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:
- What does a credit score mean to a lender?
- 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:
- Your credit score.
- Your salary.
- Your savings.
- 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?
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!
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.
Credit Bad, How to Build Credit, Credit Score – Question #4
Question Submitted by: Kevin, Tempe, Arizona
I’ve heard you shouldn’t challenge every negative item on your credit report, but my credit is bad due to identity theft. If I disputed them individually it would take me years to clean it up, any thoughts?
Good point Kevin. Yes, if you dispute all your bad credit or items on your credit report at once, the bureaus can deem the request “frivolous” and ignore it. That is why in 7 Steps to a 720 Credit Score, I recommend you only dispute three items at a time.
Now, if your bad credit is because you were a victim of identity theft, its’ a different story. In that case, simple submit your police report with the dispute and the credit bureaus will not deem your request “frivolous.”
Make sure you follow my video lessons on how to build credit, as just because you get the bad credit off your credit report, it does not mean that your credit score will be above 720.
Credit Bad, No Credit Score, How to Build Credit – Question #1
Question Submitted by: Benjamin, Aliso Viejo, CA
How can a first time entrepreneur, with virtually no credit score, who is starting his own business, apply for business credit – the correct way, and not have to use personal collateral to obtain the credit?
Answer by Philip Tirone:
In short, especially in today’s market, you will need to learn how to build credit personally, before anyone gives you business credit without personal collateral. In short, they will consider your credit bad, and not lend to you.
This was possible before the mortgage meltdown, but now, it’s not possible and anyone that tells you it is, is just dreaming.
I’m a big believer in entrepreneurs! The key is that you start establishing your credit immediately, and the good news, since you have no credit, you will have a 720+ credit score in a very short time as long as you take the right steps. At that point, the lenders won’t consider your credit bad.
I recommend you attend our free 60-minute teleseminar, it’s jam packed with information, and at the end of the call you will be invited to enroll into our full program (that is why it’s free). Even if you don’t enroll in our program, you will find this very valuable.
If you can’t attend, here is a link to our full program, however, since you are a start up – I will give you our $997 program for whatever you can afford. I’m really committed to riding America of bad credit or no credit. The only way I can do that is with people like you, if you help me spread the word.
If you want to enroll, email me at Philip (at) 720CreditScore (dot) com and I will get you enrolled immediately.
How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 3
I’m excited about this week’s update to my eight-part series—How to Build Credit Before You Buy a Home or Make Another Major Purchase! Today’s lesson in how to build credit comes straight from Step Two of my book, 7 Steps to a 720 Credit Score. Step Two is: Have at least three revolving credit lines.
Credit bureaus give higher scores to people with three to five revolving credit card accounts, which include major credit cards such as Visa, MasterCard, American Express, and Discover, as well as store-specific retail cards, such as a Macy’s card, Chevron card, Gap card, etc. If you do not have at least three active credit cards, you should open some.
But, there’s a caveat: Open three major revolving credit cards, not three retail credit cards. If you have retail credit cards, be sure to read my article entitled, “Retail Credit Cards.” In short, this article explains that:
- Retail credit cards are not the best credit cards to help you along your path to learn how to build credit. Credit-scoring bureaus respond most favorably when people have three to five credit cards, so why waste one of them on a card that can be used only at specific stores.
- These credit cards often end up costing you more than you will save with the one-time discount you might receive when you open the account.
One thing to keep in mind when opening new credit cards and learning how to build credit: You credit score will initially take a hit when you open a credit card. The credit-scoring bureaus use a formula to calculate credit scores, and 10 percent of this formula considers inquiries by lenders into your credit score. Anytime you apply for a credit card, the credit card company will make an inquiry into your credit score, so your credit score will drop a bit at first. Don’t worry! Just know that in six months, your credit score will start to rebound, so long as you keep the balance below 30 percent and pay your bills on time. For this reason, if you have to open more than one card, open them all at once. Don’t prolong the agony! If you open one now, and another in six months, you will have to wait a year before your score starts to build. If you open them both now, your credit score will start to climb within six months (so long as you implement all the other steps).
If you have poor credit, you might not be able to open a typical credit card. In this case, consider opening a secured credit card. Lenders that offer secured credit cards will require you to make a deposit that is equal to or more than your limit, thereby guaranteeing the bank that you will repay the loan. If you do not make your monthly payment, the deposit is applied toward your balance.
Another option for borrowers with poor credit is to be added as an authorized user to an existing account in good standing. Authorized user accounts help you borrow a family member’s positive credit history while you learn how to build credit on your own.
If you have more than five credit card accounts, do not close the accounts. Most credit experts agree that once you have opened the excess accounts, the damage is done. In fact, closing them might hurt your score and will never help you if you want to learn how to build credit. If you have more than five credit cards, we sure to read the blog called “Closing Credit Card Accounts” so that you know exactly what to do if you have more than five credit cards.
Be sure to come back next week for the fourth blog post of my eight-part series: How to Build Credit Before You Buy a Home or Make Another Major Purchase. And, don’t forget to register for my free teleseminar that teaches you how to negotiate with banks for lower interest rates.
Credit-Scoring Myth #1: If I avoid credit, I’ll have a great score.
Fact: Though shunning credit cards and loans might sound like a good idea, going down this path will make your life harder, not easier. Credit scoring systems want to see that you can responsibly handle many different types of credit before they award you a good credit score. If you don’t accumulate a proven track record, you won’t get a good score. And I always say that no credit score is as bad as a poor credit score. Credit companies will be unlikely to advance you a loan, and a bad credit score may prevent you from getting a job or landing an apartment.
Credit-Scoring Myth #2: As soon as I shut down some of my credit card accounts, my score will go up.
Fact: In this case, rather than causing your score to rise, your credit score may drop sharply. Fifteen percent of your credit score is affected by the length of time you’ve had credit. To reach this figure, credit-scoring bureaus take the average age of all of your credit accounts. Canceling several of them could cause your credit score to plummet. A better bet is to pay off the balances on your credit cards.
Credit-Scoring Myth #3: I must retain a balance or else I won’t have a good credit score.
Fact: Unfortunately, this myth has caused many consumers to spend money for no other reason than to preserve a balance on their credit cards, which actually has no effect on a credit score. Credit-scoring bureaus value activity on cards, but they do not add any value to keeping a balance. If you retain a balance, you will accrue interest on the balance, and your utilization rate might increase about 30 percent.
Credit-Scoring Myth #4: I’ve just experienced a bankruptcy, foreclosure, or tax lien and had bills turned over for collection. There’s no way I can get credit.
Fact: The facts of bankruptcy, foreclosure, tax lien, or collections notice on your credit report will have a very negative effect on your credit score, but if you take the proper steps to learn how to improve your credit score after a financial disaster, your score could increase to 720 in two years. As well, some lenders cater to people with bad credit, although you’ll probably have to deal with a high interest rate.
Credit-Scoring Myth #5: As long as I pay my credit card bill in full and on time each month, my credit will be perfect.
Fact: This is a popular myth, but paying your bills on time is only part of the story. You’ll have to add a diverse mix of credit and show that you can responsibly manage several active accounts to fully maximize your credit score.
Credit-Scoring Myth #6: My credit score will increase by paying any account in collection.
Fact: This is not a sure thing. More often than not, your credit score will decrease if you pay a collections account, especially since it will extend the time the account stays on your credit report.
If you want to learn more about the credit-scoring myths, be sure to attend the next teleseminar!
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!
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.