5 Facts about Credit Scoring

Are you thinking of buying a house or a new car? If you’re like most people, you’ll probably have to secure a bank loan. When it comes to money lending, most financial institutions strive to live by maxim of ‘only good credit need apply.’ Yes, there are lending institutions that will lend to individuals or businesses with very low credit scores (known as ‘bad credit loans’), but these loans often come at a high price. These types of loans frequently come with very high interest rates and exorbitant fees that can end up costing consumers much more than the original purchase. Even if your credit score is not necessarily bad, but just ‘so-so’, chances are you’ll end up paying a lot more than a person with very good credit.

So what exactly do lending institutions consider good credit? Good credit is based on your credit report and the accompanying three-digit FICO credit score.

Your FICO credit score is based on a number of factors, including:

1) Your payment history. This includes whether you have missed any payments, or paid late. Payment history also involves the different types of payments (car, house, different credit cards, etc…) you make each month. Roughly 35% of your credit score is determined by your payment history. A person with good credit probably has a consistent record of paying on time each month over a long period of time, with little or no missed payments.

2) The amount you owe on all your different accounts. Do you have dozens of accounts carrying high balances? Are most of your credit card accounts maxed out? Or can most of your debt be traced to one or two accounts, such as your mortgage and car payments? Good credit is hard to attain if you carry balances on many different accounts. A person with good credit probably only carries balances on one or two accounts.

3) The length of your credit history. This refers to whether you have established sufficient history to provide an accurate portrait of how you manage your finances. Lending institutions want to know whether you have a history of paying on time. Keep in mind that even if you have managed your credit perfectly, if your account is only a year old, it probably won’t raise your credit score immediately. Keep it up for a few years, however, and watch your credit score soar.

4) Types of credit. Another factor used in calculating your credit score involves the types of credit you use. Different kinds of credit include credit cards, mortgages, and installment loans such as car and student loan payments. If the type of credit you most commonly use weighs heavily on credit cards and other high-interest credit sources, your credit score will probably suffer.

5) New or recent credit history. The last factor used to calculate your credit score has to do with your recent credit history. This includes any new credit accounts you may have opened, whether you’ve made requests for new credit, and how you’ve recently managed all of your credit. If you decide to open several new accounts at once, be warned that this may hurt your credit score. A person with good credit most likely does not open new accounts frequently, but rather has a long history with a few accounts that are in good standing.

Now that you have an idea of what good credit looks like, how can you improve your chances of getting a loan if your credit is less than stellar? First, obtain a copy of your credit report. Your report is available from any of the three major credit reporting bureaus—Experian, Equifax, and TransUnion. By law, you can obtain a free copy of your credit report once a year, but additional copies will cost you approximately $13. Review your credit report carefully and contact the credit bureau if you spot any errors or omissions (be prepared to provide documentation).

Remember that so much of your credit score depends on your payment history. The importance of paying your bills on time, every month, cannot be stressed enough. Many banks offer you the option of scheduling automatic payments each month. Make use of these, if your financial situation allows. Also, don’t open new credit accounts if you don’t intend to use them, and don’t open and close accounts frequently. Instead, focus on using responsibly the accounts you already have. This alone will raise your credit score, and make you much more likely to get best loans from lending institutions.

It is the nature of family to love and protect each other – but how does that transfer to the financial realm? Is your family obligated to help you with your financial debts? Are you obligated to help a family member who is overwhelmed with mortgage payments or saddled with massive credit card debt? Though the answer to both of these questions is probably no, it is a much more complicated than a simple yes or no answer. You and your family are not obligated to help each other with financial problems, but most people would like to help their loved ones with a crisis if it is within their means to do so.

When you face financial problems, it is probably tempting to turn to family first, rather than face the impersonality of a bank or other lending institution. But do family and finances really mix? Financial debts to family members can complicate even the best relationships and in extreme situations it can result in nasty arguments and the severing of familial bonds. Some of the most common arguments families have are over money. On the other hand, borrowing money from family and having that security can ease the stress of any financial crisis. If family members have the money you need in their savings account and are willing to lend it to you, then why not pay the interest to them instead of the bank?

Right from the start, you need to be realistic about your financial situation. As the person looking to borrow money, you should ensure that you have cut back on non-essential expenses and have exhausted all the possibilities before approaching family members for money. As the lender, you must also take a close look at your financial situation and make sure you have the money to offer to your family member. If it is not within your means to help them, then you must say so. There is no point both of you going into debt just because you have the desire rather than the means to honor the request for money. It is hard to say no to family, but sometimes it is necessary.

Where most families go wrong with lending to one another is a failure to establish firm guidelines and rules. You need to be very clear from the start whether this is a gift or a loan. If you give money without specifying which it is (a gift or a loan), then the other person may just assume it is a gift. If you need the money back down the road, he or she may not have the means to repay it, because there was no understanding at the start that the money would have to be repaid at some point. Even though you are dealing with your mother or father or your daughter or your son, you still need to treat the arrangement as you bank or lending agency would. You need to write down the amount being lent and the agreement you have made concerning the amount to be paid back and the amount of time that repayment will take. Writing it down will solidify the arrangement and ensure that no one is taken advantage of.

