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1. What Makes Up A Credit Score?

We have worked with clients from all walks of life. Some who had "perfect" credit, and some who upon seeing their credit report, thought the only way to fix it was to get a second job. TSR wants you understand what makes up a great credit score, and how to alter any situation to improve the credit scores with confident credit repair.

  Let's lay some ground-work.

Credit scores will be different among the three bureaus because not all creditors report your data to all three bureaus. Even if your data was reported exactly the same to each, the three credit bureaus don't use the same model to evaluate your score. Typically your three scores range within 50-60 points from high to low. On some occasions you will see a score drastically higher or lower than the other two. For this reason, many creditors will pull all three scores and use your middle score for qualifying purposes. The middle score is assumed throughout these articles when we talk about one's credit score.

Credit scores range from 350 - 850. The higher the score the better. What is a great credit score? In today's market you want to have a 720 or better. Even higher is better for qualifying purposes, although it probably won't get you a better interest rate.

"Good" Credit Scores. You can still finance a home with a lower score, but it becomes more expensive either by way of a higher interest rate, or by way of higher fees (usually points*). Stepping down from that 720 score, you will experience what is call Risked Base Pricing. Each 20 points, or so, lower could cost you in rate or fees. Today Fannie Mae, Freddie Mac, and FHA all have some form of risked base pricing. So, literally one point in your credit score could be a huge savings to you.

"Poor" (Bad) or Low Credit Scores. Your options diminish quickly as you fall below 580. Although many mortgage guidelines allow for scores below 580, many lenders/investors incorporate their own guidelines on top of these main guidelines. So in some instances, going to another lender that offers the same type of loan, for instance an FHA loan, may allow you to finance your purchase or refinance instead of being denied.

Now that we have a basic knowledge of credit scoring, let's look at the next section to see how they all start to fit together, Payment History - where we will start to talk about the reasons scores are what they are, and how to improve your credit score and keep it there.
 

    Payment History

The most important factor regarding your credit score is your payment history. Your ability to pay your accounts on time reflects 35% of your credit scores. The credit scoring model certainly wants to know that you are paying your accounts as agreed. The last 6 months are the most important time frame. As time goes on older accounts and reportings have less weight to your score. Although many factors come into play, a very recent hit to your credit could drop a score as much as 50 points or more.

A credit report will usually show at minimum these categories;

Public Records, such as Judgments, Bankruptcy, Tax liens

Past due accounts are accounts that are 1 day past due. They will negatively affect your credit score while the account shows "past due". If the account reports as paid before hitting the 30-day mark, then the past due amount will not show past due, and you won't have a long term credit hit as you would for a 30+ day late.

Credit reports have no "memory". It is snapshot of what appears
at the time the report is requested.

30-day late payments and greater are more permanent negative hits to your credit score. The worse the late period the more damage it does to your score. For example, a 90-day late is worse than a 30-day late. Accounts that go beyond 90+ days may eventually show up as a collection item or a judgment if litigated.

Collection items are among the worst reported items to affect a credit score. If you are looking to maximize your credit score, here is a basic rule of thumb. Paying off collection items may damage your credit score even further.

Essentially, what happens is the account is brought to a current status, and as stated above, the more current the derogatory mark, the more damage it does to your score. But once the paid account reflects a zero balance, and passes one cycle (30-35 days) the items should have no affect on your score at all. Zero balance items remain on your report as historical items. In all cases, be certain to obtain proof of the account's pay-off in case it is needed in the future.

A few more notes regarding payment history ...

The highest weight is attributed to the highest pay account. For example, a 30-day late on a mortgage for $2,000/month is worse for your credit score than a 30-day late on a JC Penney card for $10/month.

Judgments, bankruptcies, and tax liens can keep you from purchasing a home, but it is not always the case. Judgments and tax liens can be satisfied and bankruptcies can be discharged.

     Balances

One of the most misunderstood areas of a credit score is the "balances" part of scoring. Not because it is complicated, but because people tend to have no idea why their credit score is low, when in fact they are carrying very high balances on their credit lines, a common factor in a low credit score.

We have seen credit reports where people were never late on a payment, yet their scores were in the 580's. That isn't exactly a score to get excited about. The credit scoring model views such a person as a higher risk, and grades them accordingly.

