Understanding Your Credit

Understanding Your Credit

Understanding your credit is something of a misnomer. You can't really understand something that has no obvious rules and seems to change every time you get close to figuring it out. The way credit is scored is the biggest bunch of B.S. in the world. The big three credit companies make up their own rules about how they score you and then never tell anyone exactly what their criteria is. It is horribly unfair. We are all supposed to guess at what is going to affect our credit, and then get surprised when we have a low score. How is it even remotely fair that something that affects our lives so directly and so harshly has no published set of guidelines? And to top it all off, they can change their rules whenever they want to.

Below is an excerpt from the TransUnion website on credit criteria, this is all they tell you:

A credit scoring model is developed using several criteria:

Selecting a large sampling of customers.
Analyzing the data in their credit reports to determine which factors relate to creditworthiness.
Assigning a degree of importance to each of the factors, based on how accurate a predictor it is in determining who will repay their loan on time.

This tells you a whole lot of nothing. You can't base what to do to improve your credit based on this. These credit companies are vague intentionally. I don't know why. If you are going to have so much power over other people's lives, you should have a civic responsibility to say what the criteria is.

I want to start off with the three major companies, if you click on the names it will take you to their site's.

If you want a free credit report, which you are entitled to once a year, go to http://www.annualcreditreport.com/. They will make you jump through a ton of hoops, but you will get the report. They make you pay for the score though. It costs between five and seven dollars, a piece, for your scores. They will get your money some way. You do need your score, so bite the bullet and get it.

These are the companies that every lender turns to for your credit score. Your score, not your actual report, is the single biggest factor in determining whether or not to extend credit to you. And they are not the only ones. Credit card companies, insurance companies, cell phone and phone companies, electric companies, satellite and cable companies, and almost every other company you have a payment with, checks your credit to decide whether or not you are the type of person that pays your bills. If your credit is bad, they may charge you a deposit before you are allowed service.

Because credit is so important, you need to baby it. Below are a few things that I've found out that negatively affect your credit score. I found a lot of them out as a loan officer, and some things list on credit reports. I also spent hours on the phone with credit counselors just to understand credit. The counselors made it very clear that what they told me was information collected about credit from thousands of customers. They had to look at tons of credit reports and assume what affected scores. The credit bureaus consistently turn down their requests for factors that impact credit as well. Pay attention to all of them, they are all important:

