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5 Factors That Impact Your Credit Score

By | Credit Scores

Like it or not, your credit score probably affects where you live, the car you drive, the smartphone you use, and how you take vacations, go to college and care for your family. Even with a moderate or lower income, it’s important to understand the factors affecting your credit score. With smart moves and strategic thinking, you can build a foundation for the future and enjoy the benefits of plentiful low-interest credit. Here are the five factors to remember every time you’re considering a loan, card or new account:

1. Number of Accounts

Every time you open an account that requires faith in your ability to pay on time — and this includes phone lines, utilities and student loans — you add a record to your credit history. Most financial advisors recommend limiting yourself to the average amount of three or four cards. The reason is simple: The more cards you have, the higher chance you’ll miss or forget due dates. Alternately, you should get at least one card if you don’t have one. This is because you can’t build credit without having any.

Obviously, you can’t control the number of accounts for life necessities like heat, electricity, internet and phone. You can, however, limit the number of student loans, car loans and mortgages. If you’re married, work it out so both you and your spouse hold accounts for things you share. One partner might pay the power bill, the other the internet. This practice also allows each partner to practice good financial management and build a healthy score.

2. Age of Accounts

A long time ago, you took on a high-interest or secured credit card as a way to improve your score. Should you close that account when a better card comes your way? Maybe, but probably not. The age of your accounts is another factor that affects credit rating, so an old account is a plus instead of minus. Just make sure you have a low balance, no more than five percent of the limit, and pay on time to avoid fees. Be aware that closed accounts will drop off your record after a certain period of time — usually seven years. Keep track of open accounts by looking at your credit report frequently.

3. Number of Inquiries

Although it can be frustrating and seem unfair, your score is affected when lenders considering your request for a mortgage, business loan or credit card request your credit report. Sometimes, your credit history is also accessed by potential employers, agencies checking your background, or other instances in which your character may come into question. Keep the number of inquiries in check by planning ahead. Be strategic about major purchases, like a car, that will cause numerous checks on your credit as you search for the best financing. By limiting the number of inquiries in the months before the purchase, you’ll suffer less damage when lenders look at your record.

4. Outstanding Debt

Imagine that every cent of your credit is poured into a single, large bucket. This bucket, the total amount of credit assigned to you, is marked with three gauges — green at the top, yellow in the middle and red near the bottom. The point where the contents of the bucket settle represents your debt-to-credit ratio, one of the most important factors of a credit score. As a rule, your credit card balance shouldn’t be higher than one-third of your total allowed credit. Why? Consider how your high balances look from the viewpoint of lenders — if you have a crisis or emergency and no means to pay with your credit, the chance of late payment or bankruptcy increases.

5. Payment History

When you pay and how much is another important factor of total credit score. Establish the good habit of paying more than the minimum amount due to offset any interest charged to the account. When possible, pay all but five percent of the outstanding balance due. Leaving a small amount due in each account shows the account is active and confirms your commitment to the lender, but don’t forget it’s there, forget to pay and be charged a late fee.

If you have a record of late payments, it’s possible to recover. Pay a few payments on time and then call the lender and ask them to remove the negative mark. They might not agree, but you’ll never know unless you ask. The same goes for accounts in collections — once you are in the position to pay off the debt, call to negotiate with the agency or lender. Many times, they will reduce the total amount due if you agree to pay the amount due and close the account. Also note that you should speak carefully and cautiously when talking to debt collectors on the phone. Review your rights with a credit counselor first.

By setting goals, paying on time and making a sincere effort to raise your score, you can earn the good things in life. Low-interest credit opens doors to opportunities like self-employment, travel and education. Now that you know more about how credit scores are calculated, it’s time to get yours in shape for a better and brighter future.

Sources

TransUnion.com: “What is a credit score?” https://www.transunion.com/credit-score

Credit Karma.com: “How many credit cards does the average American have?” https://www.creditkarma.com/credit-cards/i/how-many-credit-cards-does-the-average-american-have/

TransUnion.com: “How closing accounts affects my credit score”: “https://www.transunion.com/article/closing-accounts-and-your-credit-score”

5 Reasons Why Paying Your Bills on Time Is Not Enough

By | Credit Scores, Uncategorized

Accounting for 35 percent of your credit score, payment history is the number one factor affecting your credit standing. A single missed payment could lower your credit score by 60, 80 or 100 points, depending on the date of the late payment and your current credit score. Generally speaking, higher scores are hit harder by late payments than lower scores and older late payments have less impact than recent ones.

