The credit score along with other financial information are utilized by lenders in order to:

1. Make the decision to lend money to you, and

2. To calculate the interest rate you will pay for the loan.

The higher your credit score, the more likely you are to qualify for a loan and obtain a favorable interest rate. Conversely, if you do qualify for a loan with a low credit score, you may pay thousands more in interest than those with a higher score.

Put simply, your credit score is a valuable asset that can save you hundreds of tens of thousands of dollars over your lifetime.

 General Information

Your credit score is calculated using a proprietary formula developed by the Fair Isaac Company or FICO.

FICO applies a mathematical formula to information contained in your credit report to arrive at a credit score. FICO receives payment from the three major credit bureaus, (Equifax, Experian and Transunion) to allow the credit bureaus to use FICO's mathematical formula.

Although the mathematical formula licensed by the bureaus is the same, your actual credit score may vary depending on the credit bureau consulted by the lender.

The variance in credit scores among the three credit bureaus is based on either:

1. The way in which the respective credit bureaus categorize the information scored by FICO and

2. The fact that creditors report your past credit history to one or more credit bureau(s), and neglect to report the same credit history to the other(s).

Therefore, when investigating your credit score, it is important to consult a credit report from each of three credit bureaus. There may be incorrect information in one credit report that will not appear in another one because creditors report to different credit bureaus.

Incorrect information in your credit report results in a lower credit score.

 The credit report and consumer reporting agencies

A credit report is a semi-public record of your credit activities.

It's a collection of information stored and distributed by a consumer reporting agency or credit bureau to prospective lenders.

The information contained in the credit report is also utilized to create a credit score, which in turn, is used by potential lenders to evaluate the creditworthiness of potential borrowers.

There are usually four types of information contained in your credit report:

1. Private Identifying Information: Your full name, any known aliases, current and previous addresses, social security number, year of birth, current and past employers, and, if applicable, similar information about your spouse.

2. Credit Information: This includes the accounts you have with banks, retailers, credit-card issuers, utility companies, and other lenders (accounts are listed by type of loan, such as mortgage, student loan, revolving credit, or installment loan; the date you opened the account; your credit limit or the loan amount; any co-signers of the loan; and your payment pattern over the past two years).

3. Public Record Information: State and county court records on bankruptcy, tax liens, or monetary judgments (some consumer reporting agencies list non-monetary judgments as well).

4. Recent Inquiries: The names of those who have obtained copies of your credit report within the past year (two years for employment purposes).

This information is compiled by a credit bureau (formally known as a consumer reporting agency) through public records filings (such as bankruptcies, judgments, foreclosures), creditor reporting (such as 90-day late payments, loan defaults and charge-offs) and lender inquiries (such as potential auto or mortgage loan inquiries).

A credit bureau is not a governmental agency or even a not-for-profit company but rather a private corporation that collects information and issues credit reports, credit scores and other information about individuals to prospective lenders.

Currently, there are three credit bureaus: Experian, Transunion, Equifax

 How is the credit score is calculated?

The credit score is simply a number from 300-850 utilized by most lenders when making a lending decision and how much interest to charge on a loan.

The credit score is calculated applying a percentage to five different categories of information as follows

1. Payment History.

Your payment history reflects any late or missed payments on any given credit line as well as public record and collection information and how late you were in making those payments.

a. Credit Accounts. With respect to the credit account payment history, FICO takes several different categories of credit into account, such as:

  Credit Cards
  Retail store accounts (Nordstrom, Home Depot)
  Installment loans (auto loans)
  Mortgage and other secured loans

b. Public Record and Collection History.

In terms of the public record and collection history, FICO takes the following events into account:

  Bankruptcy
  Foreclosure
  Liens
  Lawsuits
  Judgments
  Garnishments

c. Late or missed payments:

  How late (60, 90, 120 days)
  How much was owed on the accounts with late or missed payments
  How recently the payments were late or missed
  The number of late or missed payments

The final consideration in the Payment History category is the number of accounts with no late or missed payments.

The more accounts with no late or missed payments the higher your Payment History will score.

2. Amounts owed:

This category is essentially measures the amount of available credit you have on all and each respective credit account. This category measures the following:

  How much is owed on all accounts
  How much is owed on each different account
  The number of accounts with a balance
  What percentage of credit is being utilized on credit cards
  How much is owed on an installment loan (such as an auto loan).

This category is utilized by creditors to calculate your debt-to-income (DTI) ratio. The DTI is the amount of your total monthly gross income that goes toward paying debts.

