Tag: credit score

In my last post, I talked about five of the top ten things that will hurt your credit score. Here are the final five:

Things That Will Hurt Your Credit Score #6: Not Pulling Your Credit Report Regularly.

A lot of people worry that if they pull their credit report, they will hurt their credit score. While it is true that 10 percent of your score is based on the number of inquiries by lenders into your credit report, pulling your own credit report does not hurt your score. You can pull your own credit report each and every day, and your score will not budge.
In fact, failing to pull your credit report could hurt your score. How will you know if someone opens an account in your name? How will you know if your account limits are being inaccurately reported?
At a minimum, pull your credit report from www.720FICOScore.com at least every six months.

Things That Will Hurt Your Credit Score #7: Closing an account.

15 percent of your score is based on the age of your credit accounts. The older your accounts, the better your score.
For instance, let’s say you have five accounts:

• Account #1 is five years old,
• Account #2 is twelve years old,
• Account #3 is seven years old,
• Account #4 is eight years old, and
• Account #5 is nine years old.

The average age of all of your accounts is 8.2 years. Now let’s imagine that you close account #2, which is twelve years old. Now the average age of your accounts is only 7.25 years.
And this is just one reason closing an account can hurt your score. If you close an account, the account will show a $0 limit. So if you have a balance on this account, your balance-to-limit ratio will be sky-high.
Don’t forget, too, that 10 percent of your score is based on the type of credit you have. The credit-scoring bureaus like credit reports with a healthy mix of credit, and they prefer that you have at least three credit cards. If you close an account, you might have too few credit cards, or you might not have a healthy mix, both of which will hurt your score.

Things That Will Hurt Your Credit Score #8: Collections.

Collection accounts are particularly harmful because they are always preceded by late payments. A collection account should stay on your credit report for seven years from the date of activity that sent the account into collections. For instance, if you fail to pay your credit card bill on March 1, 2010, this is the traditional course of action:
1. A 30-day late payment will be added to your account on approximately April 1.
2. A 60-day late payment will be added to your account on approximately May 1.
3. A 90-day late payment will be added to your account on approximately June 1.
4. A 120-day late payment will be added to your account on approximately July 1, and the account will be sent to collection.
5. Assuming you make no further payments on the account, the collection will remain on your credit report for seven years after the original late payment. In other words, it will fall off your credit report on approximately March 1, 2017.

Things That Will Hurt Your Credit Score #9: Paying a bill in collections.

Now let’s add a payment into the mix. Let’s assume all of the above, but that in March 2012, you make a partial payment on the collection account. Guess what? This renews the date of last activity, meaning that the collection account will stay on your report until March 2019!
It’s crazy but true. Paying a collection account will often hurt your credit score.
In 7 Steps to a 720 Credit Score, I describe this process in detail, and I provide you with all the forms and worksheets necessary to get that collection account off your credit report!

Things That Will Hurt Your Credit Score #10: Late payments.

You probably already knew that late payments will hurt your credit score. Here’s the good news: The credit-reporting bureaus pay more attention to recent behavior than past behavior. If you follow the steps for building your credit score, the damage will be all but erased in as little as two years!

You might be surprised by some of the things that will hurt your credit score. Over the next two blog posts, I’ll reveal the top ten things that will hurt your credit score, in no particular order.

Things That Will Hurt Your Credit Score #1:

No credit.

I always say that no credit is just as bad as bad credit. The credit-scoring systems have certain criteria by which they determine a person’s credit score. Without that information, they have no way of telling whether a person is creditworthy. Better safe than sorry, they think, and they assign a poor credit score to that person.
Ideally, you should have between three and five credit cards, an installment loan, and a mortgage.

Things That Will Hurt Your Credit Score #2:

Bankruptcy.

You probably already know that a bankruptcy is one of the worst things that can happen to your credit score. Not only does the bankruptcy hurt your score, but so do the late payments and collection accounts that led up to the bankruptcy.
Here’s what you don’t know: You can repair credit after bankruptcy in as little as two years!

Things That Will Hurt Your Credit Score #3:

High credit card balances.

Your credit score is comprised of 22 criteria, and a whopping 30 percent looks at your outstanding debt. Among other things, the credit-scoring bureaus want to see a low balance-to-limit ratio. If you carry a balance that exceeds 30 percent of your credit card limit, your score could be lowered. For instance, if you have a limit of $1000 on your MasterCard, keep your balance below $300 at all times.

Things That Will Hurt Your Credit Score #4:

An incorrect credit limit.

Here’s a dirty little secret that will hurt your credit score:  Almost half of people have a credit card limit that is being incorrectly reported to the credit-scoring bureaus. Say, for instance, that your MasterCard has a $1000 limit. The credit card company might be reporting your limit as only $500.
Now let’s imagine that you have a $250 balance on that credit card. This is only 25 percent of the $1000 limit (see #3). But because of the credit card company’s mistake, your balance-to-limit appears to be 50 percent!
Failing to correct this mistake is one the ten biggest credit mistakes to avoid.

Things That Will Hurt Your Credit Score #5:

A foreclosure, repossession, judgment, or lien.

Ouch. Each of these things will cause your credit score to drop. The key to recovering after a foreclosure, repossession, judgment, or lien is to be proactive. You can raise your score to 720 in just two years if you start the process of rebuilding your credit score.
Too often, though, people feel overwhelmed by their finances, so they adopt a do-nothing approach and hope the problem just disappears. This only delays recovering. Instead, decide that you are going to take simple steps to rebuilding your credit, and that you are going to start today. If you follow an easy plan to rebuild your credit, your score will start to increase, and in just two years, you can enjoy all the perks of a 720 credit score.
Be sure to come back next week for #6 through #10 of the top ten things that will hurt your credit score.

In “Part I: What does a credit score mean?” we took a look at the meaning of credit scores in being approved for a loan and in obtaining the best interest rates.
“Part II: What does a credit score mean?” looks at:

• What a credit score means in your job hunt.
• What a credit score means for your insurance premiums.
• What a credit score means in your search for a rental unit.

What does a credit score mean when searching for a job?
More than half of employers run credit checks on potential job candidates at least some of the time. This means that you must learn how to improve your credit score if you are one of the millions of unemployed Americans, particularly if you are applying for jobs that require you to handle money.
A potential employer considers a person’s credit score an indication of how reliable they are. And if the job requires you to handle money, a low credit score could also mean that you are financially strapped and might be tempted to skim a little money from the register. Whether you are a financial advisor or local hardware store cashier, a low credit score means that you might be less employable.
If you have a mediocre or bad credit, be sure to read my post about credit scores and jobs so that you can learn strategies for combating this problem.
What does a credit score mean for your automobile insurance premiums?
In some states, a low credit score will increase your auto insurance premiums! Auto insurers have found a correlation between a person’s credit score and the number of accidents in which they are involved, so the lower your score, the higher your premium.
What does a credit score mean for your rental application?
Landlords almost always run a person’s credit score before approving a rental application. The last thing a landlord wants to do is evict a tenant, a time-consuming and costly process. If your score is too low, you might have a problem finding a lease to sign. Be sure to read my article about renting and credit checks.
What does a credit score mean? A high credit score means that you are more employable, pay lower insurance premiums, and have more housing opportunities. A low credit score means you should learn how to improve your credit score!

I spend a lot of time talking about the importance of building a good credit score, but a lot of people want to know: What does a credit score mean?
In this blog post, I’m going to answer that question, taking a look at two factors:

1. What does a credit score mean to a lender?
2. What does a credit score mean in terms of monthly payments?

What does a credit score mean to a lender?
A credit score is designed to give creditors an answer to one question: “What is the likelihood that this borrower will be more than three months late on a payment within the next two years?”
A credit score generally ranges from 300 to 850. A borrower with an 850 credit score (a rarity) is considered the least likely to default on payments while a borrower with a 300 credit score is considered the most likely to default.
A credit score above 720 is considered wonderful. These borrowers will qualify for the best loans and interest rates. Anything below 660 is considered weak credit, and anything below 620 is considered bad credit. A borrower with a score below 620 is considered “subprime,” which tells the lender that the borrower is highly likely to default.
A person’s credit score is the single most important factor in determining whether lenders will approve your credit card application, mortgage loan, and car loan. Generally speaking, lenders look at four things when determining your creditworthiness:

1. Your credit score.
2. Your salary.
3. Your savings.
4. Your down payment (for a home or car loan).

A person with a high credit score and a modest salary would be much more likely to receive a loan than a person with a modest credit score and a high salary.
What does a credit score mean in terms of monthly payments?
We always say that on a $300,000 30-year, fixed-rate home loan, the difference between a 720 credit score and a 620 credit score is $589 a month, or $212,040 over the life of the 30-year loan. Though this statistic is certainly an accurate representation of the difference a great credit score makes, the truth is that interest rates change daily. During the peak of the credit crisis, a person with a 719 credit score (normally considered a great score!) didn’t even qualify for credit.
The interest rates on a loan are updated daily in tandem with the Federal Reserve’s adjustments. As well, different types of loans call for different interest rates.
According to MyFICO.com’s August 2 listing of interest rates, a person with the best credit score would pay $753 a month on a three-year $25,000 car loan; a person with a 620 credit score would pay $919, a difference of $166 a month or almost $6,000 over the life of the loan.
As you can see, if you want to qualify for a loan and receive the lowest payments, you should learn how to improve your credit score.
And next week, we will take a look at several other reasons to build credit in Part II: What does a credit score mean?

Question: What exactly are all the credit score factors I should consider when learning how to build credit?
Philip Tirone’s Answer: There are actually 22 criteria that go into determining a person’s credit score. These criteria can be organized in five credit score categories:
1. Payment History—The first of the credit score factors, your payment history, accounts for the largest percentage of your score: 35 percent. Do you pay your bills on time? How many late payments have you had? How severe are your late payments? How recent are your late payments?
This credit score factor takes a look at the answers to these questions. If you always pay your bills on time, your credit score is probably better than someone who rarely pays on time. If you have a lot of recent late payments, especially if they are more than 90 days old, your score is probably low.
This component considers your credit cards, mortgages, car loans and other installment loans, student loans, and retail credit card accounts. It also looks at the details of your late payments. Late payments within the past six months have the greatest impact on your credit score; late payments that are more than 24 months old have less impact on your credit score.
2. Outstanding Balances—This is the second-most important of the credit score factors, comprising 30 percent of your score. In short, the less you owe in relation to your limit, the higher your credit score.
Among other things, this criterion considers your “utilization rate,” which is the debt you carry on a credit card as a percentage of your credit card limits. Credit cards with balances that never exceed more than 30 percent of the limit provide for better scores.
This category of credit-scoring also looks at how much you owe on home loans, car loans, or other loans versus how much you originally borrowed. If you have a new loan, credit-scoring systems usually consider you riskier than someone who is five or ten years into a loan. Loans usually take about six months to “mature,” meaning they might harm your score at first, but after six months of on-time payments, your score will probably start to climb.
3. Age of Your Credit History—Credit-scoring is a lot like wine: the older the better! This is the third of the credit score factors, and it accounts for 15 percent of your score. The longer an account ahs been open, the better. This component looks at individual accounts, as well as the average age of your accounts.
4. Mix of Credit—The fourth of the credit score factors, this looks at the type of credit you have, accounting for 10 percent of your score. Credit bureaus respond best if you have a mix of credit. Ideally, you should have three to five credit cards, a mortgage, and an installment loan.
Contrary to popular believe, having too little credit can hurt your credit score because the credit-scoring models will not have enough information to determine whether you can responsible manage debt and high limits.
5. Credit Inquiries—This is the final of the credit score factors, and it counts for 10 percent of your score as well. Anytime you apply for credit, the creditor will run a credit check, which causes your score to drop slightly.
But keep in mind that inquiries into your own credit do not affect your score. Only inquiries by a lender or creditor will hurt your score, and the damage will be minimal. As well, inquiries stay on your report for only two years, and they affect your score for only one year.