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What is a Credit Score?

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Credit Scores Explained

Our credit score is one of the most important things in our lives. Not only is it important in buying homes and cars etc. but it can effect if we are hired, get a security clearance, our insurance premiums, and determines if we find a rental and how people judge us.

FICO

FICO credit scores are what most vendors use, but they are far from the only scores. FICO is the software made by Fair Issacs Corporation, and it examines your credit report and creates a “credit score” from the data. Because FICO is more expensive, many other companies started making their own credit reports, not to be mixed up with FICO. These other credit reports are for consumer consumption, not for determining credit worthiness . They try to emulate the FICO score.

Types of Credit Reported

Revolving Credit

Credit cards are the most common types of revolving credit along with HELOCs (Home Equity Lines of Credit). With these, you have a fixed amount of credit from which you can draw from. There are minimum monthly payments, depending on how much credit you use. The remaining can be pushed to the following month, accruing additional interest.

It is important to know that credit cards are the only type of loans that can change their interest rate. This means that a nice 0% card can go up to 29.99%! There are five reasons credit cards can raise your interest rates.

    • Promotional period ending
    • You have had the card over one year
    • 60 days late on payments
    • A substantial drop in your credit score
  • When the prime lending rate goes up and the card is a variable-rate card.

******It is important to note there is NO FEDERAL LIMIT on the credit card interest rate BANKS can charge!*****

The limit is determined by the state the bank is based. This is why most credit card issuers are based in “bank friendly” states like South Dakota and Delaware. Typically the rate is under 30%

On the bright side, credit Unions cannot charge more than 18% on ANY loan, which is why I generally prefer credit unions.

Credit card issuers make a lot of money on late and over-limit fees.

Late fees

One day late means a $25 charge the first time and $35 every other time within 6 months of another late fee. By not paying on your account, you are increasing your debt while seriously hurting your credit!

Over-Limit Fees

Thankfully, there are generally not any more over-limit fees – unless you opt-in to them. If you don’t opt-in, when you don’t have enough credit available for a purchase, the purchase is denied. If you do opt-in, they MAY allow the purchase, but there will be a $25 over-limit fee the first time and $35 every time after that or until you have not had an over-limit fee in the previous six months.

Installment Credit Accounts

In these types of credit, you pay a specific amount each month over a set period of time when the loan is paid off. Unlike credit cards, in this type of credit, the interest rate cannot change unless it is a variable-rate loan. They are home and vehicle loans, but can also be for smaller purchases like furniture.

Be aware that NO COMPANY HAS TO REPORT to the credit bureaus – yet most will report late fees and charge-offs! ALWAYS ask if they report positive credit, and to which credit bureaus.

Open Credit Accounts

Open Accounts are credit accounts where the balance needs to be paid off each month. TV, electric, cell phones and rent are good examples. They often don’t even report negative payments to the credit bureaus, but they DO keep track of it, and if they do report, it is usually as a delinquent payment.

Typically, if you get behind on payments, they deny services, except where the law prohibits it. While it may vary from state to state, the services that cannot be denied are for public safety (such as heat in the winter) – and even then for a limited time.

Credit Score Breakdown

Payment History – 35%

This is if you have made payments on time or late and how late. Included are collections charge-offs and liens.

Debt settlements, bankruptcies, foreclosures, suits, liens, wage attachments or judgments can really hurt your credit.

Amounts Owed – 30%

Your debt to income level is VERY important too. The revolving debt you owe as opposed to the debt available should never be more than 30% Creditors like to see some debt as opposed to no debt. If you can’t trust yourself with credit cards, don’t use them, but keep them. They will show as paid every month (because the payment is zero), and while it is not as good as a little debt, it still helps your credit score.

The less you owe on an installment loan from the original balance is important too.  Creditors like to see this being paid off.

Having a low debt to available debt ratio shows how responsible you are and that you are financially stable enough to pay it back.

Length of Credit History – 15%

How long have you been using a particular credit line, and the average age of all current debt contributes to about 15% of your credit score. A long credit history is helpful as long as it is not marked with negative items!

New Credit – 10%

Your credit score takes into account how many new credit accounts you have recently opened. The more new accounts can show financial distress and a poor credit risk. While your credit score will dip with each new credit account, as long as you make your payments on time it will rise quickly.

Types of Credit In Use – 10%

Most credit experts agree that you should have a mix of 6-12 types of credit accounts. Your credit score also depends on a mix of different types of credit, as credit cards, store accounts, installment loans and mortgages.

Derogatory Marks

Derogatory marks can drastically reduce your credit score. Here are the “biggies”

    • Bankruptcy – While a bankruptcy will negatively affect your credit, most often the change to your debt to income ratio will change too. Because of this, a bankruptcy can boost your credit.
    • Foreclosure
    • Collections – this is when a debtor is behind on payments and the debt is sent or sold to a third-party collector.
    • Tax Liens – Tax liens can stay on your credit report forever.
    • Civil Judgments
    • When a creditor takes you to court over a debt, if they win they get a judgment. This means the court agrees with the creditor, and the creditor can take action against the debtor. Civil judgments can be against real estate or other property where they may be able to force you to sell it to pay the judgment. Other times it can be a judgment lien where when you sell the property, they get paid from the proceeds.
    • Judgment Proof – If you have property that is equal or less than the amount allowed in a Chapter 7 bankruptcy for your state, then they can’t take anything from you, making you “judgment proof”. This DOES NOT mean  you cannot get a judgment, but you can’t lose anything in a judgment – until you become over the limits.
  • Please note that judgments stay on your credit for 10 years and may be renewed indefinitely.

Charge-Offs

A charge-off means the debt is unlikely to be collected. Installment loans need to be 120 days late to become a charge-off and a revolving account needs to be 180 days late. A CHARGE-OFF DOES NOT MEAN YOU NO LONGER OWE THE DEBT*****

******A CHARGE-OFF DOES NOT MEAN YOU NO LONGER OWE THE DEBT*******

Yes, the creditor can still collect the debt, or use outside debt collection agencies, but at this point they can write this loss off on their taxes.  A CHARGE-OFF IS ONE OF THE WORST THINGS ON YOUR CREDIT! it can make getting credit difficult – even for secured credit cards.

If the charge-off is paid, it is marked “paid” but remains on your credit. If it is settled, it will be marked settled, both of which are bad on your credit – but better than being unpaid.

Credit Aging

We do not start out with good credit, it is built. Perhaps “being built” is more accurate. If you stop building it, you start losing it. As the items that make-up your credit age, both good and bad, they become less influential.

This means items that affect you credit today (good and bad) will affect it less each following day until they fall off completely in 7-10 years.

PLEASE! Refer your friends to Cameron Bankruptcy Law or write a brief online review!Cameron Bankruptcy Law of Raleigh thank you!
(919) 627-7748


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