What you may not know about your credit score can hurt you. Did you know that the average American credit score is a 669-699. Sounds great right? It might sound amazing but if you the average person upped their credit score by 50 points, they would lower their mortgage interest rate by .5%. 20% of the US has a credit score below a 520.
Today we’re going to break down a few things you need to know about your credit score.
Things You Need To Know About Your Credit Score
1. Check Your Credit Score
This one is critical to improve or maintain your credit score even though it seems so simple. To seriously know your credit score you need to know your credit report and use an accredited reporting agency. By using The Annual Credit Report website you can get a free credit report. Federal law allows you to get one every 12 months. Sign up for a credit monitoring service to stay on top of your report. These reports are different then your credit score, but are just as important if not more as these are the factors that make up your credit score.
2. Know Your Report
Your credit report is not your credit score, but what determines your credit score. Knowing what is on your report is the best way to defend against identity theft as well. Credit checks do not verify if information is correct. If the computer associates a piece of information with you then it will count towards you. One of the first stages cyber criminals take is to try and get an incorrect piece of information (like an address that you have not been associated with) on the report. These are the items that make up a credit report:
- Identifying Information: Name, Address associated to you, DOB, SSN. Important to Note– If you do not recognize an address or if your name is misspelled by even a letter you can run into merging with other people who have the same name, but aren’t you!
- Trade Lines
- Inquiries- Any inquiry for up to 2 years and the most recent 12 months will have the most weight.
- Public Record- The report will say “No Public Record” if none are on the report.
- Collections- Up to 2-3 years worth of any account gone to collections Pro Tip– In order to “clear up” your report you can request a verification and validation of debt as some collections may not belong on your report. Be aware that paying off an old collection account of more than 2 plus years will cause that account to be “current” on the next report and will lead to a decrease in your credit score (it appears to the computer system as a more recent account that was in a collection status).
3. The Big 3 and You
Staying on top of your credit score and report are crucial to any real estate deal or acquiring and type of loan. Your FICO credit score is determined by factors at the time of the report. It is important to verify your report.
The Big 3 Credit Bureaus (Equifax, Trans Union, and Experian) are in it to make money, they are privately owned, for profit companies and monitoring your credit report is not something they take as a responsibility. The most widely reported complaint of consumers is of inaccuracy on their reports. 90% of credit reports have an error of some kind!
4. Your FICO Score
FICO does 91% of all credit scoring. This is the number score that is a result of all the factors on your report. Your credit score will determine your ability to get the interest rate you want on mortgages and even impacts insurance premiums.
In determining your ability to acquire a certain interest rate your lender will consider this number carefully. 670 and below is counted as sub prime. At 740 or above is the start of what can be used for the premium interest rate.
The average across the United States is between a 669-699 with about 28% of the country being less than 620. Because of these averages and most people being closer to the subprime level many seek out ways to improve their score. A 1% difference in an interest rate for a home can mean the difference of thousands of dollars.
5. Vantage Scoring and Ultra FICO
At any given moment you could have 3 separate FICO scores from each of the credit bureaus. What the Vantage Scoring system is set up to do is to have a single number combined of each of the Big 3’s scores and provide a tri-merged report or Vantage Score.
Lenders have the ability to use this score as well so make sure you are having the conversation with your lender on the score they are using. Consumers can ask for lenders to pull the Ultra FICO score if they are falling just short of a needed score. What this report will include are things like your bank account (checking and savings) and other money market accounts to help possibly give a small boost of your score.
What this also allows is for the lenders and creditors to see much more information than they normally would.
6. Factors Used to Determine Your Score
- 35% Payment History
- 30% Amounts Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of Credit
7. What Can Help Increase Your Credit Score?
- Keep Accounts Open: Especially if the account is all paid up and has been a long standing credit line you have had. The longer you have accounts the better it will do for your score.
- Make Payments On Time: To avoid any extra fees you will want to make sure payment is sent on the due date. You have 30 days before a payment is late.
- Keep Utilization below 30%: This is the balance between how much you owe on all your accounts and how much is available.
- Keeping a Small balance on a Credit Card: This one might shock you. The best course of action is still to pay everything off, but if you were looking for a small bump (5-10 points) in your score, a small balance left on your card actually will help.
- Keep Hard Inquiries to a Limit: Keeping hard inquiries below 1 every 12 months will help your score.
- Home Equity Loan: This gets reported as a mortgage and will actually help your score.
8. What Will Cause Scores to Decrease?
- Closing an Account: First of all, if you close an account with a long history this will significantly lower your credit score. Some people will close an old account they haven’t used and then open a new account for benefits. In turn they have negatively impacted their credit score with decreasing account history, adding a new account, and adding a hard inquiry.
- Payments More Than 30 Days late: A payment that is 30 days past due, or no payment at all, will be reported and your score will drop.
- Utilization is above 30%: If you have an overall usage of more than 30% of your available credit your score will start to go down.
- Adding a New Account: New accounts will immediately decrease your score and will remain down until the account is seasoned for at least 6 months.
- Obtaining a loan or Co-Signing: Once you sign on the dotted line for any loan, including co-signing, you are legally responsible for the FULL amount owed even if someone else is paying for it.
- Home Equity Line of Credit: The difference is that this will be reported as a credit, and maxed out credit at that.
9. Student Loans and Credit Score
It’s important to know how The Big 3 will account for student loans as it relates to your credit score. Because the overall owed amount does have a role, but the reported amount will be 1% of the total balance.
10. What Do Lenders Look For?
When you are applying for a home mortgage lenders will be looking at these items on a report:
- Credit Score
- Housing payment history- Pro Tip: If you are renting make sure there is a paper trail of some sort.
- Late Payments
- Short Sales
- Collection Accounts
- Disputed Accounts
- Public Record
Bonus Tip: National Consumer Assistance Plan
Why the NCAP is important to you is because it caused Experian to launch an investigation where it found that 96% of people’s reports that had some sort of civil judgement, tax lien, or public record was invalid or inaccurate!
So, many still have inaccuracies like this and when fixed it can increase credit score close to 40 points!
If you fall in this category it is critical to understand what can be inaccurate and it can be fixed.