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.
As you know, I love receiving testimonials from my happy and satisfied clients. So for fun, I have decided to host a challenge on who can give the best testimonial about their success with my 7 Steps system… AND I’ve made it SUPER EASY. Just follow these simple instructions:
You will need to record your testimonial by calling 1-800-609-9006 Ext. 9038.
Please use the following script as a guideline for your testimonial (fill in the blanks):
- Hello, my name is ___________________ (first and last name) from ________________ (city), _____________(state)
- What I love about Philip’s system is ______________________________ (make sure this flows from the heart)
- The specific results I achieved because of Philip’s system are_________________________________ (examples: higher credit score, low interest rate, money saved per month, etc. – the more detailed the better)
- Philip, I want to thank you for __________________________________ (fill in the blank)
Be sure to end your recording with your phone number, as we will be contacting the winner by phone.
Once you have submitted your recorded testimonial, email a digital picture of yourself to info@720CreditScore.com. Once your entry has been received, we will confirm receipt via email. If you do not receive a confirmation email from us, within 48 hours call us at 1-877-720-7267.
All entries must be eighteen (18) years of age or older and submitted no later than Saturday, May 15th 2010.
The winning prize for the best testimonial will be $500. The winner will be selected based on the following three criteria:
- Success with the system – Increase in credit score (before and after score), time it took to increase your score, your savings per month due to your increased credit score.
- Communication – Effectiveness in communicating your success story in a clear, expressive, and genuine way.
- Presentation – Creativity of your script
The winner will be contacted by a 7 Steps to 720 representative and we will post the winning testimonial on this site on Friday, June 4th 2010.
Consent, Waiver and Release:
By submitting your entry, you voluntarily and irrevocably give your consent to Philip Tirone, 7 Steps to 720, LLC , their assigns, successors, licensees, agents, advertising agencies, producers, publishers and legal representatives, the use of your name and story in all forms of media and in all manner, for advertising, trade or in any other lawful purpose, including, but not limited to 7 Steps to 720, LLC products, promotional materials and web sites. You therefore waive any right to inspect or approve your testimonial or any version thereof including a paraphrasing and release any obligation to make any payment hereunder or from any other liability incurred in connection with the use of any such text or other material in the manner provided; with the exception of the one-time payment to the chosen winner in the amount of five hundred dollars. Philip Tirone and 7 Steps to 720, LLC will not use disparaging references of your name in any form, and disclaims any responsibility for such unauthorized use of your published name or testimonial. You voluntarily and irrevocably give your consent and agree to this Consent, Waiver and Release with submission of your testimonial.
Thanks for your support!
Among the most-asked questions about credit scores is this: What do I do about my credit score if I have a collections on credit report?
For sure, having a collection account on your credit report is a big deal. Creditors will be unlikely to grant you a loan if you do not pay your bills. Though a collection account is not as big of a deal as having foreclosure or bankruptcy facts on your credit report, your credit score will suffer.
And though it sounds crazy, making a payment on a bill in collection might cause your credit score to suffer again. Bills that have been turned over for collection hurt your score only a bit after two years, but as soon as you make a payment, your score will be damaged again. As well, making a payment renews the seven-year period in which an item stays on your credit report.
So what do you do about those pesky collections on credit report? Paying your bills is your responsibility, even if it causes your credit score to suffer. However, you can and should negotiate with the creditor or collection agencies to minimize the damage.
Especially in today’s economy, you might be able to negotiate to pay less than the full amount of the bill. Though this doesn’t remove the collections from your credit report, paying a lesser amount can surely help your pocketbook!
Better yet, consider negotiating for both a smaller payment and a letter of deletion.
Not to be confused with a letter of payment, a letter of deletion is basically a letter they send to the credit bureaus saying that the bureaus should remove the collections on credit report. This is obviously the best-case scenario. Your credit score will surge if you can get a letter of deletion that wipes the collection from your credit report!
Qualifying for a letter of deletion is tricky, though. This technique will work best if the collection item was not correctly sent into collections.
The Fair Debt Collection Practices Act limits the ways creditors and collection agencies can contact you. If you believe that they have violated the Act, you might be able to get a letter of deletion, so long as you promise to pay the collections on credit report. The most common violation of the FDCPA occurs when a collector fails to advise debtors about their right to dispute part or all of the debt within 30 days of first contacting the debtor.
As part of your plan for learning how to build credit, you might wonder if you should start closing credit card accounts. After all, if you have more than five credit cards, you have more than the ideal number.
True, credit scoring systems are happiest if you have no more than five credit cards. But before you make that call to the credit card company, be aware that closing credit card accounts can have a major impact on your credit score. Keep in mind a few basics about owning credit cards.
Fifteen percent of your credit score is derived from the age of your credit accounts, with older credit accounts giving you a better score. This part of your credit score is based on the average age of your accounts. As a result, every time you terminate older accounts, you drive down the average age of your accounts considerably and risk decreasing your credit score.
You should also consider how closing credit card accounts will affect the portion of your credit score that considers your credit card limits and balances. Your “utilization rate” is the ratio of your credit card balance against your credit limit, expressed as a percentage. If you have $800 of debts on a credit card and your available line of credit is $2,000, your utilization rate is 40 percent. Since credit-scoring bureaus reward people who have utilization rates below 30 percent, you should try to always keep your utilization rate under that threshold.
