Credit-scoring | 7 Steps to a 720 Credit Score

Should I Add a Consumer Statement to My Credit Report?

August 2nd, 2010

The Fair Credit Reporting Act allows a person to add a 100-word consumer statement to their credit report. Often, people use the consumer statement as a chance to explain a derogatory mark or a bad credit score.

The consumer statement does not change a person’s credit score; it simply gives the consumer a voice. The statement, which can be 100 words or shorter, can be used to dispute a mistake:

The Visa credit card account ending in 1234 does not belong to me, and I am currently in the process of disputing this with the credit card company and credit bureaus.

The statement can be used after bankruptcy to explain that a person’s bad credit was caused by a medical condition:

You will a bankruptcy on my report from January 2007. I was the victim of a hit-and-run car accident and was unable to work for eighteen months. As a result, I fell behind on my payments and declared bankruptcy.

Some say the consumer statement will hurt a person. After all, it draws the lender’s attention to derogatory information. Others say the consumer statement is pointless as it most often unread.

Still, consumer statements do have their uses. If you are trying to rent a home, the landlord might read the explanation. If you know a potential employer is running your credit score, you can be upfront—let them know about any mishaps, and direct them to the consumer statement.

How to write a consumer statement:

A consumer statement should always be short and to the point. Never place blame on someone else (unless you are a victim of identity theft). If you decide to write a consumer statement:

Do not complain or present yourself as a victim (unless you truly are a victim of identity theft)
Take responsibility
Do not blame anyone or anything
Do not justify what happened
Keep in 100 words or less

Let’s take a look at two examples:

An effective consumer statement:

I experienced bankruptcy because I naively expected the value of my home to go up. Instead, the payments grew and became unmanageable, so I began charging them to credit cards. Have since gone back to the basics and am working on building my credit and my savings. Also taking classes in financial management.

An ineffective consumer statement:

The bankruptcy is NOT my fault. I was sold a home that I couldn’t afford, and while the agent earned his commission, I lost my home, racked up huge credit card debt, and was stuck with poor credit! As far as I’m concerned, the mortgage broker should go to jail!

Do you see the difference? The first consumer statement makes the borrower seem responsible and mature. The second might sound entitled, immature, and irresponsible!

Tags: bad credit, consumer statement, credit-scoring

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Authorized Users—What Are They? How Can They Build Your Score Fast?

July 30th, 2010

One of the first pieces of advice I give to people who have suffered severe financial crises and want to learn how to build credit is to become authorized users on credit cards. Authorized users are allowed to use credit cards but have no contractual obligation to pay the bills.

For this reason, a person does not need to have a high credit score to qualify for authorized user status on a credit card. However, the credit card’s history will often be reported on the authorized user’s credit report, so long as the authorized user is related to the account holder.

Becoming an authorized user on a family member’s credit card will quickly raise your credit score (even after bankruptcy or other financial disaster) by allowing you to “borrow” the account holder’s clean credit history.

However, the account holder—fearful that you will rack up huge charges you cannot or will not repay—might be reluctant to add your name to his or her account. Let the account holder know that she or he can be protected.

First, the account holder should shred the credit card that arrives for you.
Second, the account holder should never give you the account number, credit card expiration date, or card security code.

In this way, your credit score will increase while still protecting the account holder from any irresponsible behavior on your part.

Authorized users should also protect themselves by choosing the account wisely. Only authorized users who are related to the account holders will see their bad credit scores benefit from this strategy. Therefore, be sure you choose an account holder who is also a relative. Try to choose someone with the same last name and address. Otherwise, the credit-scoring bureaus might not recognize your status as an authorized user, and your credit score might not improve.

To make sure that the credit card company is reporting your status as an authorized user, call them and ask. You can also check your credit report to see if the account is appearing. If not, choose another account holder.

Be sure that you also choose a responsible relative with an account in good standing. If you become an authorized user on an account that becomes delinquent, guess what happens? Your score will drop. As such, be sure to pick an account with a clean history of payments. Be sure, too, that the balance on the card stays low—preferably about 30 percent of the limit. If the balance exceeds 30 percent, or if the account holder makes a late payment, you should immediately remove your name as an authorized user so the negative information does not hurt your credit score.

Authorized users usually see a quick jump in their score. After twelve or eighteen months, you might be able to remove yourself from the account and qualify for loans on your own.

Tags: authorized users, CREDIT CARDS, credit-scoring

Credit-Scoring Factor #1: Payment History

May 19th, 2010

In my book about how to build credit, 7 Steps to a 720 Credit Score, I remind readers that a clean payment history is only one aspect of a good credit score. That said, it is among the most important aspects, counting for 35 percent of a credit score.

The credit-scoring bureaus use 22 criteria to design the intricate formulas used to determine a credit score. These criteria can be segregated into five factors (“What Are the Credit Score Factors?):

Payment history
Outstanding balances
Age of credit
Type of credit
Credit inquiries

This blog focuses on the first: payment history.

