| The process of repairing credit reports may appear to be easily accomplished on your own, however achieving maximum results can be extremely difficult, time consuming, and not to mention frustrating. The specialist at Community Lending Group, Inc. are here to provide years of experience and professional services on your behalf. |
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Credit Repair Benefits
The Math is SimpleYour credit will determine the cost of every dollar you borrow. The math is simple. The higher your credit scores the lower your interest rates. Let’s take a look at the financial benefits of improving your credit scores.
Every Point Matters
Here are the potential effects of a 100 point improvement in your credit scores. The following figures are from Fair Isaac Corporation and based on national averages.
- If you have a $300,000 mortgage, a 100 point improvement in your scores will save you $264 per month.
- If you have a $25,000 automobile loan, a 100 point improvement in your scores will save you $65 per month.
- Together your combined monthly savings equals $329.
Let's Multiply
If you were to invest your $329 monthly savings into an account earning 5% per year for the next ten years you would accumulate $51,000. And over 20 years it would grow to $135,000.
And There's More The real financial benefits of credit repair go well beyond your mortgage and auto loan to include your credit cards and other consumer debt, not to mention the potential impact on employment and insurance. It adds up. Are you ready to learn more?
The Fair and Accurate Credit Transactions Act of 2003 (FACTA)
Consumer reporting companies are required to notify consumers of their rights under FACTA and steps they can take to protect themselves against identity theft and difficulties resulting from identity theft. The identity theft rights summary includes the major new identity theft rights granted to consumers by FACTA, including the right to place fraud alerts on their credit reports, to block businesses and credit bureaus from reporting information in their credit files that is a result of identity theft, and to obtain from businesses information about accounts or transactions in their name that result from identity theft. The identity theft rights summary will be provided by consumer reporting companies to consumers who contact the agencies because they believe they are victims of fraud or identity theft. For full details use the following link: (FACTA)[LEARN MORE]
Credit Score Stats and Ranges
Understanding credit score stats can help you put your own rating into perspective. The first thing you need to realize is that it is possible to have more than one score. Each reporting bureau calculates your score individually, and your number may vary due to differences in your credit history at each bureau. Also, while scores generally range from 300 to 850, there are slight variations in the range, depending on which agency is reporting the information. For example, here are the ranges for each bureau:
TransUnion: 300-850
Experian: 340-820
Equifax: 300-850
Credit Score Distribution Among the General Population
Based on the general population's FICO®
scores (as stated by the Equifax website), the percentage of the population
scoring in each range is as follows:
- 20% are above 780
- 20% are in the range of 745 - 780
- 20% are in the range of 690 - 745
- 20% are in the range of 620 - 690
- 20% are below 619
For a more thorough breakdown, Fair Isaac reports the following percentages:
- Up to 499: 1%
- 500 - 549: 5%
- 550 - 599: 7%
- 600 - 649: 11%
- 650 - 699: 16%
- 700 - 749: 20%
- 751 - 799: 29%
- Over 800: 11%
What is the average American credit score?
According to Experian's National Score Index for credit score stats, the average American credit score was 678 (as of 4/2006). During this period, the New England states (Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut) had the highest score average, and the West South Central states (Texas, Oklahoma, Arkansas, and Louisiana) had the lowest average scores. As for individual states, South Dakota had the highest average of 710, while Texas had the lowest average of 651.
Interpreting Credit Scores
Given the current credit score stats, how does this relate to your own personal score? Generally, if your score is higher than 660, you will be considered a good credit risk. If your score is below 620, then you might have a tougher time getting a loan. The following ratings explain the impact of the different score ranges:
- 720-850 - Excellent - This represents the best score range and best financing terms.
- 700-719 - Very Good - Qualifies a person for favorable financing.
- 675-699 - Average - A score in this range will usually qualify for most loans.
- 620-674 - Sub-prime - May still qualify, but will pay higher interest.
- 560-619 - Risky - Will have trouble obtaining a loan.
- 500-559 - Very Risky - Need to work on improving your rating.
