Ultimate Credit Score Guide

ULTIMATE CREDIT SCORE GUIDE

Understanding and Increasing Your Credit Rating

STEPHENSON LAW FIRM PLLC www.Utahjustice.com

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Table of Contents

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8 10 12 13 page page page page page

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Credit Score Components

Credit Inquiries

Reporting Periods

Unscored Factors

Credit Score Minimum Requirements

Increasing Your Credit Score

Reviewing Your Credit Reports

Correcting Credit Report Errors

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Ultimate Credit Score Guide: Understanding and Increasing Your Credit Rating

Understanding your credit score and what factors impact that score are crucial tools for building a healthy credit rating.

Your credit score determines how much you will pay in interest rates to borrow money or even whether you will even get financing in the first place. Credit reports are also used to decide whether to provide you with insurance, housing, and utilities. Even many employment decisions are based on your creditworthiness.

A higher credit score makes you a lower risk to lenders, which, in turn, means you are more likely to get credit or insurance—or pay less for it. It also means you are more likely to get that dream job you worked so hard to achieve.

Keep reading and learn to understand, manage, and improve your credit rating.

© 2015 Stephenson Law Firm PLLC www.Utahjustice.com

http://www.utahjustice.com/


Payment History

Amounts Owed

Length of Credit History

Types of Credit Used

New Credit

Inquiries

Reporting Periods

Unscored Factors

Minimum Requirements

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Credit scores are three digit numbers that typically range from 300–850 The scores are calculated using data taken from your credit reports and are used to predict your future creditworthiness

35%

30%

15%

10% 10%

Payment History35%

Amounts Owed30%

Length of CreditHistory 15%

New Credit 10%

Types of CreditUsed 10%

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Payment History (35%)

Your payment history is the most important factor in calculating your credit score. Late payments, charge offs, foreclosures, repossessions, liens, wage attachments, and bankruptcies will all negatively impact your score at varying amounts depending on the severity of the issue. The score also considers how late a payment was, how much was owed, how recently the negative payment history occurred, and how many accounts are listed with a negative payment history.

Amounts Owed (30%)

The amounts you owe is also a heavily-weighted factor in calculating your credit score. The score considers how much you owe on individual accounts and how much you owe in the aggregate compared to how much credit you have available.

This factor is also known as the utilization ratio. As a rule of thumb, you should strive to keep the amounts you owe on credit cards and other revolving debt below 10% of the total amount available. Alternatively, a utilization ratio of 30% or below is also considered an indicator of a low credit risk.

A recent 60-day late payment hurts your score more than a 90-day late payment from two years ago

Keep your total revolving credit below 10% of your total available credit

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Length of Credit History (15%)

Typically, a longer credit history will increase your credit scores. However, even consumers who haven’t been using credit for very long may have high credit scores depending on their other credit score factors. Generally, your score considers the age of your oldest and newest accounts and the average age of all your accounts. Older is better. The score also considers how long it has been since you used certain accounts so it may lower your score to have unused accounts in your credit history.

Types of Credit in Use (10%)

Your mix of credit use is also considered in your score. A good mix would include credit cards, retail accounts, installment loans, finance accounts, and mortgage loans.

New Credit (10%)

The amount of newly opened credit accounts also figures into your score. Too many new accounts in too short a time period will generally lower your score. Especially if your history is relatively short.

Age your accounts by keeping them open and active

Keep a diverse mixture of credit types

Don’t open new accounts unless absolutely necessary

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Credit Inquiries Hard Inquiries

With a few exceptions, hard inquiries that occurred in the last twelve months are calculated as part of your score. Any hard inquiries older than twelve months can remain on your reports for up to another year but are not calculated as part of your credit score.

Generally, hard inquiries are those that occur as a result of your attempts to obtain new credit. Hard inquiries can also occur as a result of skip-tracing efforts by collection agencies.

Types of hard inquiries include applications for:

• Credit Cards

• Auto Loans

• Mortgages

• Personal Loans

• Collection Agency Skip-tracing

Soft Inquiries

Soft inquiries are not calculated as part of your credit score. Types of soft credit inquiries include:

• Consumer-initiated inquiries of their own report

• Inquiries for promotional or “pre-approved” offers of credit

• Administrative inquiries from lenders with whom you have an existing relationship

Credit inquiries for employment purposes, to obtain insurance, or to acquire utility services are not calculated as part of your credit score

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Credit Inquiries 30 Day Safe Harbor Period

Inquiries for mortgages, auto loans, and student loans are not calculated as part of your credit score if they are less than 30 days old.

45 Day Rate Shopping Allowance

Mortgages, auto loans, and student loans also benefit from a 45 day rate shopping allowance period in which multiple inquiries for the same loan type are calculated as part of your credit score but are only counted as one inquiry.

This allowance encourages rate shopping by consumers by not penalizing them for multiple related inquiries.

Revolving credit applications do not benefit from this rate shopping allowance.

Credit inquiries are maintained for between six months and two years depending on the inquiry type

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Reporting Periods Seven Years

Most items continue to report for up to seven years from the date of the last payment. The most common items that fall within the seven year period are:

• Late Payments

• Foreclosures

• Judgments

• Settlements

• Repossessions

• Delinquent Child Support

• Paid Tax Liens

Seven Years + 180 Days

Collections and charged off accounts report for the seven year period plus 180 days from the date of the delinquency.

If your report is being accessed for a loan or life insurance policy of $150,000 or more or for employment purposes for a job paying more than $75,000 a year, the typical reporting periods do not technically apply. For these purposes credit information can report indefinitely. Fortunately, the credit bureaus generally stick to the typical seven to ten year reporting periods even for these purposes

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Reporting Periods

Student Loans

Defaulted student loans can report for up to seven years from the date they are paid, the date they were first reported, or the date on which the loan re-defaults.

