Understanding Credit This is a simple guide to understanding your credit and how to ensure a healthy credit rating for major life purchases including vehicles and homes.
What's In Your Credit Report? <ul><li>Personal Identifying Information
Collection Items </li></ul>
Personal Information <ul>Personal information includes: <li>Name and Address
Social Security Number
Date of Birth
Updates to this information comes from data collected by your loan officer. </li></ul>
Credit Accounts <ul>When taking out a loan or opening a limited account, those figures are reported in this section of a credit report. Data provided by the originating bank includes: <li>Type of account (mortgage, vehicle, credit card, student loan)
Date account was opened
Credit limit or loan amount
Payment history </li></ul>
Inquiries <ul>This section of your report lists all companies who have accessed your credit worthiness over the last two years. There are three types of inquiries: <li>Soft – Initiated by you through a credit reporting Web site, such as MyFico.com.
Voluntary – You have requested a loan or credit card and the bank is accessing your report to establish a new line of credit.
Involuntary – Bank requested report to solicit a 'pre-approved' credit card. </li></ul>
Public Records <ul>Public records reflected upon a credit report include: <li>Bankruptcy
Foreclosures and Repossessions
Collections <ul>Any time a person defaults on an account, it is handed off to collection agencies aimed at receiving those funds on behalf of the original account holder. Those accounts note: <li>Amount of defaulted debt
Applying for Credit <ul>Applying for credit drops your rating. <li>Typically people who apply for multiple credit accounts in a short period are considered “desperate” and the multiple inquiries will drop your score 5-50 points, depending on the number of banks accessing your report.
Those inquiries will remain on your credit report for two years.
You can regain those points by not requesting any new credit accounts until prior inquiries drop off. </li></ul>
What about rate comparisons? <ul>When you begin the process of purchasing a house, it is common practice to contact multiple mortgage companies to find the best rate, based off your credit score. <li>These inquiries must be completed in a 30 to 45 day period (varies by baking institution), resulting in a loan. </li></ul>
Credit Account are Complex <ul>Managing credit based of the Fair Issac Company (FICO) method is complex, yet simple. Let's look at a breakdown of credit accounts and their value towards your overall credit score. </ul>
What Makes Up My Credit Score? <ul>The following chart is from MyFico.com </ul>
Payment History <ul>The largest factor in credit scoring. If you are maintaining all of your monthly payments, you are increasing your score in small increments over time. Being late on one payment can reduce your credit score by as much as 100 points! </ul>
Additional Payment History Factors <ul><li>Adverse public records (bankruptcy, liens, etc)
How past due any negative accounts remain
Time since past due accounts were added to your report and since payoff
Balance between number of negative accounts (delinquent) and number of positive accounts (paid as agreed) </li></ul>
Amounts Owed <ul>The ratio between the total loan or credit limit amount and how much remains owed factors greatly into your credit score. Additionally, the more accounts you have open, with balances, will lower your score. </ul>
Length of Credit History <ul>The longer your credit history, the better! The top 10 percent of credit scores have a history of 12-20 years. The last 10 of those years represents paying on time, every time. </ul>
New Credit <ul>New credit is not bad, when it is done in moderation. Opening one loan account every couple of years for a vehicle or a new credit card every 2-5 years, reflects well on your credit. You can experience a slight decrease in your credit initially, but it will return and continue to climb within six months, on average. </ul>
Types of Credit <ul>With most every financial decision you make, diversity of accounts is paramount for stability and success. Credit is no different and values the diversity of your own accounts: <li>Mortgage
Retail Accounts </li></ul>
How to Keep Credit Good <ul><li>Eliminate any delinquent balances
Pay your current bills on time, every time
Establish or re-establish a healthy payment track record
Have a hearty 'slice of pie' and diversify! </li></ul>
Negotiating Delinquencies <ul>It is possible to negotiate with creditors to remove negative accounts from your record. <li>Be prepared to make a payment.
If offered a settlement, agree to the dollar amount, but stipulate that the negative item MUST be removed from your report.
Have the agreement in writing prior to paying the debt. </li></ul>
Late Payments <ul>Everyone reaches a point in their lives, prior to understanding full financial freedom and planning where a single payment might be paid late on an account. Once the account is paid in full, with no remaining payments, contact the banking institution and ask that they remove the one late payment. This isn't always agreed to, but when it does, your score can jump 25-100 points! </ul>
MyFico.com <ul>I have referenced MyFico.com a few times throughout this slide presentation. This is the ONLY credit monitoring site I will ever recommend. Not only is it secure, their credit scores are almost always spot-on with every lender I have ever used. Definitely worth the investment to monitor your score through them! :) </ul>