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CREDIT SCORING
By Sandra Pilkington

You know we all have a credit history and about credit reports but how many of you know what a FICO or credit score is? It’s a range from 300 to 850 designed to estimate our credit worthiness. It’s called a FICO because it was devised by an analytical company known as Fair Isaac Corporation. Even if you’ve heard of it, you probably don’t know much about it and you don’t know how it’s determined.

In the maybe 10 years since FICO scores have been widely used, I’ve only occasionally seen scores over 800. Does that mean I only work with people with bad credit? No. The typical consumer with a score over 800 not only has made all their payments on time, but most likely has one long-term mortgage or rental history, maybe a car loan they’ve already paid off plus maybe one credit card they charge $100 a month and pay off monthly. Most people with perfectly good normal, healthy credit do not have scores in the 800’s. Scores in the 700 range are considered excellent and a score of 680, along with other good-risk factors, gives a borrower access to the best of interest rates. Below 680 and you’re looking at more of a challenge to obtain credit.

So what affects credit scores the most?

1. Recent adverse credit actions.
Bankruptcy, foreclosure, judgments, and collections weigh the most BUT the more recent, the more detrimental. Adverse credit actions will show up on credit report up to 10 years and perfect credit for 2 years (4 years for bankruptcies) will usually bring up scores enough to qualify for primo interest rates once again. So what’s important is even if you have a credit problem, keep paying your debts on time and you can overcome those obstacles.

2. Late Mortgage or Rent Payments.
This is especially pertinent when you’re applying for a new mortgage. Mortgage lenders are more concerned about your mortgage payment history than they are about your credit card payment history….but don’t neglect paying any of your debt payments – they all count.

3. Recent Late Payments
The more recent, the heavier their weight on your score. Late payments over 24 months ago on consumer debts will not count much in and of themselves but late payments within the past 24 months, especially after previous negative history will count very heavy. It shows you are a potential risk of default once again.

4. High balances compared to credit limits on revolving accounts.
Better to have more cards with lower balances than one maxed out credit card. Rule of thumb – keep balance at 30% of limit.

5. New credit.
Chasing lower interest rates can backfire. The newer the credit, the higher the effect on your score. Don’t open a new account until your last card has been opened at least six months and one day.

6. Closing accounts.
This is a tricky one and I still think it’s wise to close unused accounts but don’t do it when you’re preparing to apply for a mortgage or car loan because it signals a potential problem.

7. Types of Credit.
Finance company loans reflect negatively on your scores because it may indicate you can’t get prime credit and had to seek subprime sources. Those offers for 6 months, 1 year, etc. same as cash are usually transacted through finance companies and they will adversely affect your score so pay them off and close them as soon as they are paid off.

8. Inquiries.
Every lender inquiry within the past 12 months will affect your score – usually 5 points per inquiry.

9. Too much credit.
This is why closing your unused accounts is a good idea. The more cards you have open, the more the potential to max them out, thus the effect on your score.

10. Not paying off charged-off Collections.
Just because the vendor charged off your unpaid account, don’t think it’s disappeared. It’s still there and will continue to affect your score.

It’s a good idea to obtain copies of your credit report from all three credit bureaus (a credit reporting company pulls your credit history from the three credit bureaus; a credit bureau records your credit history from the vendors, courts, and collection companies.) You are entitled by law to a copy of your credit report from each of the three bureaus but if your want your scores, they each have a minimal charge.

You can obtain your credit report on-line at www.annualcreditreport.com. 

Contributed by SANDRA PILKINGTON, Choice Lending, Inc.
970-225-0991
sandrap@choicelendinginc.com

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