Interest rates generally rise along with a lenders risk factor. Overall, people with the highest credit scores receive the best financing, while those that fall below the average will generally only qualify for sub-prime loans with higher interest rates. In fact, the mortgage interest rate for people scoring in the average range is generally 1.5 point higher than the rates for those at the top of the scale. To get the best interest rates, your score should be 720 or above.
Credit Score Needed to Buy A House
It is not impossible to obtain a mortgage with an imperfect credit rating, and you may even be able to qualify with a score as low as 500. In fact, some lenders specialize in sub-prime loans (for scores below 620), even though it means higher down payments and interest rates for the borrower.
On the other end of the spectrum are scores over 720, which means a person has excellent credit and will probably receive the best financing terms. For scores in between 620 to 650, most people will qualify for financing, but will probably have higher fees and rates.
Because interest rates are determined in part by your score, it's important to know where you stand before you ever begin the loan process.
While these credit score stats can give you can indication of what to expect, you need to understand that each lender has their own range of acceptable scores. Lenders also consider other factors, such as your employment, savings, and income-to-debt ratio when making decisions on whether to lend you money or not. Therefore, you should find out what your lender's requirements are before you apply for a loan.
Elements That Determine Your Credit Score
When it comes to computing credit scores, you need to understand that there are 5 elements that determine your credit score. These elements come from the information in your credit report, and points are awarded for each factor. The total points predicts how likely you are to repay your debts in a timely manner, which is a powerful indicator of credit-worthiness to lenders. The total amount of points that you can have on your credit score can range from 300 to 850, depending on the source.
Now let's take a look at the 5 elements that determine your credit score and how points are calculated. The most important factor in computing your credit score is your payment history, followed by amounts owed, length of credit, types of credit, and finally new credit accounts. You can find a more detailed description of each of these factors below:
Payment History determines 35% of your credit score, with the most emphasis given to recent activity. Your payment history includes:
- Any bankruptcies, judgments, liens, collections, suits, and wage garnishment
- Types of credit and payment information
- Number of accounts paid as agreed
- Late payment information - number of past due items, how long the items have been past due
Amounts Owed accounts for 30% of your credit score, and includes such things as:
- Total amount owed to all creditors
- Amount owed on specific types of accounts (credit cards, installments, etc)
- How many accounts show balances
- How much available credit you have
- How much you have paid down on installment loans
Length of Credit makes up about 15% of a person's credit score, with information about:
- When your credit file was established
- How long individual credit accounts have been established
- Age of the oldest account, and the average age of all accounts
- How long it has been since certain accounts have been used
New Credit Accounts determine about 10% of your credit score, with the relevant information being:
- How many of your accounts are new
- The ratio of new accounts to established accounts
- How long has it been since a new credit account was established
- How many credit inquiries have been made on your credit file
- How long has it been since these inquiries were made
Types of Credit in Use determines approximately 10% of your credit score. A mixture of account types generally scores better than reports with only revolving accounts, such as credit cards. Types of credit include:
- Credit cards
- installment loans
- mortgage loans
- finance company accounts retail accounts
As the 5 elements that determine your credit score change, your credit score will fluctuate accordingly. If you get behind on payments, your score will go down. As your payment history shows more reliability, it will be reflected positively on your credit score.
Currently, it's possible to have more than one score, depending on which credit bureau furnishes the information and the scoring system used. In March of 2006, the three main credit bureaus rolled out a system that strives to produce consistent credit scores, regardless of where they originated.
This new credit score system will be called the VantageScore, and should be available to consumers fairly soon. It is similar to many of the old scoring systems, with the range of credit scores falling between 501 and 990. What weight it gives to the 5 elements that determine credit scores is still unknown, but it will be based on a 24-month performance period. Even though it offers consistent scoring capabilities, the other credit scoring models will still be available to consumers.
Now that you know the elements that determine your credit score, you can use this information to get an estimate of what your score is, by using a score simulator.
How a Credit Card Affects Your Credit Score
Those shiny pieces of plastic can be the best thing in the world, or the worst, depending on your point of view. Use them without discipline, and you will very quickly find yourself in debt. Use them wisely, avoiding impulse buys and paying off your bills very month, and they are the greatest and most convenient things in the world. Even better, they will prove to the credit bureaus that you are a financially responsible person, and your credit score will go up and up. Let’s see how this happens.