You and your family should agree on a reasonable interest rate and you should also consider arranging monthly payments (as you would with the bank or other lending institution). It is better to pay the money back gradually over time rather than try to gather one lump sum.

If you are the one borrowing money, you need to make sure that they money is used only for the thing it was lent to you for. If you have borrowed money for the down payment of your house, then all of that money needs to be put into the home, not a new pair of shoes or vacation to the Bahamas. Problems arise when family members think that they money they have lent is being misspent or mismanaged.

As you can see, family and finances can mix if you take a few precautions and clearly outline the expectations on both sides. It is worth putting in the extra effort to prevent uncomfortable holiday dinner scenes.

The 5 Percentage Breakdowns

Those looking to secure a loan learn very early how important a credit score really is. It can determine whether or not a lending institution approves your loan application, and your credit score also influences the interest rate offered to you by a bank or other lending company.

A credit score is a number assigned to you based on an analysis of your credit history. All of your credit history information is entered into a computer. The computer analyzes that information and then assigns a number. The major credit ranking agencies do not use the same software so you might be assigned a slightly different number at each of them. Credit scores are sometimes referred to as FICO scores. This is because Fair Isaac Corporation (FICO) developed the software most commonly used to determine credit scores.

What aspects of your credit history matter most when you’re FICO score is calculated? Different factors are assigned different percentages in the calculation of your overall credit scores. Your payment history, amounts owed and the types of credit you have are all factors in your personal FICO score. Here is an approximate percentage breakdown:

Payment History

Things like records of amounts and schedules of payments (including late payments) accounts for 35%. Lending companies see the length of time you’ve been past due as well as the amount of time since you had a past due payment.

Amounts You Owe

Any loans or a debt that you have outstanding is 30% of your score. Lending companies have a chance to see how many accounts you owe money to and what balance you currently owe. They also take a look at your credit lines and for indications that you might currently (or in the recent past) have been overextended.

Length of History

This area accounts for 15%. Lending companies see how long your accounts have been open and how much time has passed since there was activity in your accounts. The longer and better your credit history, the better your scores will be in this area.

Types of Credit

The number and types of accounts you have makes up 10% of your FICO score. You will receive a better score is there is a variety of account types rather than just credit card accounts.

New Credit

This area is also worth 10% of your credit score. Under this heading, lending companies see the number of new credit inquiries you have made and the number of accounts you have opened recently. Banks and lending institutions want to ensure that you are not trying to open a lot of accounts at the same time and overextending yourself and your financial obligations.

Now you might be wondering, what is considered a good credit score? Credit scores usually fall between 350 and 850. The higher your score is the better. The higher your score is, the less of a risk you are perceived to be. Banks and other lending institutions feel they are more likely to get their money back from people with high FICO scores because these kinds of people have a good history of managing and meeting their financial obligations. The less of a risk you appear to be, the more likely you are to have your loan application approved.

Have can you improve your card score? It takes time, of course, but it’s never too late to start practicing proper financial management strategies. Make sure you pay your bills on time and keep your credit card balances low. Also try to avoid opening a lot of new accounts in a short period of time because this can alter the score in the new credit section of your FICO score. Lending institutions are looking for people that are able to successful manage their financial matters so it takes time to make a favorable impression if your current credit report and score are poor.

You also want to take a close look at the information on your credit report and ensure that it is all up-to-date and accurate. If the credit agencies have incorrect information to plug into the computer, then your FICO score may not be correct.

Credit and debt can be difficult for anyone to handle, but you need to remember that it is not only the amount of debt you have that influences your FICO scores, but also the manner in which you manage it.

Foreclosure begins when a property owner defaults on the mortgage of a property, mainly due to financial difficulties or the inability to keep up with the mortgage payments for some reason or another. In the event that a property succumbs to a foreclosure, it’s most likely that the property has not been maintained as it should have been. This means that perhaps the roof is in dire need of repair, a damaged foundation or the landscaping has been severely neglected, or a number of other maintenance or repair issues that may be costly. Some foreclosure homes may only need a fair amount of TLC. The amount of repairs needed or required for the foreclosure property may greatly reflect on the asking price. A major fixer upper may be offered at a lower than normal price, whereas a property that is in fair condition may go for a price just the below the market value.

When a mortgage lending institution decides to foreclose on a property, they will file a notice of default that will become a public record for all buyers who are interested in locating foreclosed properties for purchase. There are many places buyers can look to find foreclosed properties such as: various web sites on the Internet, real estate agents or brokers and real estate magazines.

Once the buyer locates a foreclosed property they are interested in, the buyer can assess the public records and check for any liens on the property. Most liens that are placed on foreclosed properties are for unpaid taxes. Interested buyers should also check the values of the neighboring properties before entering into a contract, to make sure they would be getting a fair market value.

