Wednesday, December 9, 2020

Credit Score Basics


About 10% of the companies that give auto insurance have a higher rate for those consumers with higher FICO credit scores (which are arrived at using the information in your credit report) than for those with lower scores. There is no national credit score, just individual credit scores from each credit bureau or institution.

FICO scores calculate credit information from the following areas of your credit: payment history, amounts owed, length of credit history, new credit and types of credit used. The weight of each factor will depend on the information contained in your credit report, so understanding how each factor affects your score is important.

Your payment history accounts for 35% of your score. This includes accounts that are current, accounts that are paid as agreed, accounts that were referred by a lender, and accounts that were sent to a collection agency. Late payments will lower your score. Your most recent history counts for 30% of your score. It includes accounts sent to collections, accounts referred to a collection agency, accounts the company no longer keeps, and the age of your accounts. Inquiries for new credit accounts for 10%. The amount of a person's average annual Inquiries count for 10%. The number of recent credit applications counts for 10%. The amount of credit used is calculated based on how much available credit you have and what type of credit is used. The percentage of your revolving loan portfolio used is used in the calculation of your credit score (10%). The second largest amount of your score is based on your debt to available credit ratio. The total amount you owe on all of your accounts, and the proportion of your installment loans versus your available credit is used in the calculation of your credit score (10%). Additionally, two other pieces of information can affect your credit score. The average length of time accounts have been open, and the number of recently opened accounts can affect your score negatively if there are too many in a short period of time. The most common mistake people make when filing a dispute about a negative item on their credit report is to contest that all negative information is inaccurate. In most cases, this is not the case, and the negative item can stand, so these should not be disputed every time you receive your credit report and notice negative information. Better to focus on the negative accounts that affect your score the most, and have the most impact on your credit score.

The dispute process is entirely differ from the process of repairing bad credit. When you repair your credit, you are essentially asking the Credit Bureaus (the agencies that maintain on your credit report throughout their investigation) to verify information with the creditor. On the other hand, when you seek the creditor's adjustment or deletion of a negative account, you are asking the creditor to verify the information with the credit bureaus. They have much additional power with the creditor than a credit repair company. Moreover, creditors have the constraint to verify information in their possession, whereas they are not required to do so under the dispute process. These factors make the process of repairing your credit far more forgiving and effective. It can be a true "saint's savior" in many cases.

From what I've seen, the overall process for repairing your credit takes 18-24 months. This is a much better track record than trying to fix your credit for the next five years or longer. With so many people falling victim to bad credit, there is tremendous pressure on these companies and the credit bureaus. People are coming to them with a lot of stakes. Because of this, more consumers are seeing the credit repair path as a viable option to fix what is damaged on their report. Good credit is more vital today than it has been at any other time in history.

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