
If you carry a balance on your credit card from month to month, consider getting a low interest card to save you money in the long run.

Discover More (SM) Card - This card has a 0% interest rate for one full year. The card also has a 5% cash back rebate on qualifying purchases relating to travel, home improvement, department stores, gas and restaurants just to name a few. There is no annual fee for this card.

Pulaski Bank Visa Classic Card - This card has an introductory 0% on balance transfers for the first six billing cycles. This introductory offer applies to balance transfers processed within three months of your accounts activation date. There is no fee for balance transfers.

Best Credit Card Deals - Cash Back Credit Cards:
Using a cash back credit card can save you money on everyday purchases if you are in a habit of paying off your credit card balance each month.  Otherwise, any savings you’ve earned from using the card will be lost in financial charges.

Blue Cash from American Express - This card offers up to 5% cash back on everyday purchases - including gas. This card also offers a 0% APR for new purchases and a low 2.99% APR on balance transfers for 12 months.  There is no annual fee for this card.

Discover Motiva (SM) Card - With this card you can earn 5% - 20% cash back on top retailers through their exclusive online shopping site as well as Cash Rewards for good credit management.  There is a 3.99% introductory APR for six months on purchases and up to 12 months on balance transfers.  There is no annual fee for this card.

Best Credit Card Deals - Instant Approval Credit Cards:
The nice feature about instant approval credit cards is that when you apply, the issuer will tell you immediately whether you are rejected or approved.

First Option Visa - You can be approved regardless of credit history or income with this card. There is an annual fee of $59.00 for this card. You can get a REAL Visa Credit Card with up to a $5,000 secured line of credit.

Blue Sky from American Express - You will get a decision in 60 seconds after applying for this card. The card has 0% APR on purchases and a low introductory APR of 2.99% for balance transfers for up to 12 months.  With card, you will also earn 1 point for every dollar spent and you can use those points on hotels, airlines and car rentals just to name a few. There is no annual fee for this card.

Best Credit Card Deals - Student Credit Cards:
Student credit cards are ideal for high school and college students because they are more lenient on young people with a limited credit history.

Citi mtvU Platinum Select Visa Card for College Students - You can earn 5 ThankYou points for each dollar spent at restaurants, bookstores (this includes Amazon), music stores, movie theaters and video rental stores. Earn 1 ThankYou dollar for every dollar spent on other purchases and you will also get 25 ThankYou points for making your payments on time. You can redeem the ThankYou points for gift cards, travel, electronics, music and much more.  There is no annual fee for this card.

Discover Student Card - Clear - This card offers 0% interest for 6 months plus it gives you up to 20% CashBack Bonus when you shop online - if you shop with the more than 100 CashBack Bonus partners you will earn double rewards. They offer unlimited cash rewards, automatically and their customer service is fast and available 24 hours a day. Easy online account management tools are also included with this card.  There is no annual fee for this card.

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