Inquiries. This is one of the single biggest controllable factors in low credit scores. Every time you apply for credit your score is affected. I have been told that one single inquiry can lower your score as much as five points. The really bad part is that credit card companies can check your credit as much as they want to to make sure that you are still an acceptable risk and that they don't need to increase your interest rate. It's ridiculous that if your credit is going down, which is a sign of financial struggle, means that credit card companies think your interest and your payment should go up. And when you apply for a loan, mortgage companies tend to pull your credit more than once. I applied for a refinance mortgage a few years ago. In the two weeks they were working on the loan, the mortgage company checked my credit 13 times. They lowered my credit score 56 points. With my new lower score, I couldn't even qualify for the loan. I qualified easily for it before they checked my credit. It took over six months to get my score back up any at all. Most of the credit bureaus will hold inquiries against your score for at least six months to a year. Whenever you apply for a loan, make sure you insist that your credit be pulled only one time. They will try to tell you that more than one inquiry from the same company won't hurt you within 30 days, but they are lying. It absolutley lowers your score. Right now I have 5 inquiries on my credit from mortgage companies when I authorized only two of them. Once they get your social, they will do what they want with it.
Opt Out. Whenever you get a credit card offer or home loan offer that says, "pre-approved", they have most likely checked your credit. While this doesn't affect your credit as much as an authorized inquiry, it can hurt. Check on the back of some of those offers and look for the info on Opting Out of hard credit offers. It's a phone number you have to call, but I swear to you it's a good idea. Then companies aren't supposed to pull your credit to send offers to you. It also greatly reduces the "junk mail" you get from creditors.
Protect your social. Every single time a company calls you and asks for your social security number, they plan on checking your credit. DO NOT give anyone your social EVER! Unless you know and trust the company or person asking, protect your social at all costs. You don't need the inquiries on your credit. And I promise you if you give it to them, they will check it, no matter what they say.
Credit Cards. You have to have a credit card today, there is no doubt about it, but you don't need ten of them. The more open accounts you have like this, the more your score is affected. This is a double edged sword though. If you have open accounts, and you close them all at once, then your score goes down. It is a sign to the credit bureaus that you are in financial trouble. This is the dumbest thing I have ever heard. You are trying to be responsible and get rid of credit cards and you get penalized for it. I closed down three accounts at one time and lost 20 points off my score. If you want to get rid of the cards, just pay them off and cut them up and don't use them. This can raise your score because it shows the credit bureaus that you have access to all this credit and you don't use it. That makes you appear very responsible. And, if you owe more than 33% of the balance, your score is also affected. I have only one credit card. It has a $15,000 limit that currently has a $6,000 balance. When I pulled my credit at http://www.annualcreditreport.com/, one of the remarks was "balances on revolving credit accounts negatively affected your score". It wasn't even half of the credit limit. Just remember, anything over 1/3 of the limit can lower your score. Just control the balances and your score will go up. If you want to use one, try and pay it off every month. This makes you look like a financial genius to credit bureaus and it can save you tons in interest.
Amount owed. The amount you owe on your credit between mortgages, credit cards, car loans, and everything else that ends up on your credit, is important too. If you have a million dollars owed on your credit and you work as a laborer, it can hurt you. Right after my wife and I got married we bought a house. A few months later we wanted to buy another one so our credit got pulled again. The only thing that had changed was the house going on her credit and her score lost over 50 points. After that, we knew that we couldn't put her on any more mortgages because her income couldn't handle having a debt that big on her credit. The credit bureaus keep track of your employment and assume what kind of money you make. If you owe way too much compared to your income then it lowers your score because they assume you can't afford it or that you are over extending yourself. We keep my wife's credit score up by not putting anything on both of our credits. If you and your wife are on something together, then the entire debt counts against both of you, not half of it for each of you. Why let one debt hurt you twice? If you don't need your spouse's income to qualify for a loan, especially a mortgage, then you should consider not adding them to the loan. You can always put them on the deed to the home or title to the car, just don't put them on the loan unless you have to.
Mortgage lates. It is getting easier than ever to buy a home, even if you have less than perfect credit. More and more lenders are able to offer mortgages to people that a couple of years ago would have had no chance at getting one. I know for a fact that you can get 100% financing with a 580 credit score. When I bought my first house, I had to have a 680 to be considered. Even though it is getting easier, there is one thing that will stop you in your tracks no matter what your score is, a mortgage late. When I was doing mortgages I had to turn down a 700 credit score because my customer had one 30 day late on a mortgage payment. Just one. There was nothing else wrong with his credit. No matter how much money you make or how good your credit is, 95% of lenders WILL NOT give you a mortgage if you have any 30 day lates on your mortgage payments in the last 12 months. If you absolutely have to be late on something, don't let it be a mortgage payment if you plan on buying a home in the next year.
Late payments. I mentioned inquiries being one of the most important factors affecting your credit, well the most important factor is paying your bills on time. Credit bureaus have three different lates, 30, 60, and 90 days. Each one affects your score more than the other. Every one of them are bad. Be warned, just because it says 30 days doesn't mean that you get 30 days before you get a late mark. The companies that report your payments to the credit bureaus have different criteria for what they consider late. Some companies don't report a 30 day late until you are 30 days late. Others, however, report any late at all as a 30 day late whether you are 30 days late or not. About 90% of credit card companies report a one day late as a 30 day late. And guess what you can do about it? NOTHING. Try to make your payments a few days early. If they are always early, then they are never late. I know it sounds simple, but it is key.

If your credit is screwed up then you really need to work on fixing it. If you have overdue payments, then get them caught up. If you have late payments that weren't late, then go to the credit bureaus' website and find out how to file a dispute. That goes for anything on your credit that is wrong. If you have proof that they are wrong then they will correct your credit. If you have no proof then you can write an explanation to have posted with your credit report so any time your credit is checked then whoever checked it will see the explanation. If you have too many inquiries then you will have to wait for them to drop off. Just stop applying for credit for six months or so and they will stop affecting your score. Remember that anything affecting your credit will stay on your report for SEVEN years. But, after two years from the time it's paid off it stops affecting your score. So, pay everything off that is overdue and keep everything paid on time, and worse case scenario is that in two years any problems on your credit won't be held against you anymore.

Some of the stuff mentioned here may sound obvious, but they are all important. If you take your credit serious then a whole new world of opportunities will open up for you. With better credit you will get lower interest rates and lower payments, better terms on credit, and more acceptances for almost any credit you apply for. You can also say good bye to all those deposits you have to put down on cell phones and utilities. Also, you won't have to worry about landlords doing credit checks when trying to get a rental. It is a whole new world when you have good credit.

If you have any questions on credit or anything else, then you can feel free to call me at 240-298-2977, or e-mail me at greyn10@msn.com. Even if I can't help you buy a home right now, it will be my pleasure to help you with your credit. If there is something I don't know, then I can find someone that will know. If you've gotten in over your head with debt, then you should consider a credit counseling service. The one that gave me some of the info in this article is The Freedom Point, ask for Penny. Click on the link or call 1-800-437-3336 ext. 7684. I don't know exactly how their services work, but they were really knowledgeable when I talked to them. I hope this article helped, after all, it's time for it to be about you.

Greg Reynolds, Jobin Realty

If this article helped, let me know. If there is something you would like to know about, just e-mail me, greyn10@msn.com, and I will do my very best to get you the answers you need. I am available 7 days a week.