This portion of the credit-scoring formula looks at:

Your payment history on revolving accounts such as credit cards, retail accounts such as gas cards, installment loans such as car loans, finance accounts, mortgages, and other credit accounts. I think it goes without saying that the formula responds better if a credit report has no late payments.

The severity of late payments. A 30-day-late payment will be judged less severely than a 120-day late payment. And an account sent to collections will cause the score to drop even more.

The presence (or lack thereof) of repossessions, collections, charge offs, and public records such as bankruptcies, judgments, and foreclosures. The fact of bankruptcies and other severe defaults will hurt your score the most, especially if they have happened recently.

The recency of late payments. Your payment history if weighed on a scale with the most recent payment activity given more weight than past activity For this reason, recent late payments will affect your score more negatively than aging ones. This is because the scoring models assuming that current behavior is a far better predictor of your future behavior than is past behavior.

In fact, if your prior credit report is spotless but you make on late payment, your score will probably experience a sharp drop. This is because the scoring bureaus will assume you have had a shift in your financial situation. If you make late payments all the time, the scoring bureaus will eventually start making gradual deductions.

This is not to say that one or two late payments will cause your score to plummet so drastically that you are unable to qualify for a loan. One or two blemishes on an otherwise strong credit report might be overlooked. However, if you have a high credit score and make a late payment, you will be docked more points than if you already have a low credit score and make a late payment.

In other words, your payment history is a critical component of your credit score. However, the most important part of this is your recent behavior. The past two years of your payment history are far more revealing than behavior that occurred five or six years ago. And with some exceptions (e.g., bankruptcies, which stay on a credit report for ten years), your payment history from eight years ago is a moot point as most items fall off a credit report in seven years.

In my free teleseminar, I talk about how banks use your payment history to legally rob you of your hard-earned money. Be sure to check it out!

Tags: credit-scoring, How to build credit, payment history, Philip Tirone

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Key Considerations About Divorce and Credit

May 6th, 2010

While divorce often causes a person to take inventory, many people forget the implications of divorce and credit. Many married couples or life partners jointly apply for credit cards, auto loans, and mortgages. Part of learning how to build credit means that you learn about how divorce can complicate your credit situation.

If you and your partner kept all credit separate during your marriage, you will not be impacted by your ex-spouse’s credit behavior at any time before, during, and after your marriage. However, if your spouse is an authorized user or joint holder of a credit card, an angry former spouse can start lots of problems with respect to divorce and credit. With joint accounts, both you and your ex-spouse are jointly responsible for debt and therefore are affected by each other’s financial decisions. For example, your ex-spouse’s late payments and collection notices show up on your credit report after the divorce if you have not split the accounts.

The best move is to cancel these cards rather than risk the negative effects of someone else’s mismanagement. Some credit card companies may require a special type of notice to cancel jointly held cards, such as a written notice. Doing this as soon as possible is in your best interest in terms of divorce and credit. After a divorce, your ex-spouse may need to charge many things to make up for reduced income. Even if your ex is not being malicious, this could harm your credit score by causing your utilization rate (the balance as a percentage of the credit card limit) on jointly held credit cards to increase.

If you and your ex-spouse own a home together, both are charged with paying off the debt unless you work out another arrangement. Aside from selling the house, your best option may be to pursue refinancing. Using a quitclaim deed, you can take your name off the title of the property, but this is not enough when it comes to divorce and credit. Your ex must also refinance, or your credit will suffer if he or she becomes delinquent on payments.

On the other side, if you retain ownership of the home and do not put the property in your name, you could be affected if your ex-spouse is sued. The house might be seized to pay off your spouse’s debts.

If you are separated, you may want to take a few steps to prepare yourself, especially if you think you are heading toward divorce. Pull your credit report and assess your financial situation, noting all existing credit accounts. Keep copies of everything in a safe place. If you have joint accounts, have a discussion with your spouse about who will assume payments for which credit accounts. If you are on peaceful terms with your spouse, have a frank discussion about divorce and credit, and how you can both protect yourselves. Consult an attorney, and create a plan to keep your payments on schedule and your credit protected.

To protect yourself from the pitfalls of divorce and credit, cancel your joint accounts, and make sure you contact all credit bureaus to ensure that your address information is updated.

Tags: credit-scoring, divorce and credit, How to build credit, PERSONAL FINANCE, Philip Tirone

What Are the Credit Score Factors?

April 22nd, 2010

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.

***

People often think that salary, education, and rent history might be credit score factors, but these criteria do not affect your credit score. Bounced checks and late payments on utility bills (gas, electric, cell phone, etc.) are also not credit score factors unless these accounts are turned over to a collection agency.

Tags: credit score factors, credit-scoring, How to build credit, Philip Tirone

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Page 1 of 212 »

Credit Bad? Want to Learn How to Build Credit?

Should I Add a Consumer Statement to My Credit Report?

Authorized Users—What Are They? How Can They Build Your Score Fast?

Credit-Scoring Factor #1: Payment History

Key Considerations About Divorce and Credit

What Are the Credit Score Factors?

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