Credit score is the key factor determining approval of almost any type of credit. It is based on the information contained in your credit report files. The widely used FICO score was developed by Fair Isaac Corporation, and it is a formula which assesses your potential credit risk.
The information used to calculate credit score can be broken down into five major parts. Your payment history with banks and other lenders will account for 35% of the score, the amount of money you owe for 30%, and the length of your credit history for 15%. New credit and a statistical assessment of how healthy your credit mix is will both account for 10%.
Credit score is not based in any way on the following information:
- references to debt management or credit counseling programs.
- persons marital status.
- current employment status, including how long with the same employer.
- credit report inquiries made by you, employers, insurance companies, or banks if made without your knowledge.
- what interest rates are charged on your credit cards, etc.
- public assistance received.
- persons age.
- child or family support received.
You can increase your score by:
- always paying bills on time.
- paying off or reducing credit card and other debt.
- keeping old, unused credit cards, departments store cards and other revolving credit accounts open, even if you dont use them.
- not applying for credit very often.
- correcting mistakes on your credit reports.
Banks decisions are made according to their own standards.
While the majority of lenders use credit score as a key factor in approving credit, other facts play their parts as well, among them: your income, employment status and length of time at present address, to name a few. Each bank has its own standards. What score is acceptable for a particular loan or credit product depends solely on a lender. The persons credit score might not be high enough to get credit with one bank, and perfectly acceptable with another.
According to Experian, a credit score is a number lenders use to help them decide: “If I give this person a loan or credit card, how likely is it I will get paid back on time?” The information from your credit reports is used to create your credit score.
Before getting a line of credit, get your free credit report from each of the three major credit reporting agencies (CRAs): Experian, Equifax, TransUnion. Under federal law, you are entitled to one every year. Order online at www.annualcreditreport.com, or call 1-877-322-8228. Check to make sure someone else’s information isn’t mixed into your report. If so, contact the CRA immediately and have them delete it.
Then, follow these tips to help you establish credit and build your credit score:
1.Establish checking and savings accounts and maintain them responsibly.
2.Piggyback on someone else’s good credit by being added to a credit card as an “authorized” (joint) user.
3.Get someone to co-sign a loan for you (e.g., financing a car, or other secured loan) and make your payments on time.
3.Apply for student loans and make your payments on time.
4.Apply for a credit card or a secured card. But, make sure the issuer reports to all three CRAs. Otherwise, the card won’t help you build your credit.
6.Apply for one gas card and one department store card to add to your credit mix.
7.Use your credit cards regularly, but wisely. Make all payments on time because the two most important factors in your score are whether you pay your bills on time and how much of you available credit you actually use.
Establishing and maintaining good credit will make buying a home a lot easier for you. You’d be able to get a good fixed rate loan instead of having to settle for a variable rate sub prime loan. It will also help for times you may need a home equity line of credit for home improvements or a home equity loan for debt consolidation, including paying off student loans.
It is estimated that more than 40% of Americans carry a revolving balance on at least one credit card. This is an enormous number, and it is caused primarily by the security people feel in making minimum monthly payments. When you charge money to your credit card, you are only required to make a small monthly payment to keep the debt from entering into collections, which means that a purchase made in 1995 might still be carried on a credit card in 2006.
Under pressure from the U.S. government, banks are increasing the minimum monthly payments. This can mean both good news and bad news for consumers, though it is supposed to be designed to assist cardholders with paying off debt.
In the recent past, minimum monthly payments have been between 2% and 3% of the total balance owed on the card. This means that 97-98% does not immediately have to be paid, and the balance continues to accrue interest as time goes on. Since some credit card APRs number between 12% and 20%, consumers are paying off debt over several years.
Federal regulators say that by increasing minimum monthly payments, consumers will pay off their debts faster and spend far less in interest payments. In addition to the rise in monthly minimum payments, credit card companies will also have to include a Public Service warning on all bills stating that paying off debt faster will result in lower interest payments.
For consumers that count on low minimum payments this change might be devastating. It will make it more difficult (rather than less) to get out of debt, and many accounts may be entered into collections. For consumers who can afford the increase, however, they will find that they pay less in interest rates and get out of debt much faster.
This might also help consumers with their purchases. If you frugally determine your spending practices based on your budget, youll be less likely to purchase things for which you cannot afford the higher monthly payment. This will result in better spending practices and less debt.
To deal with this new increase, most financial institutions are allocating money that will help to cover defaulting cardholders. They are also cognizant of the fact that they might have to negotiate with cardholders to lower interest rates so that they can afford to pay off their debts. If you are concerned about affording the minimum payment, you are encouraged to call the financial institution to discuss your options.
