Seth: After months of harassment from my girlfriend, last week I took advantage of www.annualcreditreport.com and got my credit report. I paid the extra $7.95 for my credit score, and it was well worth it. To my shock and dismay, my credit score is in the “Not Good” bracket. That’s just above “Bad;” I suppose not being in the lowest category is a good thing. My FICO score is better than 19% of U.S. consumers. That sucks.
Credit is very important, Raysean wrote about that in an earlier entry. Knowing your credit score and what is in your report is helpful for several reasons. First, and most obvious, you know where you stand. Second, you will know how to improve your score. In the report I got from Equifax, I was told key factors that affect my score. They were:
Evidence of being seriously late or having derogatory indicators/remarks on your credit obligations is being reported on your credit file
The time since your most recent past due payment is too recent or unknown
The length of time your accounts have been established is relatively short
The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high
The only thing I could have prevented is the first two items. I do have a credit card from several years ago (September 06) that I never paid off. So that’s a bad thing. Other than that there aren’t any negative items on the report. So now I’m working on repairing my credit. In order to do so, you first have to know what your credit score is based on. Here’s what I found:
· 35% is based on Payment History – This means late payments and charge-offs. They look at the recency (how recent was this issues), the frequency (how often did you pay late payments) and the severity (how many days late). You see this is a huge part of your report. Typically, any payments 30 days or more late will show up on your report.
· 30% is based on How much you owe vs. How much is available to you – We all have different amounts of credit. According to my credit report I am over my limit on my installment accounts (student loans). I can’t do anything about this but pay down my balance, which is the best way to effect this item and improve my score.
· 15% is based on Length of History – Typically the longer you had credit the better. I have 5+ years of credit history. I guess this isn’t good enough.
· 10% is based Last Application for Credit - Many new accounts in a recent period of time can hurt your score. I don’t have any new accounts since my last student loan from 2007 so that doesn’t hurt me. However, my combination of a short credit history and negative items dictates that I have some good credit as well.
· 10% is based on Type of credit you use. Variety (auto loan, personal loans, credit cards) is best, but remember the last bullet. Further, the more credit lines you have open, the better your chance to hurt your score so be careful. For the highest score, your report should include revolving and installment debt. Major credit bards are better than department store cards.
(Ray’s Note: Equifax, Experion, and TransUnion use slightly different algorithms when calculating your FICO score which is why you’ll see a difference between the reports. Unknown to most people, each reporting agency is dominant in a particular region. For example, when auto dealerships check your credit, they usually check with only one provider because it’s cheaper than using all three. On the West Coast, that provider is usually Equifax.)
This is it. Knowing what my problem areas are, and what a score is composed of, I can go about rebuilding my credit and assuring a bright financial future for myself.
Ray: What Seth did is something that we all have to do as soon as possible. Taking responsibility for your financial well-being is perhaps that greatest thing that you can do to avoid financial ruin in your lifetime. The benefits of having great credit are far too many to ignore.
Personally, I use www.myfico.com because they have a great dashboard and other features that make repairing credit very easy. When I was ignorant of my credit report and score, I used MyFico to eliminate several negative marks and boost my score by about 100 points basically overnight. It’s rare that someone would be able to do this, but by challenging all the negative marks and making phone calls directly to companies who had posted negative marks on my credit report, I was able to eliminate them all!
Like most people my age (24) the biggest problem that I can’t fix right away is the length of credit history that I have. That comes with time. I am more concerned with not missing ANY payments at all or being late on a payment by even one day. You can absolutely destroy your credit rating in one month but repairing it will take years.
Having a great credit score will lower your interest payments, get you qualified for mortgages and car loans, lower your auto insurance, and generally will present you with more opportunities to grow financially. Having a bad credit score will leave you with a debit card and a bunch of dreams. Start managing your credit TODAY. Make the calls, write the letters, and do whatever it takes to improve your score.
If you think that you’ll be late on a payment, call your vendor! Work something out. You’ll be surprised (as I was) to see how willing people are to work with you so that you can avoid negative reporting. Also, you don’t need to pay anyone hundreds or thousands of dollars to repair your credit. They don’t have any more negotiating power than you do. You’ll only be getting ripped off for these types of “quick-fix” credit services.
Email me if you want more advice on tips to improve your credit. Otherwise, check back in the ‘Personal Finance’ section of this blog for more tips in the future.