Debt Fast Track

Credit Scoring Basics

Credit scoring – simple do’s and don’ts

Maintaining a good credit score is critical in today’s world.  We are used to the lending industry evaluating our credit worthiness based on our scores.  However, these days, insurance companies and prospective employers, among others, are increasingly viewing credit scores to determine future risk.  Of course, I have a bit of an argument with this trend.  Credit scores are an attempt at predicting the future based on past information that is often taken out of context.  The context is important for a true evaluation of the past, and predicting the future is at best a very inaccurate science.

Of course, my problems with the current trends carry very little weight, simply because there are not any better systems widely available.  Fair Isaac, the company that is currently the king of credit scoring models, is fat and happy, and will continue to be so in the foreseeable future.   So, for the time being, it is best to understand the basics of the system in order to maintain scores that are high enough to make you appear as a model citizen, both now and in the future.

Let’s break this down into simple terms.  If your credit score is 720 or better, that means you are in good standing almost anywhere.  Scores can go up from there, with a few people even being in the low 800′s, but 720 or above is sufficient.  If you are between 680 and 720, you are still considered a good risk, though you may be rated slightly worse with regards to loans  and insurance products.  While it is not bad to be in this range, you still want to improve your scores, if possible.  The 640 to 680 range generally means that you still have access to products, but confidence is waning a little bit.  If you are below 640, and especially below 620, you are considered a high risk, and options become limited.

There are 25 different variables that affect your credit score.  Repayment history, public record, debt structure, andhow often you have your credit pulled, are the primary factors that seem to affect most people with their credit scores.

Repayment History – Are all bills paid on time?  Are there accounts that are 30, 60 or 90 days late?  If there are late payments, are they a one-time incident, or does it seem habitual?  How long has it been since late payments were made?  Of course, life circumstances may get in the way of a perfect repayment record.  For this reason, the effects of a short term situation disappear relatively quickly.

Public Record – Bankruptcy, judgments, collections, etc.  Enough said.  These items take a hefty toll on credit scores.

Debt Structure – New debts, especially a high amount of new debt, will make the FICO models nervous.  If you have revolving debt (credit cards), where the balance is above 65% of the credit limit, your score will suffer.  Having between 3-6 credit cards is a good thing.  Especially if you use them and pay them off regularly.  (Don’t ask me why you would have lower credit scores with less than 3 revolving debts – the arguments don’t make any sense to me either!)

Number of Credit Inquiries – The more you have your credit pulled, the lower your scores go.  Not much, initially, but it can take a hefty toll if you have more than 12 credit inquiries in a given year.  In theory, if you are having credit inquiries for the same purpose, such as having several mortgage companies pull your credit when you are shopping for a loan, they only count as 1 inquiry.  However, proceed with caution.  I have seen several instances where this was not the case.

One common misconception is that some people believe the negative credit marks disappear as soon as the issue is resolved.  This is not the case.  Most items will continue to appear on your credit report for 7 years after final resolution, though the negative effects diminish over time.

Credit repair companies, of course, are plentiful in our society.  If you need to increase scores, and especially if your scores are down due to erroneous reporting by the lenders (happens more than you, and they, think) the repair can be fairly simple and rapid.  Of course, some companies get very creative about how to make derogatory credit lines go away, even if the reporting is accurate.  From what I have experienced, there are a few good repair companies, and a lot of bad ones.  Check consumer sources to determine whether your company is providing a good service or not.

Of course, all credit is repaired with time and good behavior.  Even if your record is rocky, life gets a lot better when you have been on top of things for two years.  Unless you are in a hurry, your best bet in credit repair is to pay your bills and time and structure your debt such that your scores improve.