Novice buyers may be interested in checking out bank owned foreclosure properties. These bank owned foreclosure properties may prove to be at lower risks to the novice buyer. With bank owned foreclosure properties, there are usually no tenants to evict, no liens against the property and no past due taxes.

Some lending institutions may be eager to sell their foreclosed properties and may offer to finance the foreclosed property to the buyer at a low market rate or with a small down payment. If the lending institution has already done an appraisal, the interested buyer may not have to pay an additional appraisal fee. Most lending institutions that are eager to sell a foreclosed property may also include title insurance that generally removes most of the risks that come with buying properties early on in the foreclosure process.

The more experienced buyer may decide to find a pre-foreclosure property owner about to go into default and offer to buy the property for a portion of the difference between the property equity and the market value. This may be an acceptable offer to a property owner who doesn’t want to end up losing all of the equity that has been invested in the property. Some pre-foreclosure property owners may offer bargains to a persistent buyer. This is mostly because at this stage, credit collection agencies are constantly hounding the property owners, who would in turn want to resolve these issues to avoid any further harassment.

Buyers may sometimes find that contacting the owner of a pre-foreclosed property can be difficult. Usually by this time, the property owner may not have any electricity or a telephone. Sometimes these pre-foreclosed property owners may also be difficult to deal with directly, due to a drug or alcohol addiction that put them in their situation in the first place. Some owners may also be hostile to the buyer or unpleasant to deal with because they are bitter and frightened about losing their home and perhaps they have no other place to go. Some of these owners may even see the buyers of their foreclosed properties as their mortal enemy and may do some extra damage to the foreclosed property before evacuating the premises.

Many foreclosed properties are normally sold at prices close to the assessed value. Depending on what city or neighborhood the buyer is interested in, what the neighboring property values are, how long it has been on the market and what amount of work needs to be done to the foreclosed property will greatly reflect on the asking price.

Ever wonder just how far-reaching your credit score really is? The short answer: very. Your FICO credit score affects nearly all of your financial dealings, from the annual percentage rate that you pay on your credit card to whether you are able to purchase a cell phone.

Your credit score is of particular interest to lending institutions. Nearly 75 percent of all lenders assess your credit score when determining whether to grant a loan. If you plan on ever buying a house and car, or purchasing car or homeowner’s insurance, expect lenders to examine your credit score very carefully. A bad credit score will make most lenders think twice—they don’t want to lend to individuals who appear to be a risky proposition. A bad credit score could keep you from getting that dream house or purchasing a new car, and could even threaten the possibility of getting a job. So what’s the easiest way to ensure that you’ll be approved for a loan? Become familiar with your credit report and score. The more you learn about your credit score, the less likely you’ll be of becoming a risky proposition.

Why all the fuss over a simple three-digit number? Examining how your FICO credit score is calculated may provide insight into why some lenders may choose to deny your loan application. Your FICO score (FICO, by the way, stands for Fair Isaac Company—the institution that created and compiles the score) is calculated using several data pulled from your financial records. These include: the number and types of credit cards you use, your payment history, the amount of money you owe, the number of years you’ve had a history on file, and whether you have any new credit.

Which of these things carries the most weight in determining your credit score? Approximately 35% of your credit score is determined by your payment history. Your payment history refers to a number of factors, including the different types of payments you regularly make (examples of payments include standard major credit cards, department store credit cards, mortgages, and car loans), and whether you have missed or paid late on any payments. Included in your payment history is information regarding any bankruptcies, liens, judgments, foreclosures, wage garnishments, or law suits that have been recorded. If your payment history reflects that you don’t have much debt and usually pay your bills on time, you can expect your credit score to reach into the upper brackets. Conversely, if your payment history reflects a pattern of missed or late payments, and you have a significant amount of outstanding debt, you can expect your credit score to be much lower.

Another large chunk of your credit score is determined by the total amount of debt you carry. This includes all the amounts you owe on different credit card accounts, as well as installment payments such as car or student loans. Also of importance is the different kind of debt you carry, such as credit card debt versus mortgage and car loan payments. If you carry a lot of debt on a high-interest, long-standing credit card account, you can expect this scenario to hurt your credit score significantly. Another scenario, however, could have a much different effect on your credit score. For instance, an individual who pays a lot, mostly due to their mortgage payment, will likely have a higher credit score than a person who pays a lot because of debt on their credit card.

Now that you have a better idea of how your credit score is calculated, you can understand why lending institutions may be wary in lending to individuals or small business with a low credit score. Lenders can interpret a low credit score to mean that you have a high amount of outstanding debt and a history of missing payments (or both). Unfortunately, even if you are approved for a loan, chances are that a low credit score will saddle you with very high interest rates. Before you approach a lender, be certain you know your credit score. This gives you the opportunity to clear up any discrepancies or inaccuracies that may be on your credit report before your score is scrutinized by lenders.