How to Transform Your Credit – The Basics
Almost all credit scores on the internet are worthless and irrelevant. They are not the same scores the lenders see. Go online and get credit scores at 50 different websites, and you will probably get 50 different credit scores. Most, if not all, will be fake. The “FAKE-O” scores will not give you a true picture of your credit health. Only one score will do that.
The key to personal credit is your FICOTM score. FICO is a registered trademark of Fair Isaac Corporation.
The FICO score is used by 96% of the credit and insurance industry, as well as the federal government. Your FICO score is a 3-digit number that reflects your creditworthiness at a given point in time. Literally overnight it can go up or down by 25, 50, 100 points or more. If you have a high credit score, you pay less for credit and insurance.
The FICO Score Range…
- 780 to 850 – Excellent (lowest risk)
- 740 to 780 – Very Good (low risk)
- 690 to 740 – Good (medium risk)
- 620 to 690 – Fair (medium to high risk)
- Below 620 – Poor (high risk)
The FICO Formula
Exactly how FICO scores are calculated is a closely guarded secret. FICO guards the recipe for their credit scores like the United States guards gold in Fort Knox. The good news is (A) we know the factors that go into the FICO score, and (B) we know how to radically increase your FICO score. Let’s discuss the FICO factors first…
35% of Your FICO Score Is Payment History. It sounds obvious, right? You need to pay your bills on time and your credit will be just fine. However, because of changes in the FICO score formula, you can pay your bills on time and still have a lousy score if you do other things wrong, like carry large credit card balances. The information used to calculate the “payment history” factor includes:
Track Record with Lenders. More accounts without negative information.
Length of Positive History. Number of accounts with longer on time payment history.
Length of Time Since Negative Event. A late payment 2 years ago better than 2 months ago.
Public Records. Bankruptcy, foreclosure, tax liens, judgments, are the most damaging.
Severity and Quantity of Delinquencies. One late payment in the last 12 months is less damaging than one charge off in the last 12 months.
30% of Your FICO Score Is Amount of Debt. Most important is the ratio of total credit card balance to credit limit, also known as “utilization.” For example, if your credit card limit is $10,000 and total amount owed is $5000, your utilization is 50%, which is not good. Having 28% or lower utilization should be your goal.
15% of Your FICO Score Is Length of Credit History. The longer you keep a credit account, like a credit card, in good standing, the higher your FICO score.
TIP Never close a credit card account or retail card. Closing accounts lowers your credit score. This is even more important if you have lower than a 725 FICO score. Instead, just put the card away and don’t use it.
15% of Your FICO Score Is Amount of New Credit. This category is directed at people suddenly seeking new lines of credit such as taking on several new credit card accounts in a short period of time. New credit in a short period of time is a ‘red flag’ and it will lower your score.
10% of Your FICO Score is Type of Credit. Having a healthy mix of credit, such as a mortgage, a
The Key to Raising FICO Scores is Adding Points
Think of a FICO score like a batting average. In baseball, strikeouts, walks, hits, home runs are all part of the equation. If you get a hit, you will add to your batting average. But strikeouts will lower your average.
It works the same with your FICO score. Positive information, such as paying a car loan on time for 24 months or paying a home loan you on time, adds points to your FICO score. Negative information such as collections, bankruptcy, judgments, etc., are “strike-outs” which decrease your FICO score.
Only Information from Credit Reports Make Up FICO
The only information that makes up your FICO score is the information on your credit report. The three credit bureaus – Equifax, Experian, and TransUnion – collect credit information from credit card companies, banks, mortgage lenders, courts, public records, IRS and debt collectors and report it. And the FICO formula takes the information and spits out a three digit score.
FICO does not consider income. If you make a million dollars a year, you can still have a lousy FICO score. FICO does consider race, religion, age or occupation. FICO uses only information from your credit report. Period.
There is a FICO score from TransUnion, Equifax and Experian. The three FICO scores may vary slightly because information on your Equifax credit report may not contain the same information on your Trans Union or Experian Report.
Mortgage companies and banks may take the middle of your three FICO scores and ignore the highest and the lowest. Thus, if your Experian FICO is 702, and your Trans Union is 709, and your Equifax is 699, a creditor may consider 702 (the middle score) and ignore the 699 (lowest) and 709 (highest).
The Auto Industry Credit Score
The auto industry has its own FICO credit score. This score looks at your payment history for car or truck loans. A FICO score pulled by a consumer may not be the same as one pulled by a car dealer if the dealer is looking only at the auto industry specific score. However, if you have a good FICO score, you can get an excellent deal on vehicle credit whether the dealer uses the industry specific score or the standard FICO credit score.
TIP Some automobile dealers play games by using the lower of the standard FICO score or the “FICO Auto Industry Option” score to base a credit decision. Before you ever complete a credit application, pull your own FICO scores from www.MyFICO.com. Bring those scores with you when you start shopping.
Ask the Finance Manager for the dealer what score the dealer is using to determine your loan rate. Are they using the standard, or are they using the Auto Industry Option FICO? If you think they are playing games, then go to another dealer and speak with another finance manager and show them your scores and ask what kind of credit deal you can get based on your FICO scores. Keep shopping for as long as you need to get the best deal.
You can read about advanced credit score strategies in another article found in the library.
Faith Law Firm helps every client transform their credit scores after the tax problem is resolved. We do this as part of our Total Tax RecoveryTM system.
If you need more information, feel free to contact us at 800 659 0525 or 414 771 9200.