Credit Scores

In this article about credit scores, we cover the elements that comprise a credit score and what you can do to improve your scores.

The advice on the payment history piece of the credit score is obvious to most everyone while the advice on how to improve other areas of a credit score may come as a surprise to many. Payments history is the number one factor in credit scoring accounting for 35% of the score.

Here are some tips for improving your score:
1. Pay your bills on time (Hopefully this needs no explanation.).
2. Get current on all your bills and stay current. Obvious advice, however it is important to understand that recent delinquent payments are much more destructive to the credit score than older late payments. Time heals almost all wounds and late payments are one of those wounds.
3. Collection accounts can be the single most devastating factor to the credit score of a creditworthy borrower. Specifically, collection accounts that have been paid off yet still show a balance on the credit report. If collection agencies were one-tenth as vigilant about accurate credit reporting as they are about harassing to collect a debt, our jobs would all be much easier. Taking the proper steps to have these accounts show up “paid” in full instead of “balance owing” can be the difference between a 680 and a 580 score.

Amounts Owed – Impact To Your Credit Score

Amounts owed accounts for 30% of a credit score. Here are some tips and advice on how to improve in this area. Some credit is more important than other credit. For example, a mortgage is the best type of debt to have, yet the worst to be delinquent. Whereas a debt with a finance company hurts the credit score most, these late payments appear to have less of an adverse effect upon the score. The unofficial “hierarchy of credit” in the credit-scoring world seems to be as follows:
* Mortgage
* Student Loans
* Installment/Lease Debt
* Major Credit Cards
* Department Store Cards
* Finance Company Debt

The more debt a person has at or near the top of the list, the better. However, late payments on these accounts hurt the score to a higher degree as well.

Length of Credit History

Length of credit history accounts for 15% of a credit score.
1. Do not open several new accounts too rapidly, especially for younger people with a relatively short credit history to begin with. Rapid buildup of credit appears risky and will hurt the score.
2. New accounts will lower the average age of a person’s accounts thereby reducing the credit score.
3. Keep in mind that a credit score is based entirely upon an individual’s credit history. Income, Assets, Race, Sex, Age, Religion, Political Affiliation and Music Preference are not factors. Or so they say… Age is obviously a factor in credit scoring if only because of the importance of the length of credit history.

How many people under 40 have you seen with a credit score over 800?

New Credit

New Credit accounts for 10% of a credit score.
1. If shopping for financing, do it all in a short period. Credit scores distinguish between a search for a single loan and for multiple new lines of credit. In other words, if you go car shopping on Saturday and every dealer on “car row” checks your credit, it will only count as one inquiry. On the other hand, if you apply for six Visas, seven Master Cards, Discover, Diner’s Club, and American Express all in the same month your score will plummet. Lending tree does the same thing, so beware of theses internet-based lenders!
2. Requesting your own credit report will not affect the score if you obtain it directly through the reporting agencies or an organization authorized to provide credit reports to consumers.
3. People who have experienced credit problems in the past should open a few new accounts in order to raise their score. Too many too soon, however, can hurt the score.

Types Of Credit Use

Types of credit accounts for 10% of a credit score
1. Do not open accounts just to have more available credit. This usually backfires.
2. It seems that having about five open revolving accounts seems to be the best for a credit score. More than that indicates risk of over extension while less indicates a lack of ability to obtain credit.
3. Closing accounts will not make them go away. They will still stay on the credit reports for seven years.
4. Closing unused revolving accounts can be beneficial only to get down to the optimal five open lines to revolving credit.

How to Fix a Credit Report

In order to fix incorrect credit information, a consumer has two choices:
1. The First choice is to deal with the creditor directly and rely on them to update the credit information to all three bureaus. This is easy; however, like so many “easy ways out” it does not always work. Creditors are not always reliable in correcting information with the credit bureaus.
2. The other choice is to take matters into your own hands. This option is far more time-intensive, but the results will usually reflect the effort. You must contact all three bureaus directly and work through them to correct the information reflected in the credit report. The entire process takes 45-60 days.

How to Fix It on Your Own

First, you order your report directly from the bureau. Once you receive the report, check it for accuracy. Send a letter along with documentation to each of the the three bureaus disputing the information. The credit bureaus have thirty days from receipt of the written information to update the individual’s credit profile. Borrowers can contact the credit bureaus by phone or internet:
EFX-Equifax: 800-685-1111 or
XPN-Experian: 800-583-4080 or
TU-Trans Union: 800-916-8800 or
The reports are free of charge unless a consumer requests their report multiple times within the same year.

Review this information on how to Improve Your Credit Scores.

Bureau VS. Reporting Agency

Credit Bureaus and Credit Reporting Agencies- there is a huge difference between the two. Credit Bureaus (Equifax, Experian, and Trans Union) are the source of all credit information available to us or any other creditor. Each of the different bureaus have their own scoring systems, which are virtually identical, but each bureau will have somewhat different information on the individual at any given moment. Hence, we throw out the low and the high score and go with the middle score. Credit Reporting Agencies, on the other hand, are the companies that provide credit reports to those of us who need them in order to determine the creditworthiness of a potential borrower. There are several of these companies including Credco, the Credit Network, Credit Bureau Associates, plus thousands of smaller local companies. These companies report information from the bureaus and provide credit supplements to fix credit issues that may be incorrect on the bureau report.

Identity Theft

We have all heard about it and no doubt, there are a few unfortunate people out there who have had firsthand experience.

The following facts were published in Kiplinger’s magazine:

– There were 161,819 identity theft complaints filed in 2002. An 88% increase from 2001.

– 42% of the complaints involved stolen information to commit credit card fraud.

– The average amount of these thefts is $18,000.

-The average time between the information being stolen and the victim discovering the theft is a whopping 14 months. In addition, the average cost is $1,000 to the victim.

– The average victim spends 175 hours working to resolve issues caused by the theft.

These reasonsĀ are why you should go over your credit report line-by-line with a mortgage banker. My lending partners and I all work together to assist you to correct any reporting errors and/or identity theft issues.

Click Credits and Debits: Understanding Practical Money Management for more information.