Your balance-to-credit limit ratio makes up 30% of your credit score, only second to that of payment history. Here is an example to understand how your balance is calculated: You have a $1,000 limit on your VISA card, and your current balance is $500, so you are at a 50% ratio. The higher your balance is to the limit, the more it affects your credit score. It is even possible to go above your credit limit, which can really hurt your credit score.

Here are some fixes for the most common credit problems.

• You can transfer balances from one card to another to "balance out" your debt ratio per card. Depending on the scenario, this could improve a score by 50+ points.
   

• On occasion, a creditor will not report your credit limit. Therefore whenever you have any balance on that account, your score is calculated as having credit accounts over the credit limit, negatively impacting your credit score. What can you do to remedy? Ask for your creditor to report your limit to the credit bureaus. This should usually work. Another option is to max out your card and immediately pay it off. When you do this your credit limit will be reported at the dollar amount you just used your credit card up to, and your balance ratio will then be accurate. If utilized this second way, your "new limit" should show for about 13 months. NOTE: Do not max out your card if you do not have the money to immediately pay it off. This will do far more harm than good.
   

• Ask for a credit limit increase every 6 months. If you have paid your accounts on time, and a creditor hasn't automatically raised your credit limit, you can call and ask that they do so. Sometimes they will automatically do it, and sometimes they will say that they have to pull your credit. I would suggest you don't have them pull your credit, as it would hurt your score.
   

• Doing a balance transfer to a business credit card, if possible, that is not reported on your personal credit profile is one way to raise their score. Often business credit is not on one's personal credit profile.

    History

Your credit history accounts for 15% of your total credit score. History does not refer to payment history. History is the evaluation of the timeframe that your accounts have been open and active, as in how many months or years.

Longer Credit History = Higher Credit Score

Long Credit History Paid As Agreed = Positive Impact To Credit Score

TIPS

Why you should never close a credit account ...

Never close a credit account, especially if it has a long payment history. This can negatively impact your credit score because the history aspect of your credit profile will be made shorter.

Authorized User Accounts

A fairly well known "trick" to raise a credit score is to become an authorized user on an existing account. Adding someone as an authorized user benefits them in a few ways;

1. It gives the authorized user "instant history" as spoken about above

2. It gives the authorized user higher credit limits on their credit profile (see - Balances)

3. It gives them great payment history.

The above three benefits are assuming the authorized user is added to an account with a long history, a high credit limit, and the account is paid on time. Adding someone to a "bad" account wouldn't make sense.
 

Mix of Accounts

One of the 5 main categories in the credit scoring model is the mix of credit accounts. The mix refers to different accounts such as mortgages, auto loans, installment loans, and credit cards. A person's mix of accounts represents 10% of their overall score.

It is preferable to have a mix of accounts such as installment loans and 2-3 credit cards.

Having more than 2-3 credit cards is fine. Technically you could have as many as you want. One thing you have to keep in mind though with having so many cards is the effect it has on your credit history and inquiries. If you constantly have new credit cards, and your older cards are inactive, then your history is shallow and this could lower your score.

Having a major credit card like a VISA or MasterCard is better for your credit then, for instance, a department store card like a Target or Home Depot card. Why is that? The credit scoring model takes into account 1,000's of consumer profiles. Although such stores offer special incentives like 0% financing for 12 months, in the past stats have shown that individuals that utilize such a card are consumers that weren't able to obtain a major credit card. Likewise a consumer with only an HSBC card for instance, may not have as high a rating as someone with a major credit card. This is because such a company has lax guidelines in comparison (and higher rates) and is often associated with consumers that carry more risk.

Taking advantage of 0% financing options is often a very good way to increase your score. However, one major issue that arises is that many such financing options carry all of that interest and if the loan isn't paid off in the "12 months", and you find yourself at 12 months and one day, then you get smashed with a year's worth of interest. TOO LATE!! And certainly too bad. This could add $1000's to the account.

One other tip ... a Home Equity Line of Credit (HELOC) should be greater than $40,000 or it may report as a revolving account versus a mortgage. This is important because as mentioned in the article - see Balances - even though the HELOC is a mortgage, if it is maxed out and viewed as a revolving account (i.e., credit card), then your balance ratio being so high could lower your credit score.

When in doubt, or unsure, take the time to talk to one of our credit specialists to get the answers before you take that step and possibly make a mistake that damages your credit score.

For more on this subject you can read this article on FICO regarding how common credit mistakes affect credit scores: