All About Credit

Why Your Credit Score Matters

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If you credit score is high enough, you'll qualify for a lender's best rates. Your mailbox will be stuffed with low-rate offers from credit card companies and mortgage lenders will fight for your business. You will get great deals on auto financing and small business loans if you want to start a new business. If you score is low, however, you’ll enter a "no-man’s land" where credit is all but impossible to come by. If you find someone to lend you money, you’ll pay high rates and big fees for the privilege. A bad or mediocre score can easily cost you tens of thousands and even hundreds of thousands of dollars in a lifetime.

You don’t even have to have tons of credit problems to pay the price. 

FACT: Sometimes all it takes is a single missed payment to knock more than 100 points off your credit and put you as high-risk. That would be scary enough if we were just talking about loans.

Landlords, Insurance Companies and Employers also use credit scores to evaluate applicants. A good score could win you cheaper insurance premiums and even a better apartment.

Here is an example of exactly how much a credit score can matter. Let’s examine how these numbers affect two friends, Jim and Carol:

Why your credit score matters -Ascent

What is a Credit Score?

In recent years, a simple 3-digit number has become critical to your financial life. This number, known as a credit score, is designed to predict the possibility that you won't pay your bills. Credit scores are handy for lenders, but can have enormous repercussions for your wallet, your future, and your peace of mind. A credit score is a three-digit number based on a borrower's bill-paying history, debt profile and statistical information about borrowers that lenders use to determine the likelihood of certain credit behaviors, including whether you will pay on time. Your credit score or rating is a number between 300 and 850 that summarizes your credit worthiness. This score is also referred to as a FICO score, because Fair Isaac and Company developed it. The score is based on all the information in your credit report and is a quick rating to sum up your overall credit health.

Your Credit Score

The first thing you need to know about your credit score is that you don't have just one: you have many, and they are constantly changing. Your score can range from 300 to 850. Credit Scores are designed to be a snapshot of your credit picture. New information is constantly being added to your report and old information is being deleted. When most of us think of scores, we think of relatively straight forward systems used in sports or in school tests. You get points or subtractions for certain actions, behaviors, or answers, and those are totaled to determine your score. Credit scoring isn't nearly as easy!

Credit scoring models use "multivariate" formulas. To understand how this works, let's use a noncredit example: Suppose your friend is late getting to your house. Where do you think they are? To answer this question you need to review what you know about this person including, are they forgetful, do they often run late for things, have they ever been late to your house before, did they stop to get gas? Using all these variables you could try to predict where your friend is. The number of factors that the FICO formula evaluates is indefinitely greater, so you can see how difficult it can be to predict credit outcomes.

One thing that is certain: The FICO model is set up to place more value on current behavior than past.

Your Credit Scorecard

To make matters even more confusing you have a credit scorecard. How the five factors are weighted when it comes to you- as opposed to the general population – depends on a little known sorting system known at Fair Isaac as "Scorecards". Scorecards allow the FICO formula to segment borrowers into one of ten different groups, based on information in their credit reports. If their credit history shows positive information, the model takes into account the following:

  • The number of accounts
  • The age of the accounts
  • The age of the youngest account

If the history shows a serious delinquency, the model looks for these:

  • The presence of any public record, such as a bankruptcy or tax lien
  • The worst delinquency, if there's more than one on the file.

After the model has this information, it decides which of the ten scorecards to assign. Scorecards allow the FICO formula to give different weight to the same information.

Example: Jessica of Tampa, Florida – retained us to repair her credit. Two collections were removed. She was sure these were the only things holding her credit score down. When we successfully removed these black marks from her credit, Jessica's credit actually dropped more than twenty points. Why? Jessica got caught in what can be a jarring transition to one score card to the next. The negative items on her credit got her assigned to a certain card however her efforts to maintain healthy credit got her to the top of that scorecard group. When the negative marks disappeared, she was transferred to another group with tougher standards. Good news, she will be making her way up fast!

Understanding Your Credit Report

FACT: When people talk about having bad credit, what they mean is that they have an unfavorable credit rating or unfavorable items on their credit report that makes it difficult or expensive to get new credit.

Where does it all come from?

Who keeps track of all this information? Credit reporting agencies are huge corporations that make money by compiling financial information about consumers and selling it to potential lenders and employers. Anyone who has ever applied for credit of any kind will have a file with each of the major reporting agencies. A credit report lists names, address, SSN, employment, credit cards and debts. How did these people get all this information? The information is taken from credit applications you have completed, as well as from reports your current creditors make about how well you meet your resources. All this information is maintained by the 3 big credit-reporting agencies: Equifax, Experian and TransUnion.

What's in Your Credit Report?

Your credit report shows your entire financial life on paper. It lists:

  • Your Social Security Number
  • Current and past addresses
  • Loans, credit cards, mortgages
  • Any other debt.

It shows which accounts are paid in full, which are late, which are in collection, as well as any liens against you and any bankruptcies you may have filed. Whenever you apply for a loan or a credit card, your credit report is examined by the potential creditor.

The report rates your financial status and the creditor uses it to decide how likely it is you will pay back the money you want to borrow. If your credit report shows many delinquent (late) payments, a bankruptcy, or more loans than you are capable of paying, you are a bad credit risk and your score will be low. Since you are judged almost solely on the basis of your credit report, you need to make sure it is accurate.

This is where Ascent Credit Solutions can help.

What's Not in Your Score?

Credit scores consider a wide range of information on your credit report. However, they do not consider:

  • Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
  • Your age. Other types of scores may consider your age, but credit scores don't.
  • Your salary, occupation, title, employer, date employed or employment history. Lenders may consider this information, however, as may other types of scores.
  • Where you live.
  • Any interest rate being charged on a particular credit card or other account. Any items reported as child/family support obligations or rental agreements.
  • Certain types of inquiries (requests for your credit report). The score does not count "consumer-initiated" inquiries – requests you have made for your credit report, in order to check it. It also does not count "promotional inquiries" – requests made by lenders in order to make you a "pre-approved" credit offer – or "administrative inquiries" – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
  • Any information not found in your credit report.
  • Any information that is not proven to be predictive of future credit performance.
  • Whether or not you are participating in a credit counseling of any kind.

The 5 Most Important Factors

The credit agencies keep their models top secret. However, we know this much about factors that affect your credit score and their level of importance.

Ascent 5 factors

  1. Your Payment History: 35 percent– Your record of bill paying says a lot about how responsible you are with credit. When it comes to negative marks like late payments, the score focuses in of 3 factors:
    1. Delinquency – This is the last time you were late. The more time that passes the better
    2. Frequency – Someone with 1 late looks better than someone with a dozen.
    3. Severity – "Hierarchy of madness", a payment 30 days late is not as serious as a payment 60- or 120-days late. Collections, tax liens and bankruptcies are "credit killers," think of them as an atom bomb to credit scores.
  2. How much you owe: 30 percent – The score looks at the total amount owed on all accounts as well as how much you owe on different types of accounts (mortgage, auto, etc).Using a higher percentage of your limits will worry lenders and hurt your credit score. People who max out their limits have a much greater risk of default.
    When it comes to revolving debt-credit cards- the for-mula looks at the difference between your high limit and your balances: 2000 bal / 2300 limit = 87%. The bigger the gap between your balance and your limit, the better.
  3. How long you have had credit: 15 percent – Less important than the previous two factors, but it still matters. You can still have a good score with a short history, but typically the longer you've had credit, the better. The score considers: a. The age of your oldest account b. The average age of all your accounts
  4. Your last application for credit: 10 percent – Opening new accounts can ding your credit score, particularly if you apply for lots of credit in a short time and you don't have a long credit history. Consider the following score factors:
    1. How many accounts you've applied for recently •How many new accounts you've opened
    2. How much time has passed since you applied for credit •How much time has passed since you opened an account
  5. Types of credit you use: 10 percent – The FICO score wants to see a healthy mix of different types of credit. They recommend you have a balance of both revolving debts like credit cards and installment loans like auto loans or a mortgage.