Wouldn't it be nice if we could actually calculate our own credit scores? With hundreds of websites offering to give you your credit score, it has become more and more confusing for consumers to know where to go or who to trust to get their score. Are these scores accurate? Why are the scores different? And why does each website give me a different score? Basically scores differ because according to different scoring models. There is also no consistency in software programs used to calculate the score.
Can we expect to get scores that are similar, no matter where we get them? The simple answer is ?No, we can't.? It is impossible to calculate our own credit score because the Fair Isaac Company and the Credit Bureaus keep the exact formula a secret. However, there are many steps we can take to keep our score as high as possible.
The credit bureaus have different scoring models they use to calculate our scores. Models vary according to what is on your particular report and which bureau is doing the scoring. After your data has been put into the model, then the FICO scoring system is used to calculate your score. Each of the three major credit bureaus use their own different scoring model. Obviously, this results in a variation of the score between bureaus, sometimes a large variation. Further complicating the issue, the credit bureaus can (and do) change the scoring criteria in their particular scoring model any time they choose.
Adding one more factor to an already complicated equation, each service bureau can use a different version of software to pull the reports. For example, automobile dealerships use software that emphasizes automobile related accounts, like repossessions. Whereas banks and mortgage companies use software that emphasizes foreclosures. This is only a basic illustration. There is no way to know all of the complexities of each model and their calculations. This topic will be discussed in detail in our e-book, "Knowledge is Power", COMING SOON!
There are many secrets to the scoring system that Fair Isaac and the credit bureaus do not want you to know. Let?s discuss some things that you should and should not do to RAISE YOUR CREDIT SCORE .
To understand what to do to RAISE your credit score, first you need to know what NOT to do. The following actions LOWER your credit score.
The Dirty Dozen of Credit Don'ts
1. Opening new accounts. No matter what kind of account it may be, it lowers your score for a short period of time, for several reasons. Firstly, there are inquiries associated with opening a new account. Secondly, no payment history on the account is a negative factor. Thirdly, it increases your debt to income ratio, also lowering your score. It takes approximately 4 to 6 months before your score recovers. It's a good idea to allow at least 6 months between opening of any new accounts. This allows each new account to establish 6 months of payment history before the next account is opened. Additionally, it allows the inquiry associated with the account to age, resulting in a less negative impact on the score.
2. Letting your card go over 50% of the total credit limit lowers your score. For example, you have a credit card with a $5,000.00 credit limit, and you have over $2,500.00 charged on it. The more you charge the more the score drops.
3. Opening "Same as Cash" accounts drops the score substantially. In addition to lowering your credit score for the reasons mentioned in #1, these accounts are viewed in the FICO Scoring System as maxed out accounts, with no credit available.
4. Instant Credit. Many of us have been shopping at a department store, and the clerk at the register offers a 5 or 10 percent discount on our purchase if we open a credit account right there at the check out. . See Instant Credit section of this website for details.
5. Finance Accounts. The scoring system penalizes having any kind of finance account. Having finance accounts on your credit report drops your credit score more than having debt in the form of a Visa or MasterCard. These accounts are considered to be much higher risk, resulting in a lower score.
6. No limit accounts. There are accounts that appear on your credit report with NO credit limit. The account has information only in the high balance column. Without the credit limit represented, these accounts are always calculated in the system as being maxed out. Two cards that do this are Capital One and American Express.
7. Authorized User Accounts. Authorized user accounts no longer give points to your credit score. See authorized user section of this website.
8. Bankruptcy. If you have a bankruptcy, make sure each creditor is reporting the account as a bankruptcy account and not as having an outstanding balance. So, always make sure the accounts are reported correctly as "included in bankruptcy."
9. Student Loans. If you have student loans, make consolidate them into only one or two loans, if possible. Closing out several of them in perfect standing and keeping 4 open raises the score significantly. A client of ours raised his scores over 60 points by doing this one thing.
10. Overlimit credit cards. Never go over the limit on a credit card. Not only has it cost you a hefty fee to the credit card company, but also this appears on your credit report as long as the account is on your file, dropping a score, sometimes by as much as 25 points. Always manage your accounts wisely, so they're never close to their limits
11. Closing accounts. If you are paying down or paying off a credit card, DO NOT close the account. If you must close an account, chose carefully. Keep the oldest accounts with the longest payment history open. Close accounts with low credit limits, if possible.
12. Credit Inquiries. Many people do not realize how quickly inquiries can drop their credit score. More than one or two in a 6 month period is too many. People can go shopping for an automobile or a home and drop their scores 100 points. Be aware of anyone pulling your credit report, and always make sure no one is looking at your credit without your verbal or written permission.
There are other actions that can drop your score, but for the purpose of this article, the above list contains the main points of which you need to be aware and keep under control. Other actions will be covered in our "Knowledge is Power" e book.
It?s always a good idea to raise your credit score, but especially when getting ready to apply for a mortgage. There are several things you can do to raise your score in a relatively short period of time,.usually within 30 to 45 days. If you're working with a mortgage broker or banker, they can do what is called a "rapid rescore" usually within 7 to 10 days.
1. Unauthorized Inquiries. Look on your credit report for inquiries. If you have not given these companies verbal or written permission to look at your credit, you can dispute the inquiries with the credit bureaus as unauthorized and they must delete them. The credit bureaus and the Federal Trade Commission frown on unauthorized inquiries
2. Inaccurate account information. Review each account history for accuracy. If a correction would be in your favor, write to the credit bureau to request a correction of the information. For example, balances appearing on accounts that have been paid off, updating charge offs to show "included in bankruptcy," if this fits your situation. Make sure ALL balances are accurate.
3. Months Reviewed. Make sure the "months reviewed" notation is accurate. Often this section of the report is blank or inaccurate The higher this number is, the more reviews it has had. A higher number raises your score. Equifax is the best report to look at, in our experience, for this information.
4. No Credit Limit Accounts. (See number 6 above). Pay these accounts down to zero, but do not close them. Remember these accounts are viewed as maxed out if anything is charged on them.
5. Authorized User Accounts. These need to be removed. Have your spouse call and remove you from the account, then dispute the account is NOT yours through the credit bureau. There will be no reference of you on the account, and it will be deleted from your report. Any unnecessary balances hurt your score.
6. Revolving Balances. Pay all revolving accounts down to under 50% of the total credit limit. Less than 30% is better, and less than 10 % is even better. It is actually good to have a very small balance on the account as long as it's under 10%.
7. Same as Cash accounts. Pay them down to under 50% of the total credit limit if the creditor is reporting the account with a credit limit on the account. If the total credit limit column is blank on your credit report, then you should pay the account off as soon as possible because the account will appear to the scoring system as a maxed out account. Remember these accounts appear as maxed out accounts if there is no credit limit column to use as a benchmark for the total credit limit on the account.
8. Unpaid Collections and Public Records. Paying these off can actually DROP your credit score if not done properly. This will be discussed in great detail in "Knowledge is Power". In most cases if you have a collection that is 12 months old or less, then you should pay it off immediately. If the collection account is over 24 months old then DO NOT pay it off before closing on a mortgage because the scoring system views it as a recently paid collection, and your score WILL DROP. I GUARANTEE it. Pay these type of collection accounts at closing.
I know you think I forgot about the collections aged between 12 and 24 months. What do we do with them? This will be discussed in great detail in "Knowledge is Power". However, for this article, generally if the account is up to 18 months, most of the time , pay it off. If it is over 18 months, then pay it at closing. For a more detailed analysis purchase our e-book "Knowledge is Power".
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