Continuing on in the month of December closing out the rest of 2014, I will be giving away all of my knowledge on credit. 31 tips to be exact! I have used credit for a variety of things from purchasing vehicles to getting approved for business loans. I want to help you align credit with your personal and professional goals. So today we will be discussing understanding and knowing your credit score and what it means.
But first, let’s recap highlights from my last post, which you can read here: 31 Credit Tips for 2015 – Tip #2 – GET a copy of your credit report
I spoke on the importance of first, obtaining a copy of your credit report before you can begin to fix anything and improve your credit score.
I gave you a list of sites that you can visit right now in order to get your free credit report.
I mentioned that you are entitled to one (1) free credit report every 12 months as dictated by Federal law.
KNOW YOUR CREDIT SCORE
In simple terms a credit score is a numerical value that was created based on an analysis of a person’s credit files, to represent the creditworthiness of that person. A FICO score ranges from 300 – 850. A credit score is primarily based on credit report information typically sourced from the 3 major credit bureaus, Transunion, Equifax, and Experian. Lenders use credit scores to determine what loans you will qualify for, what interest rates, or the amount of money they charge you for borrowing their money, and the specific credit limits that they wish to grant you.
The ideal score you should aim for in the range is between 680 and 750, but also realize that you can have a very high credit score and still have insufficient credit to get approved for loans. This is why I say that there are multiple factors that play into whether you get approved for loans or not. You need to understand and manage ALL aspects of your credit file. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. This is key! The better you can position your credit file over the long-term to create a case that you have the ability use credit successfully, the better it’s viewed from the lenders perspective.
The use of credit or identity scoring more eloquently put prior to authorizing access or granting credit is a form of creating a system that allows for some form of verification and credibility on behalf of you, the consumer. Lending institutions need some way to verify that you are who you are and that they can loan money to you and not someone else. They also want to know that you are qualified.
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques for a variety of reason. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques. Companies like Dun & Bradstreet, Transunion, and Equifax make billions of dollars by collecting information on consumers. I won’t venture too far into that side of things, but I want you to understand that credit is a very BIG business for large companies. It is a system that is designed to help you gain access to money, but you have to understand how to use the system effectively. All of these techniques combine thousands of factors that affect you.
Your credit score influences the credit that’s available to you and the terms (interest rate, etc.) that lenders offer you. It’s a vital part of your credit health. When you apply for credit, whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they’d take by loaning money to you. When lenders order your credit report, they can also buy a credit score that’s based on the information in the report, which is why it’s important for you to manage your credit file. A credit score helps lenders evaluate your credit report because it is a number that summarizes your credit risk, which is based on a snapshot of your credit report at a particular point in time. Credit scores are often called “FICO Scores” because most credit bureau scores used in the U.S. are produced from software developed by FICO (Fair Isaac and Company). I mentioned this in a previous post, but it’s important to understand that not every credit score you can buy online is a true FICO Score. There are many credit reporting sites that use different vendors to report your score. When it comes to your true score I recommend checking your FICO score at www.myfico.com as this is the best way to get a very realistic snapshot of your credit score.
WHAT DOES A GOOD CREDIT SCORE DO FOR YOU?
A credit score translates the information in your credit report into a number reflecting the risk of doing business with you. While there are many different types of credit scoring models, a higher score generally represents a lower risk or probability that you will default if given a loan. To check your risk, request a credit score when you order your credit report. You will receive an explanation of what the score means and what from your credit report is most affecting it. This a very good feature that you can use at www.truecredit.com and the site is very easy to use.
The higher the score, the lower the risk. But having no score does not give an indication of your level of risk either way. A lender cannot identify whether a specific individual will be a “good” or “bad” customer. This is why you have to use credit because it shows a documented use of credit that lenders can assess. There are people that are well into their 30’s and 40’s that have no credit file at all. This may work for some people, but for the majority of Americans no one can purchase anything without being extended a loan or line of credit. Also, while many lenders use FICO credit scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no clearly defined standard used by all lenders and there are many factors that lenders use to determine your actual interest rates.
PROBLEM: I need to understand my credit score and what the actual numerical values mean, and how it relates to my ability to get approved for loans and other credit products.
SOLUTION: You will need to engineer specific aspects of your credit profile structure in order to influence the actual credit score. Keep in mind that it’s not always about the actual score. You can have a 700 credit score and still get denied for a loan if you don’t have an efficient amount of credit in use on your file. The best way to do this is to start with credit cards, secured credit cards mainly. Secured credit cards allow you to create credit lines on your file that you engineer. It gives you control over the credit limits and allows you to begin building a credit history. You can start with $500 and over time increase the limit by adding your own money.
You can find a list of lenders that offer secured credit cards by clicking this link – Secured Credit Cards
Additionally, the more AVAILABLE credit you have verses what you use the higher your score will be. So for example, if you have a credit card with a $1,000 limit and you only use $200 of it on a monthly basis, that’s a great place to be! Now, let’s take it a step further. If you had 4 credit cards that all had $1,000 limits and you only used $200 on all 4 credit cards, this is even better.
Let’s to do the math:
Let’s say that you had 4 credit cards. These are the only credit cards on your credit file.
4 Credit Cards with $1,000 limit each = $4,000 available credit for you to spend. (4 x $1,000 = $4,000)
You use $200 on each card (by the way, we call this utilization) and you have now used $800 combined on all of your cards but you still have an available credit balance on your credit file of $3,200. Lenders will look at this very favorably because it shows them how much money you have available to you at this present moment. Plus you are keeping the utilization under 50% and very low. This simply means that you are using a very low amount of the credit made available to you. Also, a configuration like this allows the algorithm that the credit bureaus use to generate your score help give you a higher credit score. Now, this is all hypothetical of course. This is in a perfect world given the fact that you have anything else on your credit and that you’ve made all of your payments on time. However, this is an ideal scenario.
2015 CREDIT RESTORATION PROGRAM
If you are interested in our Credit Restoration Program where we consult our clients on restoring their credit profiles to align with their personal and professional goals email me now at firstname.lastname@example.org with the subject line, “Credit Coaching/Consulting Services” to schedule a 30-minute consultation. I want to START you off on the right foot in 2015!
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