Credit Cards – A Window into Your Financial Life
Most credit reports begin life with a credit card. Whether you are a student or your bank introduced you to the wonderful world of credit, that very first application has been marked and compiled in a computer. Every month, another record will go on your new credit report, showing if you paid your bill on time, and how much you paid off. As you go through life, car loans, mortgages, bankruptcies and other financial and social information will be added to your report, newer items affecting your score more than older items.
Many financial actions comprise your credit score – your total debt load as a percentage of your total credit limit, the age of your credit history, the frequency you apply for new credit, and how well you pay your bills off. As you can see, credit cards can be a factor in all of these actions.
What a Credit Score is Made Of
Total debt load (about 30% of your score) – Having lots of debt will not necessarily lower your credit score. It’s how much debt your have and how much credit you have available. For instance, if you have two thousand dollars on your credit card, it could look bad. However, if you have a ten thousand dollar limit, that’s only 20% - a very healthy ratio. Credit lines and mortgages versus the value of your house are also taken into account.
The age of your credit report (about 15%) – Lenders need to know how well you respond to paying your bills. In order to do that, they need to see how you have behaved in the past. Because credit cards will likely be your first introduction to credit, paying your bills on time, and consistently, will be a good indication of your reliability to handle money well.
Applying for new credit (about 10%) – It stands to reason that the more lines of credit you have, the lower your score will be. This is simply because you are carrying more debt. However, even if you are not approved, this application still counts. Applying for credit too often could be an indicator of financial irresponsibility, such as applying for too many credit cards in too short a time, or hopping from card to card.
Paying your bills (about 35%) – The largest factor in your credit score is, of course, paying your bills. Skipping payments, only paying the minimum (thus carrying a higher debt load), or walking away from loans will immediately destroy your score. Conversely, paying on time, in a predictable and consistence manner, will prove to future lenders that you are financially trustworthy. Credit cards, or course, are a huge factor in this. Pay on time, as much as possible, and your score will be excellent.
Okay, I Pay My Bills on Time, But My Score is Still Low!
If you are concerned with getting a better credit rating, there are a few factors to investigate. If you rule out past bad debt such as defaulted loans or a high debt load, take a look at how your credit card activity is reported. First, make sure your credit card company is actually stating your credit limit. If they are not, then your credit report will calculate your credit limit to be the highest amount you ever placed on your card. This will make it appear your debt load is too high, and your score will suffer.
Another option is that you may have cancelled one of your credit cards. As strange as this seems, this could have actually hurt your score! Why? Two things – if that card had a long credit history, this source is now gone. The second thing is that your overall credit limit is now lower. The credit bureaus calculate the credit limit of all your cards together, so removing one will remove that extra credit.
Instead, if you are trying to get your
finances under control, cancel your store credit cards (they aren’t
worth as much), and take one of your major cards out of your wallet
and keep it in a safe place. Use it once or twice a month just to keep
it active.
The Secrets of Raising Your Credit Score
Why is it important to learn the secrets of raising your credit score? Because your score helps determine whether you'll be able to get credit and the interest rate you'll qualify for. If you are planning on making any major purchases within the next few years (such as a home or car), you should start working on improving your credit score now.
Since credit scores fluctuate over time, the steps you take now will reflect positively in the future. Credit scores place the most emphasis on information that is reported within the last 24 months, so the actions you take now can really help. This means that even if you currently have a bad credit score, it won't haunt you forever if you work on improving it. Below are the main areas to work on when trying to build up your credit score.
Correct errors on your credit report
One of the first places to begin improving your credit score is by checking your credit report for errors. This includes such things as accounts that don't belong to you, or paid accounts that are still showing a balance. Having inaccurate information removed from your credit file can really make a difference on your score, so it's worth the effort. To correct any errors, we will need to contact all three credit bureaus to dispute the information. You can find a more detailed description of correcting inaccurate information in our article on disputing credit report mistakes.
Build a Solid Payment History
Since your payment history accounts for 35% of your credit score, you need to make sure that all your accounts are up to date and don't show late payments. Pay off past due accounts, and then concentrate on paying your bills consistently before the due date. If you tend to forget to mail your payment in on time, consider automatic bill payment options (either through your bank or online).
