Financial Fitness

Article 1: Understanding Credit Scores
What is a Credit Score? What does that number mean? How does my Credit Score affect my ability to borrow money?  These are all important questions for American Consumers, and many people don’t know the answers.  This article will give you a basic understanding of the answers to these questions.

First off, what is a Credit Score?  A Credit Score is numerical calculation of a person’s credit history.  It uses software called FICO (Fair Isaac Corporation) to determine a persons’ estimated credit risk in borrowing money.  The higher the credit score, the lower the risk to the lender that the borrower will fail to pay, or “default” on a loan.

There are three major Credit Reporting Agencies.  Although each uses the same basic formula, the results are likely to be a little different at each agency.  The score is calculated with the FICO software by using a person’s social security number to determine that person’s financial history.    The most significant factor is the payment history; that is, whether the bills are paid on time and whether there are any unpaid or “delinquent” accounts. These factors account for about 35% of the final number. The next most significant factor is how much is owed on all existing accounts or the “current debt load”. This helps to evaluate whether the person is currently overextended. This accounts for about 30% of the final number.  Another factor is the length of the financial history, or the total length of time that all accounts have been tracked by the reporting agencies, and it accounts for 15% of the final number. The longer the length of good payment history, the higher the number.

Finally, reporting agencies look at types of loans and the number of new accounts that have been opened. Each of these factors accounts for 10% of the score.  Agencies reward higher numbers to those who have a mixture of account types (installment, mortgage, revolving) than those with numerous accounts of the same type (revolving charge cards, for example). Reporting agencies also look at how many new accounts have been opened recently in comparison to the total number of accounts. This is why that 10% off for opening a new charge card may not be such a good deal in the long run.  Also, a significant number of new inquiries on an individuals credit score or an unusually high number of new accounts can lower a person’s Credit Score.

Now we know the factors that make up a credit score, but what does the number mean?  To clearly explain credit scores, you must also understand the scale. Most scores range from 340 to 850. The higher the score, the better. An excellent score is typically viewed as 700 or above. Borrowers with FICO numbers in this range will be offered the best financing options and mortgage rates. About 30% of Americans have scores from 600-699. Plenty of financial institutions are willing to work with people with some blemishes in their financial histories. However, people with numbers under 500 will pay more in interest rates and fees if they are approved for credit. Banks and other lending institutions typically use the middle score from the three supplied by the reporting agencies to evaluate and process loan applications.

To find out your Credit Score, you can request a copy of your credit report from any of the three major agencies.  Be sure to read the report thoroughly. Report any inaccuracies to the agency immediately so that they can investigate the account and make the necessary changes. In addition to lending rates, your score can affect your search for employment. Know your Credit Score and work to keep it healthy to give yourself every advantage in building a good future for yourself and your family.

Article 2: How To Improve Your Credit Scores

Your Payment History

• Always pay your bills on time as late payments play a major role in driving down your score.
• If you have past-due bills now, get current and stay that way.
• If you know you will have a problem paying a bill on time, contact your creditor as soon possible. Work out a payment arrangement and negotiate with them to keep at least a portion of the late notations off of your credit reports. 
• If your situation is serious, seek out a legitimate, non profit credit counselor. Avoid agencies that promise a quick reversal of your credit problems for a fee as they are often scam artists.

How Much You Owe

• Keep your credit card balances low. If possible, pay them off each month.  High debt-to-credit-limit ratios drive your credit score down.
• Pay off debt, don't just consolidate it. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.
• Don't close unused accounts, because zero balance might help your credit score.
• Don't open new accounts.  Having a lot of accounts can lower your credit score.

Length of Your Credit History

• Time is the only thing that can improve this aspect of your scores, but you can manage it wisely. Don't fall prey to “save 10% when you open a new account”.  Opening several new accounts in a short period sends up a red flag that you might not be able to handle your credit responsibly.

The Types of Credit You Use

• Agencies reward higher numbers to those who have a mixture of account types (installment, mortgage, revolving) than those with numerous accounts of the same type (revolving charge cards, for example).  A mixture of loan types can help raise your score if you manage the credit cards responsibly.
• Having many installment loans can lower your scores since payments remain the same until balances are paid in full.
• Don't open new accounts just to have several accounts or to attempt a better mix of credit.
• Closing an account doesn't remove it from your report. It may still be considered for scoring purposes.

Manage New Credit Wisely

• Several credit inquiries during a short period means you are attempting to open multiple new accounts, and that lowers your credit scores.
• Credit scoring software usually recognizes when you are shopping for a single loan within a short period of time, such as a home loan. If multiple inquiries are necessary, have them pulled as closely together as possible.
• Checking your own credit report does not affect your scores.
• Do try to open a few new accounts if you've had credit problems in the past. Pay them on time and don't max out your credit limits.

Using these techniques, you can maintain and improve your credit score.

Article 3: Correcting Credit Report Errors

You pulled your own credit report, and discovered errors in one or more of the reports, or even worse, accurate references to late payments or other negative issues that lower your credit scores. Don’t panic! Credit report errors can be fixed, and it's possible to remove many negative items too.  You can even do it yourself.

How To Dispute Errors on Your Credit Report

1. Make a copy of your credit report and circle every item you believe is incorrect.
2. Write a letter to the reporting agency (the address will be printed on the report). Explain each dispute and request an investigation to resolve the issues. If you have supporting paperwork, send it along, coding pages to match dispute paragraphs. Send copies and keep your originals.
3. Send your letter and supporting documents by certified mail, return receipt requested, in case you later need to prove it was received.
4. Send a similar letter of dispute to the individual creditors whose reporting statements you disagree with.  
5. Check your billing statement to find the correct address for disputes.  It is usually different from the payment address. 
6. If your dispute involves personal information, such as your current address, enclose a copy of your driver's license or a utility bill in your name to verify your residence.

The reporting agency will initiate an investigation, contacting your creditors to verify the accuracy of the information. If the creditor cannot verify that the entry is correct, it must be removed. When the investigation is complete, the agency must send you a free copy of your report if changes were made.  If the investigation uncovers an error, you have the right to ask that a corrected version of your credit report be sent to everyone who received the report during the past six months.
If the reporting agency says the original information is correct and disagrees with your dispute, it must provide you with a written notice that includes the name, address, and phone number of the person who made the report.  You have the right to get specific information that allows you address specific issues.  If you receive a standardized report that is not specific to you, keep trying.  If you still disagree with the credit reporting agency, you can initiate a second investigation.  If your attempts to correct an entry are still unsuccessful, you can ask the reporting agency to insert an explanation that explains your side of the story.  Keep your comments to 100 words or less.
Keep in mind that bankruptcies remain on your credit report for ten years, while other types of entries are generally reported for seven years. If you have brought an account that was previously passed due up to date and having been paying on time for a year or more, your creditor might agree to an early deletion of the past due references.  The most effective method is to write a letter to your creditor and request that the negative entries be removed. They'll often meet your request if they see you are up to date and handling your account responsibly.