If you want great credit, you must pay all of your bills on time — that’s a given. However, excellent payment history alone will not give you the credit score you desire. You must also pay attention to the factors that make up the remaining 65 percent of your credit score.

5 Factors That Influence Your Credit Score

Credit scoring models look at a variety of factors when calculating your score, including payment history, credit card utilization, length of credit history, mix of credit and inquiries.

1. Credit Card Usage

With the exception of payment history, credit card utilization impacts your credit score more than any other factor. A whopping 30 percent of your credit score depends on it. Your utilization score represents the percentage of revolving debt you have in comparison to the total amount of revolving credit available to you. Most revolving credit comes in the form of credit cards, but it can also include any other type of revolving credit, such as a revolving loan.

Ideally, your credit card utilization should be 30 percent or less. For example, if you have $5,000 in revolving credit, your total balances should add up to no more than $1,500. To find out your utilization percentage, divide your total balance by your total credit then multiply the answer by 100.

2. Length of Credit History

The length of your credit history accounts for 15 percent of your credit score. To calculate your length of history, credit scoring models determine the average age of all credit accounts listed on your credit report. Closed accounts that have fallen off of your credit report are not considered.

When it comes to credit history, there is no magical number you should strive for. However, the longer history you have, the better.

3. Mix of Credit

Accounting for 10 percent of your credit score, your mix of credit depends on the types of credit accounts listed on your credit report. A diverse mix that includes installment loans, revolving credit and secured credit is best. The following is a brief explanation of each type of credit.

  • Installment loans: Personal loans, student loans, furniture loans
  • Revolving credit: Credit cards, retail credit cards, gas cards
  • Secured credit: Auto loans, home loans, equipment loans

For the best possible score, maintain a mix of credit accounts but don’t go overboard. A single installment loan combined with two credit card accounts and an auto loan is sufficient to show how you manage different types of credit.

4. Hard Credit Inquiries

There are two main types of credit inquiries: soft and hard. Soft inquiries are initiated without your knowledge by companies screening you for pre-approved offers. They do not affect your credit score.

Hard inquiries, however, account for the remaining 10 percent of your credit score. Hard inquiries include any and all credit applications initiated by you or by a lender on your behalf. Scoring models look at two factors when considering hard inquiries: the number of inquiries present and the date they were initiated. Older inquiries carry less weight than newer ones.

5. Multiple New Accounts

Too many new accounts can lower your score by decreasing your length of credit history and increasing the number of hard inquiries appearing on your credit report. For this reason, you should avoid opening multiple accounts within a short amount of time. Strive to wait at least six months between credit applications.

How to Improve Your Credit Score

To improve your credit score, take steps to address and optimize all of the factors affecting your credit score. The following tips will help you.

Improve Payment History

Do this by making all payments on time. If you have late payments listed on your credit report, contact the lender to see if there is a remedy. You may be able to restructure your loan or set up a payment arrangement in exchange for the removal of the delinquency from your report. This only works if your account is not currently in collections.

Lower Credit Card Utilization

Do this by paying down your credit card balances or asking for a credit limit increase on one or more of your revolving accounts. Remember, balances should account for no more than 30 percent of your available credit.

Increase Length of Credit History

This can be accomplished by being patient and letting your credit profile age. Avoid obtaining new credit, as this will shorten the average length of your credit history. Also, consider leaving older accounts open even if you’re not using them.

Diversify Mix of Credit

You can do this by obtaining new types of credit. If you have two or more credit cards, do not apply for more revolving credit. Instead, consider taking out a personal loan.

Decrease Hard Credit Inquiries

Do this by spacing out your credit applications. Only apply for credit if it’s absolutely necessary. Note: multiple inquiries for a car loan or mortgage are often grouped together and only considered as one inquiry, provided they occur within a reasonable time frame.

Credit scoring models are complicated and mysterious on purpose. Credit agencies do not want you to know or understand the exact formula they use to calculate your credit score. However, they offer enough transparency for you to optimize your credit profile in an effort to earn the best possible score. If you learn all you can and take steps to improve your credit profile, you will see your score improve over time.

Sources:

www.blog.equifax.com/credit/can-one-late-payment-affect-my-credit-score/

www.thebalance.com/understanding-credit-utilization-960451

www.creditcards.com/credit-card-news/length-credit-history-fico-score.php

www.myfico.com/credit-education/questions/how-do-inquiries-impact-credit-scores/

De-coding Credit Scores – What your Score Really Means

By | Credit Scores

what-your-credit-score-meansYour credit score – that three-digit number on your credit report – has significant implications on your ability to borrow money and how much interest you pay. But, do you know what your credit score means? What is considered good or bad?

 

The 400 and Under Credit Score

A score this low is nearly impossible to accomplish. But, maxing out a bunch of credit cards immediately after receiving them and then filing for bankruptcy might do the trick. Unfortunately, most lenders can’t do anything for you, with a score this low. But, some car dealerships may be able to give you a car loan at an insanely high interest rate.

 

The 500 Credit Score

You might fall into this scoring range if you defaulted on some credit cards, have significant late payment history and/or have a high debt-to-limit ratio. A common misconception is that credit reports reflect your debt-to-income ratio; however, your income has no bearing on your credit. How much you owe vs. how much your credit limits are play a large part in your report.

If you’re in the 500 range, getting credit from traditional lenders will be tough, so you may want to opt for a pre-paid credit card. These cards require cash up-front to establish the credit limit (a $500 payment gets you a $500 credit limit). While technically you are borrowing your own money, using the card and making on-time payments will help you build your score. Also, some lenders specialize in finding credit for low scores, but the interest rates are very high.

 

The 600 Credit Score

While you have more lending options available to you than someone with a 500 score, you are still considered a somewhat risky borrower. That means that banks will be reluctant to lend money to you and if they do you will have to pay higher interest rates. The goal with this score is to try and improve. Perhaps consolidating some student loans could do the trick, lowering the balances on your credit cards, or simply setting-up some calendar reminders to ensure on-time payments. Aim for a score in the high 600s or 700s.

 

The 700 Credit Score

This is the above average category and borrowing at decent interest rates should not be a problem. However, keep in mind that the best interest rates are reserved for scores above 740 – depending on your exact score you may have some work to do to reach the preferred rates. Take a look at your credit utilization ratio on your credit cards – this ratio accounts for 30% of your score. Lowering your credit card balances might be all you need to push upwards to 800 or beyond.

 

How to Buy with a Bad Credit Score

If you found yourself in the 500 or below categories, you probably already know how difficult it can be to secure lending. But, there are still some options for buying what you want. The first option is to pay cash. Learning to save and wait are budget skills that will help you maintain a higher credit score once you achieve it. Credit card-debit cards (like Visa-debit or MasterCard-debit) allow you do make purchases that are usually reserved for credit card holders, but the purchase is made with cash from your checking account. This includes shopping on-line, airline tickets, hotel rooms and car rentals.

As mentioned above, there are some lenders who are willing to take a risk on borrowers with low scores – but you have to be willing to pay the price. Interest rates can be as much as 6% higher (meaning a higher monthly payment) and the down-payment required on a car loan or mortgage may be as high as 35%.

No matter what your credit score is, you probably have some room to make it better. The factors that contribute to your FICO score are: payment history, amount of total debt, how long you’ve had credit (the longer the better), how often do you apply for new credit and the types of credit you use (mortgages, car loans, credit cards etc.) The past has already happened; look forward to your future and your new and improved credit score.

 

Photo Credit: telegraph.co.uk

 

You’re Ready. Is Your Credit?

By | Consumer Rights, Credit Repair, Credit Reports, Credit Scores, Personal Finance, Your Credit

Armed with an impressive resume and knowledge of the company you are interviewing for, you confidently approach the interviewer and begin to craft the inspiring ‘first impression’ you envisioned last night as you went to bed.

You may feel prepared for the interview and qualified for the new job, but there is a strong possibility that the interviewer has already formed an opinion about you – through information contained in your credit report. 

Increasing numbers of companies are requesting credit reports to assist them in the job hiring process.  Essentially, your credit report is your financial resume and employers use it as an indicator of your personal integrity and how and how you conduct your life.  With that in mind, it’s alarming that seventy none percent of all credit reports contain errors.  A qualified job seeker simply can’t afford to have credit report errors sabotage an excellent employment history.

In the competitive job market, an accurate credit history may be the decisive factor in gaining a job interview.  Inaccurate credit reports can torpedo the most impressive resumes, and you won’t have a second chance to make a first impression.

The labor market is not only intense form the job seekers standpoint, but employers also are striving to gain a competitive advantage in the hiring process by accessing all the information available to improve the quality of the workforce.  Employers are also more likely to check the credit history of prospective employees who will be involved in some aspect of the company’s finances.

You can use this trend of employer credit checking to your benefit by repairing and/or maintaining a clean credit history.  Your credit report is your financial fingerprint, so check it frequently and keep it accurate so you are prepared to jump on the dream job opportunity should the occasion arise.

Information on Credit Reports

By | Consumer Rights, Credit Laws, Credit Repair, Credit Reports, Credit Scores, Fair Credit Reporting Act

Credit Reports generally contain five types of information:

Identification Information: Information such as the name of the individual, current and previous residential addresses, and Social Security number.

Trade Line Information: Detailed information reported by creditors and other furnishers on each current and past loan, lease, or other debt (such as utility and medical debts).

Public Record Information: Information derived from financial-related public records, such as records of bankruptcies, foreclosures, tax liens, garnishments, and other civil judgments.

Collection Account Information: Information reported by collection agencies regarding credit accounts and other debts.

Inquiry Information: Identities of individuals or companies that have requested information from an individual’s credit file; the date of inquiry; and an indication of whether the inquiry was by the consumer, for the review of an existing account, or to help the inquirer decide on a potential future account or relationship.

Unfortunately, an alarming number of these files (credit reports) contain serious errors and could cause the denial of credit, a loan, or a job, so monitor your credit report and minimize or eliminate future credit problems.  A recent study of consumer credit found that 3 out of every 4 credit reports contain errors, some large enough to cause credit denials.

  • Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit;
  • Seventy-nine percent (79%) of the credit reports contained mistakes of some kind;
  • Fifty-four percent (54%) of the credit reports contained personal demographic identifying information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;
  • Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open.

Can I Raise my Credit Scores by Paying Off my Credit Cards and Closing the Accounts?

By | Ask a Credit Expert, Credit Cards, Credit Repair, Debt, Payment, Personal Finance, Revolving Debt, Your Credit

The credit score was designed to show lenders how much of a risk a consumer can be.  The higher your credit scores are the lower the risk you are to creditors and obviously the lower your credit scores are the higher the risk you are.  When it comes to your credit and credit score, paying off your credit cards and credit accounts is always a good idea and can help raise your credit score.  However, closing your credit accounts does not always help your credit score, even if they are paid off.  Sometimes closing your credit accounts will even lower your credit scores.  Let me explain why.  When you pay off an account it helps raise your credit score in a couple of areas.  First, it helps the payment history to show that the account is paid and positive.  Second, it shows you have less money you owe on that account and on your overall credit. But, the downside is when you close your credit accounts you are stopping your payment history on that account, therefore shortening the timeframe of your payment history. If any of the credit accounts you paid off have been open for 2 years or less than you are ok to close them out because you are not getting rid of a long history. However, if you have had the card for 5+ years than I would recommend you keep it open so you don’t lose that payment history. Payment history counts as 35% of your credit score. What this means is that the longer you have your credit accounts (mostly credit cards because they are revolving) the better.  Your credit score takes an average of your payment history time frame, for example, if you had 2 cards for 10 years and 1 card for 1 year, the credit account that you have only had for a year is actually bringing down your average.  So, if you pay the accounts off that is great but don’t close them unless you have to and if you do close any, close the one you have had for a year so your average will go back to 10 years.  This will help your credit score!

Good Luck and with any other credit questions, ask our Credit Expert Kristi Thornton by emailing your questions to [email protected].  You can also call any of our Case Analysts at 1-866-639-3426 Option 2 or check out our site at www.ovationcredit.com.

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