Wealth Manager

Is improving your credit score possible?  Improving your credit score is not only possible but a must if you want that loan, or better rate, or insurance or even maybe that job. But the first and most essential trick to improving your credit score is insuring the accuracy of each of your credit reports.   You can get a free copy of your credit report from only one source.  (See how from Free Federal Credit Report)   But Only after you are certain of the accuracy should you begin planning other steps to improving your credit score.

And just so you know when you get your credit score, it will normally cost. But if you can get your credit score from Credit Report.com , you can get your credit score for free if you also get a 3 credit report monitoring program. It could well be worth it for you to do so.

Improving your credit score can be easy and can be maintained at its peak… if you know how to do it.  I recommend reading Credit Score Basics  Part 1 and Part 2 in conjunction with this article.

Scoring models such as FICO (Fair Isaac scoring model) generally evaluate the following types of information in your credit report and are weighted as suggested by the percent shown:

On Time Payment – 35% -Have you paid your bills on time? Payment history typically is a significant factor. Your score will be affected negatively if you have paid bills late, had an account referred to collections, had a repossession, or declared bankruptcy. The age of the positive or negative comment is also important in this factor. For example, a 90 day late payment 3 years ago may be less important than a 30 day late last month. The more current the factor, the greater the weight.

Amount Owed Versus Capacity – 30%- What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. Authorities suggest 30%-60% is desirable by creditors. Maintaining a low balance on multiple cards is better than high balances on one… but don’t run out for more cards to “even out” balances just before applying for a loan. Recent applications cost you as shown in below. You should note that a few creditors will use highest balance as your credit limit. For example if you have a $10,000 limit and have used only $1000, your limit will show not 10% but 100% utilization.

Length Of Credit History – 15% – How long is your credit history? Generally, models consider the length of your credit track record. A recently opened account will have less weight than an account 3-4 years old. An insufficient credit history may have a negative effect on your score, but that can be offset by other factors, such as timely payments and low balances. If you are going to close an account, try to maintain the oldest accounts as age of account matters.

New Credit Accounts – 10% – Have you applied for new credit recently? Many scoring models consider recency. Similarly, if you have applied for too many new accounts recently or had to many recent inquiries, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make “pre-screened” credit offers are not counted.

Types Of Credit In Use – 10% – How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies (rather than a bank) may negatively affect your credit score. There is also a hierarchy of debt beginning with a mortgage. This is followed by a secured debt such as a car, then unsecured debt (credit cards), then revolving charge cards and gasoline cards.

Most Important Issues

It’s likely to take some time to improve your score significantly. However, the most important issues to improved credit score are:

accuracy of report

on time payments

paying down outstanding balances

not taking on new debt.

And don’t forget you can get your free credit score from Credit Report.com

As you read in Credit Scoring Basics Part 1 and In a nutshell, high credit score reports help your request for credit to be approved. It can also mean lower interest on loans or even insurance rates. Low credit score reports can cause higher rates and loan denials… and even that promotion or new job you were seeking. So improving your credit score is critically important.

What’s my credit score?  How can I find my credit score?

Although there is an associated cost, you can view credit score reports from Credit Report.com

Your score is made of data you supply to a potential creditor who utilizes a scoring model supplied by someone like Fair Issac Company and produce what is know as a FICO score (sometimes referred to as Beacon Score).

So what’s a good score?

General US population FICO Scores range throughout the country per the following table.   You will see that the adult population is divided into 5 groups and with the following point spread:

780 to 850 – 20%

740 to 780 – 20%

690 to 740 – 20%

620 to 690 – 20%

Below 620 – 20%

What constitutes good credit score reports is a matter of economics.  Not long ago your pet turtle could have applied for and probably gotten a credit card so a good score could have been 620.  In a very tight economy with minimum lending a good score is considered 740 or better.  It all depends how much credit is being extended.

How Can I Get My Credit Score Reports?

Through Annual Credit Report.com  (See Free Federal Credit Report for more information), a credit REPORT can be obtained for free. ( The forthcoming article  Improving Your credit Score explains this as well.)  However, please understand, credit SCORE reports will all have an associated cost but can be obtained from the same source you received your credit report.  But as mentioned above you can also view credit score reports from   Credit Report.com

The credit granting agency utilizes computer software designed by folks such as Fair Isaac Company (thus a credit score is often referred to as FICO).  An acceptable point value is established based upon selected criteria, which offers the lender insight as to the risk involved with getting the loan.

The loan applicant gives information to the lender, which is submitted to a credit bureau. Per Fair, Isaac, the credit bureau then returns a: “credit bureau risk score, which is a snapshot of your credit risk picture at a particular point in time.” Lenders can then determine the risk in loaning money.

Is Credit Scoring Objectivity Questionable?

Fair, Isaac concludes: “Computers don’t make lending decisions, lenders do. Computers analyze credit information to produce a score, but individual lenders decide what scores are acceptable for different loans or credit cards. ”

The problem is that subjectivity has been completely removed in the models. Models should make recommendations not decisions and that is usually not the case today… it is more “expeditious” and “efficient” to rely on the model. The model, then, has become the decision maker instead of the lender.

However, consider, what would happen without a model system? In many cases the result would be non-standard chaos based upon subjective guesswork and prejudicial criteria. If I am a bald lender and very sensitive to long hair, isn’t it possible without a measuring standard to be prejudicial in my decision to loan out my money to a longhaired rock musician?

Now add on something a little closer to reality like race, color, creed, etc. None of these should be permitted into the decision making process. But we all know of incidents with objective measures fully in place where it has still happened. How bad would it be without a system, any system, fully in place?

On the other hand, what would happen if very few applications were turned down? There is no standard so how am I, the lender, suppose to know who will and will not pay me back. I can’t predict the future. The very reputable and honest person in front of me may well have extraordinary events occur tomorrow. Without some measure of prediction, I could loose more loans then are paid back. That’s a tough way to stay in business and not to very welcome at the next meeting of the stockholders.

How is a FICO Calculated?

Information about you is collected from your credit application and other sources. Data includes your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, age of your accounts, and other information. Using the Fair, Isaac statistical program or model, creditors compare this information to the credit performance of consumers with similar profiles and award points for each factor that helps predict who is most likely to repay a debt.

Credit information is weighted based upon its type and history… the more current the good or bad information, the more weighty the affect. For example a very old 90 day late may be less weighted than a very recent 30 day late. The type of data is also weighted:

Past Payment Performance (35%  heaviest weight)

Credit Utilization (30%  next heaviest)

Credit History (15%  third heaviest)

Types of Credit In Use (10% or far less weighted)

Inquiries (10% or least weighted)

See this article continued in  Credit Scoring Basics Part 2 and Improving Your Credit Score (forthcoming)