These time periods are governed by the Higher Education Act. Under the FCRA there is no limitation as to the time periods student loans can report on your credit.

Tax Liens

Unpaid tax liens can remain in your credit reports indefinitely.

Released tax liens must be deleted after seven years from the date released.

Bankruptcy

Chapter 7 bankruptcy can report for up to ten years from the date the bankruptcy was filed.

Chapter 13 bankruptcy can report for up to seven years from the date of discharge or up to ten years from the date the bankruptcy was filed.

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Unscored Factors Factors that are not used to calculate credit scores

Credit scores consider a broad range of information on your credit report but the following factors are not considered as part of your score:

• Race, color, religion, national origin, sex, or marital status

• Age (though other scoring methods do consider your age)

• Income, salary, occupation, title, employer, or employment history

• Where you live

• The interest rates being charged on your accounts

• Child or family support obligations

• Rental agreements

• Whether or not you are participating in credit counseling

• Soft inquiries such as consumer-initiated inquiries, promotional inquiries, and administrative inquiries

• Employment and insurance inquiries

• Any information not in your credit report

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Credit Score Minimum Requirements

If you have no credit yet, you can start to build some by obtaining a secured credit card, getting a low-limit store card, or by becoming an authorized user on a family member’s account

To calculate your credit score, your credit report must contain enough information on which to calculate the score. At least some of that information must be recently reported for a calculation to occur.

The minimum requirements needed to calculate your credit score are as follows:

• At least one undisputed credit account that is at least six months old

• At least one undisputed credit account that has been reported or updated in your credit report within the past six months

• No indication on the credit report that you are deceased


Pay Bills on Time

Keep Balances Low

Don’t Close Old Accounts

Avoid Opening New Accounts

Perform Regular Reviews

Correct Errors

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Pay your bills on time

Late payments and collection accounts will substantially lower your credit score. It’s easy to understand why. Keeping your bills current and paid on time is an excellent indicator of financial responsibility. On the other hand, paying late every month or falling into collections can be an indication of a higher credit risk.

One excellent way to keep your bills from ever falling into collections is to use an automatic payment service. Many banks offer automatic bill paying services for free.

Keep balances low

High balances on credit cards and revolving credit accounts lower your credit score because they increase your ratio of available credit to used credit. For the best credit score boost, keep your credit cards and revolving accounts to less than 10% of the available credit. Keeping a low ratio of credit usage to available credit limits is another first-rate indicator of financial responsibility.

If a 10% utilization ratio is unrealistic for your situation, try to keep your revolving account and credit card balances below 30% instead.

Paying a collection in full or bringing a late account up to date will not remove it from your credit report so try to negotiate for a deletion before you pay If the creditor agrees to delete the information in exchange for your payment get the agreement in writing

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Don’t close old accounts

Age is a critical factor in credit scoring. Generally, older accounts boost your score more than newer accounts s leave old accounts open even if you don’t use them.

Most credit scoring models do take into account how long it has been since you last used a credit card or revolving credit account so you should use your old accounts every once in a while just to keep things active.

Just don’t go crazy and be sure to keep the balance relatively low.

Avoid opening new accounts

True, you get reward points and discounts when you open a store credit card but weigh the savings carefully because opening too many cards too fast will lower your credit score. Having too many new accounts also lowers your credit score because of the age of the accounts.

Sadly, the credit inquiry itself will also lower your score a little, though the inquiry is a very small factor compared to the age of the account and the number of open accounts you carry.

Keep old accounts open and active and don’t open new accounts unless absolutely necessary.

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Reviewing Your Credit Reports

Regularly check your credit

Check your credit reports every four to six months. Contrary to popular belief, most consumers do not need to keep monitoring services to watch their credit hourly or even daily. For most consumers, checking your credit two or three times a year will be sufficient to be sure you are managing your reports wisely. You also don’t need to actually check your credit score. Effective credit management only requires monitoring your accounts and keeping your usage in check.

Watching your credit score closely may be desirable, however, if you are planning a major purchase that will require credit in the near future. Buying a house or car, for example, can make credit monitoring and regular credit score checks more important.

You can check your credit reports for free once every 12 months at www.annualcreditreport.com without lowering your credit score

http://www.annualcreditreport.com/

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Correcting Credit Report Errors

Correct credit report errors

If you have information in your credit reports that is not accurate it is probably lowering your score. Occasionally, inaccurate information increases your score but that is generally the exception not the rule. If you do have inaccurate information listed, you can dispute that information by sending letters to the credit bureaus informing them of the inaccuracy and requesting they re-investigate the matter.

If you have documentation proving the information is listed inaccurately, include a copy with your dispute letter. You may also want to include a copy of your report with the incorrect information highlighted to simplify the dispute process. In many cases you also want to include a copy of your identification to ensure the credit bureaus know the disputes are coming from you rather than a credit repair organization.

Once they receive your disputes, the credit bureaus will have between 30 to 45 days to investigate the information. Be patient and let the process take its course. Once the investigation is complete, the credit reporting agencies will normally send you results of any changes they make in writing.

You can also send letters requesting correction of inaccurate information directly to your creditors. If you are disputing specific charges you must do so within 60 days so check your billing statements regularly for fraudulent charges.

As many as 40 million Americans have errors in their credit reports

THANK YOU

Ultimate Credit Score Guide: Understanding and Increasing Your Credit Rating STEPHENSON LAW FIRM PLLC

www.Utahjustice.com

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Ultimate Credit Score Guide