You may be wondering how liens, judgments, collections, and bankruptcy will affect your credit score. I won't lie to you. These bad marks will seriously lower your credit score, but not indefinitely. Since this information may only be reported for 7 to 10 years, it will eventually drop off your record. And, if you can consistently pay your bills on time for two or three years, the impact of these negative items will not be as great.
Lower Your Debt Ratio
If you've extended your credit to the limit, it will have a negative effect on your credit score. By keeping your credit card balances low (less than 20% to 30% of the available credit), you'll not only be in better financial shape, but you'll also bring your score up.
It's common to carry a large balance on one card and have another card that you either don't use, or pay off in full every month. If you will be applying for a loan in the near future, you might consider transferring some of the balance to the other card to even out the percentage of available credit on each card.
The next thing that you want to concentrate on is paying off your existing balances. Try paying more than the minimum amount due on your accounts, and if possible, pay the balance in full. Once you pay off an account, don't close it because it will elevate your debt ratio due to the fact that you will have less available credit.
Another way to temporarily build up your credit score is to not use your credit cards for a few months before you apply for a loan. Because creditors provide a monthly statement to the credit bureaus (which may occur before your payment is received), your account may show a balance, even if your pay your statement in full every month. By paying with cash for a month or two before you apply for a loan, these accounts will show either a lower balance, or not balance at all. The end result is that your debt ratio will be lower, which will move your score upwards.
Your Length of Credit History Matters
If you've been thinking about closing those old cards that you don't use any more, don't do it until after you've qualified for a loan. Closing old accounts can lower your credit score it because it decreases the length of your credit history. You want to keep long-standing accounts open because it shows a longer history of established credit. If you are determined to close out accounts, make sure that you keep the oldest one open (it doesn't matter what the interest rate is if the balance is paid off).
If you don't currently have any credit accounts showing on your credit report, opening a low balance credit card can actually lift your credit score. Also, if your credit history is less than three years old, work on establishing a good payment history by paying your bills consistently on time.
Limit New Credit Accounts and Inquiries
Every time someone looks at your credit report, it shows up as an inquiry. There are two types of inquiries, soft and hard. If you order your credit report, it is counted as a soft inquiry, and won't affect your credit score. Other types of soft inquiries include inquiries for promotional offers (such as credit cards or insurance), account reviews by your current creditors, and internal inquiries by the credit bureaus.
Hard credit inquiries occur when you authorize a company to review your credit report. This happens when you apply for a bank loan, credit card, lease, or cell phone. Hard inquiries may also appear if the IRS is auditing you or if a collection agency is trying to collect a bad debt.
Hard inquiries deduct from your credit score, so you want to keep them to a minimum. If you will be shopping around for the best rate on a loan, do it within a short period of time. Inquiries made within a few days of each other will generally be counted as one inquiry.
Diversify the Types of Credit In Use
This area accounts for 10% of your credit score, and the different types of credit will affect your score differently. Having a credit card that you consistently pay on time (with a low balance) will help your score. Installment loans, such as a mortgage or car payment, can also help your rating if your payment record is good and you have paid the balance down. Cash loans and finance company credit may deduct from your score because it appears that you might be a high risk and can't qualify for mainstream financing. The best mix is to have one or two major bank credit cards and one or two installment loans.
How long does it take to build up your credit score?
This is not an easy question to answer because it depends on how you handle all aspects of your credit. Generally, there's not a lot of fluctuation during a short period because your score is mainly based on information reported within the last two years. By consistently paying your bills on time, you can see an difference in your score within 6 to 9 months.
But don't get discouraged. It is worth the effort to work on improving your credit score, because a few points can mean the difference between the best rates and a sub-prime loan. Therefore, try to have no late payments or derogatory items on your credit report for at least 12 months (preferably 24 months). Also work on paying down your outstanding balances and don't apply for new loans.
Following the secrets of raising your credit score will benefit you in many ways. Not only will your credit score reflect your efforts, your financial life will be much easier as a result, helping you qualify for the best credit, jobs, insurance, and more.