Closing credit card accounts can impact your utilization rate in a couple of ways. First, if you decide to cancel a credit card and transfer the remaining debt to another card, you may cause the utilization rate on the second card to rise sharply, which will cause your credit score to drop. Even worse than transferring a balance is leaving a balance on your card after canceling the account. If you leave a $700 balance on the canceled card, your utilization rate will suffer dramatically since the limit on the card will be $0.
So what is the plan for dealing with a bunch of credit cards? Even FICO agrees that closing credit card accounts is a bad idea. Your best bet is to keep all of them active but pay them off every month. You can even find ways to live debt-free and keep your credit cards active. A steady history of payments will demonstrate to credit-scoring bureaus your ability to manage your accounts and will eventually improve your credit score. Pay special attention to the cards with the highest limits, oldest ages, and best interest rates. Be sure to keep these cards active, maintaining a utilization rate below 30 percent.
A final note: Retail credit cards (those associated with a specific store, such as Bloomingdales) are an exception to the “keep-them-open” rule. Keeping a balance on these cards may be difficult since you probably do not need to buy something from these stores each month. Letting a retail account go inactive may not be the ideal choice, but it should not be a cause for alarm unless it causes your credit score to drop, in which case you might be able to reactivate the card with a simple phone call.
People regularly ask me for tips on how to build credit fast. Among the usual—paying down credit card limits and becoming authorized users—I tell spouses to leverage each other’s credit scores.
For a variety of reasons, you might need to learn how to build credit fast. Maybe you are applying for a loan and want to secure lower interest rates. Perhaps you are a candidate for a job at a company that runs a credit check before hiring new employees. (After all, 60 percent of companies run a credit check at least some of the time.)
If you have a balance that exceeds 30 percent of the limit on a credit card, you can transfer a portion or the entire balance to your spouse’s credit card.
This is among my favorite tips for how to build credit fast because it makes a huge difference. With the credit scoring systems calculating outstanding debt as 30 percent of your credit score, your score will quickly increase if you lower your outstanding debt. You can then walk into the loan application or job interview with low personal debt and a higher-than-usual credit score.
Though you might lower your spouse’s credit score, you can quickly “buy back” the debt using your credit cards once you secure the loan or job. Of course, you will need to repay the favor if your spouse ever needs tricks for how to build credit fast!
Do you think it is fair that the very same banks who are being propped up by your taxpayer dollars – the banks who got big bailouts – are unwilling or unable to tell you how to get a loan by increasing your credit score?
I don’t, which is why I went into a major bank with a SpyCam to see whether the banks are training their bankers to tell you how to improve your credit score and qualify for a loan.
And guess what? After the government unilaterally decided to give the banks a loan using your money, the banks won’t tell you how to improve your credit score so you can qualify for a loan.
The government forced us to give them a loan, and now they won’t tell us how to get a loan. Does that seem fair?
They should tell us:
- How to build credit so that you can qualify for one of their loans.
- How your credit cards impact your credit score (a factor I call the “credit card score.”)
- All the facts about bankruptcy and foreclosure, and how you can bounce back from these financial crises.
Are the buy now pay later no credit check offers good for your credit score?
As you learn how to build credit, you should consider that certain credit types of credit, including buy now pay later no credit check offers, will probably hurt your credit score.
You can probably surmise that buy now pay later no credit check offers usually come with Goliath-sized interest rates. People who apply for these loans are often risky borrowers who are unlikely to repay their loans, so creditors who offer buy now pay later no credit check loans know that many of their customers will default once the grace period expires. To make these loans worthwhile, creditors attach high interest rates. The people who do repay their loans pay an arm and a leg in interest to compensate the creditors for the cost of those who default.
Aside from the high interest rates, buy now pay later no credit check offers are probably a bad idea for another reason. The creditor might not check your credit before granting you a loan, but the creditor will most certainly report the buy now pay later no credit check offer to the credit-scoring bureaus. And credit scoring systems frown upon any buy now pay later loans. These loans suggest that the borrower is not currently able to meet the financial obligations of the loan, and this gives the credit-scoring bureaus reason to believe that you are a credit risk.
One of the rules of how to build credit is that you should never do anything that suggests you are experiencing financial strain. Even if you plan to repay the loan in a timely manner, the buy now pay later no credit check loan tells the credit-scoring bureaus that you are in such a financial bind that you will agree to sky-high interest rates. A person whose finances are stable probably would not agree to high interest rates, so credit-scoring bureaus will lower your credit score if you apply for these loans.
One more reason to steer clear of buy now pay later no credit check offers: These loans often result in a high utilization rate. Remember that your utilization rate is the balance you have on a loan or credit card as compared to the limit. The lower your utilization rate, the better your credit score. Because the balance on these loans often does not decrease for many months (remember, you will pay later), your utilization rate stays high until you start paying.
Though the buy now pay later no credit check offers might be tempting, if you really want to take the steps and learn how to improve your credit score, you should turn your back on these offers.