How to Handle the Increase
Examine Your Budget. Take a careful look at what you can pay each month, and work around it. Spend less on eating out or entertainment until you can significantly lower the balance on your credit card(s).
Talk to a Credit Counselor. Credit counseling can help you learn how to manage your debt and can increase your awareness of spending with credit cards. You might also receive valuable advice for dealing with creditors.
Set Personal Limits. Consumers who are used to spending with credit cards may find it difficult to stop. Put your credit cards where they are not readily accessible, and determine for yourself what qualifies as a credit card need. Perhaps youll only use credit cards for bills or for emergencies. Set those limits for yourself.
Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Isnt it interesting that the score most important in our financial lives, our consumer credit score does not even contain full disclosure? As stated above the Federal Trade Commission has ruled that it is ok for Fair Isaac & Co not to disclose the algorithms used in this process, but what about consumer rights. While it is important to understand what a FICO score is, it is not the main issue of this paper, insurance rates are. So where is the connection? All the public knows is that Fair Isaac tells us there is a high correlation between people with bad credit and high risk drivers. This notion is insane and from what I can see from this black box approach, there is no real causation between the two. This type of reasoning is similar to convicting a person of something before they have even committed a crime. For instance, lets say I do a study and that study shows there is a high correlation between criminals and people with bad credit. Is this to say that just because you have bad credit you are more likely to commit a crime and therefore you should be profiled or perhaps locked up because you are a risk to society?
This system is discriminating against minorities, disabled and in my case college students among others. Fair Isaac & Co claims that they cannot show the sophisticated algorithms they use to calculate these correlations and scores because they fear that they would be giving up valuable proprietary information that was very costly to develop and maintain. What about the cost to consumers who may be paying higher rates or in worse cases even denied insurance based on these practices.
The Equal Credit Opportunity Act forbids creditors from considering race, sex, marital status, national origin, and religion, but if we dont even know how these companies are calculating these scores, how in the world could we possibly know whether or not they are discriminating. This smoke and mirror approach is what many government agencies do to subtly discriminate and extort money from the American.
What about extortion? As I reflect on this topic extortion comes to mind. Webster defines extortion as to obtain by force or compulsion. By using such unfounded tactics consumers are forced into paying the higher rates. First of all, 90% of all insurance companies use this procedure; secondly in the interest of society legislation requires all Americans with cars to have car insurance. Living in a country where it is virtually impossible to live without a car doesnt this present some force to pay the rates? Also, lets say you cannot afford to buy a car with cash, in which case you could obtain liability insurance alone and save quite a lot of money; but instead you take out a loan, the bank will require you to obtain full coverage auto insurance to cover them until you pay off the loan. While this case may not represent an extreme case of extortion it does give reason to ponder the connection.
Insurance companies tout themselves as representing peace of mind, protection and security, but at what cost. Over the past 10 years, I have spent roughly 20,000 pounds in car insurance, what have I claimed? Easily less than half and I totaled a car. Is insurance just a form of legalized gambling protected by government? The McCarran-Ferguson Act of 1944 exempts the insurance industry from antitrust laws, so here we are again without a choice; collusion is the rule not competition. Where are the ethics of lawmakers? Many states are screaming about this controversial issue and some states such as California have had some success, but with protection from top government what can consumers do?
I have personally written the Governor of Pennsylvania about the subject, one of my main questions was;
I am a concerned citizen. Recently I noticed my car insurance rates increasing at a substantial rate. I investigated the situation only to find out that my credit rating was making the difference, not my driving record.
The response I received from the Department of Insurance follows:
This letter is in reponse to your complaint filed with the Pennsylvania Insurance Dpartment through Governor Edward G. Rendell’s correspondence office regarding the use of credit as an underwriting tool for automobile insurance in Pennsylvania.
I have read through your concerns and it appears that you are questioning the underwriting of automobile insurance. Specifically, the use of credit in determining eligibility. Many different factors go into the underwriting of an insurance policy, such as type of vehicle, drivers, location, etc. and most recently credit history. Pennsylvania law does not prohibit an insurance company fromusing credit as an underwriting tool so long as it is done within the first 60 days of writing a policy. Under the law, an insurance company is granted a 60 day window from the inception of a policy to determine whether or not the policy fits into the company’s guidelines.
In your letter, you stated credit scoring in part of the rating structure and presumable must be approved by the Insurance Department. Actually, credit scoring is part of a company’s underwriting guidelines and the Dapartment only regulates underwriting guideline to the extent they are not discriminatory.
Also, Federal law under the Fair Credit Reporting Act allows credit information to be used for underwriting financial and insurance transactions.