For example,

Assume a lender requires a debt-to-income ratio of 28/36:

 - Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.
 - $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
 - $3,750 Monthly Income x .36 = $1,350 allowed for housing expense   recurring debt.

3. Length of Credit History:

This category takes the following information into account:

  How long you have been using credit in general
  How long a given credit account has been in use
  How long has it been since you've utilized a credit account

If you are planning on making a large purchase on credit (i.e. home or car), you are advised against opening up more than one other credit account in the weeks/months preceding your purchase. The more accounts opened in a short amount of time in the recent past can negatively impact this FICO category.

4. New Credit:

This category measures not only the amount of new credit you have taken on but also the number and timing of lender inquiries where you have applied for credit. It takes the following information into account:

  The number of recent credit accounts you have opened in the recent past
  The amount of time since you opened your last credit account
  The number of inquiries you have made in searching for new credit in the past 12 months
  The amount of time since you made your last inquiry
  Your recent credit history…is it good after being bad?

5. Types of credit in use:

This category measures the types of credit you have in use.

Your FICO score takes the following information into account:

  What types of credit have you or do you utilize
  How many of each type of credit do you maintain

The different types of credit include:

  Revolving credit such as credit cards
  Installment credit such as auto loans
  Finance company loans such as Household Finance/HSBC loans usually secured by personal property
  Mortgage loans

 Tips for managing and improving your credit score

As you can see, your credit score is based on a wide array of information.

Here are some tips on maintaining and improving your credit score:

  Review your credit report every six months to ensure that all information is true and accurate

  Pay all bills on time

  Get up-to-date on past due accounts as soon as possible

  Pay off monthly charges and keep credit account balances low on all accounts

  Keep unused credit accounts open even if you don't plan on using the account (don't close accounts)

  Don't open several credit accounts in a short period of time

  If you are applying for credit, shop quickly and avoid inquiries over a long period of time

  Re-establish credit slowly, a secured credit card and reasonable auto loan are great ways to establish two separate credit lines (revolving/installment) at the same time

  Keep credit card account balances low so as to avoid interest rate increases and penalties that can eat up available credit limits.

 Who is entitled to view a credit report

Your credit report may only be reviewed by:

(1) You

(2) Creditors who are considering granting or have granted you credit

(3) Employers considering you for employment, promotion, reassignment, or retention

(4) Insurers considering you for an insurance policy or reviewing an existing policy

(5) Government agencies reviewing your financial status or government benefits

(6) Anyone else with a legitimate business need for the information, such as a potential landlord.

 How to obtain your credit score and credit report

Your credit score may be purchased for $14.95 (or more) at the following websites:

www.Myfico.com

www.Transunion.com

www.Equifax.com

www.Experian.com

Your full credit report may be purchased at: www.transunion.com, www.equifax.com or www.experian.com.

A free credit report may be obtained once a year at: www.annualcreditreport.com.

 Disputing information on your credit report

In the event incorrect information appears on your credit report, you must file a formal dispute with each credit bureau where the incorrect information has been reported.

To ensure all incorrect information is corrected, a dispute must be filed with each credit bureau where the incorrect information appears.

Disputes may be filed online with the three credit bureaus listed above.

Websites such as annualcreditreport.com (free) and freecreditreport.com (fee-based) also offer online disputes for incorrect information appearing on a credit report.

When disputing information on your credit report, it is recommended that you provide all evidence that the information was reported incorrectly. For example, if you filed bankruptcy and the debt has not been reported as eliminated in the bankruptcy case, you should include a copy of your bankruptcy court discharge along with your dispute letter.

A sample dispute letter can be found on the Federal Trade Commission website located at: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm.

After filing your dispute, the credit bureau has between 30-45 days to investigate the information.

The investigation begins with the credit bureau sending an inquiry to the creditor who has made an incorrect reporting. The creditor must then respond to the inquiry with information supporting the credit reporting, otherwise the incorrect credit reporting must be removed from your credit report.

In your dispute letter, be sure to include a request that the incorrect information be removed from your credit report.

If the credit bureau fails to remove the incorrect reporting, file subsequent disputes until the information is correct. Another option is to attach a 100 word explanation that will appear on your credit report.

However, this option does nothing to mitigate against the negative impact on your credit score.

 More Information

For more information on understanding your credit score and credit reporting, or to learn how to improve your credit, please feel free to call us at: (206) 442-9500 (Toll-free: 1-800-206-6122).

To receive a free consultation regarding your (or your friend or family member’s) debt problems, please contact us today.