What is Your Credit Score Made Of?

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When discussing about credit and finances, we often hear the term credit score. A high credit score means quick approval, access to better rates, and more opportunities. But what really is a credit score? How do credit reporting agencies calculate a person’s credit score?

You and Your Credit Score

A credit score is a three digit number that is based upon an individual’s credit report. Credit scores range from a low 300 to 850 where 300 to 600 is considered to be a low score and 650 upwards is considered as a high score. Of course, a low score makes a person a “high-risk” borrower and most lenders are not willing to approve applications from people who have a poor credit rating.

There are lenders who grant approval for people with poor credit but these transactions usually require some form of security from the borrower such as a property or an amount of money deposited and held by the lender. These deals are also often accompanied by higher interest rates, lower credit limits, and higher penalty costs to make up for the risks.

What is FICO Score?
FICO stands for Fair Isaac Company, which is the company that came up with the formula used in calculating credit scores. Although other methods are used in the past, the FICO score is the one that is widely used today.

Several factors make up a credit score. These are your payment history, level of debt, length of credit, inquiries, and types of credit contained in your credit report. Let’s take a look at each of these factors and how they influence your total credit score.

Tags: Credit, Made, Score

Home Loan Modifications and Your Credit Score

A Home Loan Modification can help you stop foreclosure and stay in your home. But if you’re like most homeowners, you’re probably wondering how it will affect your credit, and whether in a good or bad way. Unfortunately, there’s no single answer—it all depends on how far behind you are and the kind of mortgage loan modification you’ll be granted.

Best-case scenarios

Technically, since you’re not borrowing any money, a home loan modification won’t hurt your credit score. If you’re paying less in interest, you have a smaller debt burden. And since most lenders prefer an interest rate reduction, there’s a pretty good chance that a Home loan modification will improve your credit score.

The implications are even better if your lender forgives part of the principal, although this is less common. If they write off $50,000 from your loan amount, it will show up on your report as a smaller loan, which can increase your credit score.

The lender factor

Unfortunately, it doesn’t always happen that way. It also depends on how your lender reports the home loan modification to the credit bureaus. Many of them will consider it paid for less than the original amount owed, which will count against your score. If you’re already in foreclosure, the impact on your credit can be substantial. Of course, compared to a short sale or a foreclosure, a Mortgage Loan Modification is still the best way to maintain your credit standing.

Tax implications

One of the early problems with Loan modification is that the amount forgiven is usually taxable. That means if your debt is reduced by $50,000, the IRS views it as income and imposes the corresponding tax. This can catch homeowners off guard during tax season, as many of them don’t know the tax implications at the time of the modification.

Tags: Credit, Home, Loan, Modifications, Score

How to Improve Your Credit Score

To improve your credit score can seem like an impossible task. The scoring model seems to factor in tons of information and makes it seem as if you have no control over your score.

This is incorrect. If you take a few steps you can positively influence your credit score.

1. Remove bad credit items on your report. You must dispute the credit bureaus directly with either a dispute letter or by hiring a service to dispute them on your behalf.

2. Pay off any verified bad credit item on your report. In exchange for your payment have the lender remove the item from your credit report.

3. On time bill payment. It is rumored that missing a payment can damage your score up to 50 points.

4. Open a new credit line. This is best if it is a revolving line of credit, for example an unsecured credit card.

This will also help you build a positive payment history by paying your monthly bill. However if you can not qualify for an unsecured credit card then open a secured card, but make sure it reports to all 3 bureaus.

In addition try to keep your monthly balance at 10% of your available credit. Doing this shows the bureaus that you do in fact use your credit and you use it responsibly.

5. Pay off large debt. Your score will get a bump if you have high available credit to debt. The bureaus want to make sure you are not overextended and by showing them you have available credit your score will get a bump.

These are the only factors you should focus on when improving your credit score. There is one last tip that is surrounded in controversy.  Read more...

Tags: Credit, Improve, Score

3 Ways to Watch Your Credit Score Crash

Have you ever had your credit score crash? I thought so.

We’ve all been surprised by credit reports that weren’t as great as we wanted

them to be.

Here are ways to make sure your credit is headed for bad news (and the ways

to have good news):

1. Don’t Monitor Your Credit

If you know you’re going to be buying a car or home in the next couple of years, it is always good to monitor your credit so that you can know about any potential bad credit marks that might show up in advance of your big purchase.

Many purchasers of a home or car are surprised at the last minute that they don’t qualify for the best credit possible. This is because their loan officer pulls their credit report right before their purchase, with little time for credit repair.

Good news: Credit Bureau monitoring services like Equifax ScoreWatch, Experian’s Credit Manager and Transunion’s TrueCredit will help you monitor not just one but all three credit scores from the major credit bureaus. Monitoring your score in advance can save you thousands.

2. Close All Your Credit Cards (or better yet don’t apply for any)

If you have no credit cards because you closed them all (or because you never applied for them), you are actually penalized 30-50 points or more in your credit score. Credit scores are higher when the credit bureaus can see that you have been offered credit in the past. They see each credit card or line as a “vote” for your credit worthiness. It is usually good to have at least three credit cards or credit lines open. It doesn’t matter if you are using them or not.  Read more...

Tags: Crash, Credit, Score, Watch, Ways