Understanding Your Credit Score and How You Can Improve It

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1 Understanding Your Credit Score and How You Can Improve It

2 How is your score calculated? The exact formula is a mystery and protected by the Federal Trade Commission Think of it as a secret recipe. Credit Score scales generally range from 300 to 850 or 350 to 950. The higher the score, the better the credit risk The lower the score, the worse the credit risk

3 Why is your Credit Score important? Understanding credit scoring can help you manage your credit. By knowing how credit risk is evaluated, you can take actions that will lower credit risk, and you can raise your score over time.

4 How is your score calculated? (Cont.) Generally, a credit score of 719 is the average score of approved home loans (on the 850 scale). The market is moving to where you want to shoot for a score of 750 or above (on a 850 scale).

5 Your Credit Report Shows Debts and payment history with creditors: Loans with credit card companies, banks, department stores, and finance companies Whether bills were paid on time and proper amounts How much debt you currently have and if loans are not paid back History of tax liens, bankruptcies, and other public records even if they happened several years ago How often you have applied for credit in the past two years.

6 In the Secret Recipe Payment History = Approximately 35% of the score: Includes information from public records on bankruptcies, foreclosures, tax liens, etc. Number of months since most recent 30-day or higher level of delinquency reached. Highest level of delinquency reached in the last 12 months.

7 Past Payment History HIGH RISK LOW MONTHS SINCE MOST RECENT MAJOR DELINQUENCY

8 Recent Changes to the Model That May Affect Your Score One 30 day late payment hurts your score less than in the past, but More than one late payment, or even one late payment that rolls to 60 or more days will hurt your credit score even more!

9 In the Secret Recipe Outstanding Debt Utilization = 30% of your score: Average Balance on revolving accounts Percentage owed on revolving accounts Ratio of revolving debt to total revolving limits Percentage owed on open installment loans Note: Rule of thumb has changed from 50% triggering risk to anything over 30%!

10 Outstanding Debt Utilization HIGH RISK LOW RATIO OF TOTAL BALANCES TO TOTAL LIMITS ON REVOLVING ACCOUNTS

11 In the Secret Recipe History & Length of Credit = 15% of your score: Number of months since the oldest active revolving account opened Number of months since the oldest installment account opened Credit Surfing can be a problem

12 The Amount of Time Credit Has Been Established HIGH RISK LOW NUMBERS OF MONTHS SINCE OLDEST REVOLVING ACCOUNT OPENING

13 In the Secret Recipe Type of Credit Being Used = 10% of your score: Number of bank cards being used Number of retail or department store cards being used Number of finance company accounts

14 What is a Healthy Mix? A mix of credit cards, retail accounts, installment loans, and finance company accounts. It is not necessary to have one of each, and it is not a good idea to open credit accounts just to have them in the mix. The credit mix usually will not be a key factor in determining a score, but it will be more important if a credit report does not have a lot of other information.

15 In the Secret Recipe New Credit Inquiries = 10% of your score: How many inquiries impact the score Which inquiries impact the score Number of inquiries in the last 12 months

16 Top 10 Reasons for Low Credit Scores 1. Serious delinquency 2. Serious delinquency and public record or collection filed 3. Derogatory public record or collection file 4. Time since delinquency is too recent or unknown 5. Level of delinquency on accounts 6. Number of accounts with delinquency 7. Amount owed on accounts 8. Proportion of balances to credit limits on revolving account too high 9. Length of time accounts have been established 10. Too many accounts with balances **Note that the specific wording given by lender may be different from these.

17 Credit Scoring Example Credit scoring is a technology used by credit grantors to qualify the risk associated with extending credit to a given consumer. Characteristics Attributes Points # bankcard accounts or more # finance accounts # months in file <

18 To have an established Credit Score One account has to have been open for six months or more. Enough information and enough recent information in the report on which to base a score. Credit reporting agencies do not score any disputed accounts.

19 Why you might not have a Credit Score? You may not have any established credit history. For example, you may not have the type of credit that is typically reported to the credit bureau: Contract for Deed Rent Small banks that do not report to a credit bureau

20 What is your score used for? Approving New Accounts Application Instant Credit Approval Existing Account Management Increasing Lines Reissuing or Canceling Cards

21 Things that can hinder you from getting the best rate Bad debt: Late payments 30 days reported to credit bureau Large lines of credit Judgments and collections Too many cards Over your limit $ given

22 What is your score used for: Determining what RATE you pay Year/ Model Term FICO FICO FICO FICO FICO /2008 Up to

23 What is your score used for: Determining what RATE you pay Tier Level Score Program Pricing New Level Base Rate Level Base +.35% Level Base % Level Base % * Shown as an example only.

24 Home Loan Costs Representative Credit Score 60.00% % $ % % % % % 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% % 0.000% 0.000% % 0.000% 0.000% % 0.500% 0.500% % 0.500% 0.500% % 0.500% 1.000% 1.500% 1.000% 0.750% 0.750% % 1.000% 2.000% 2.500% 2.250% 1.750% 1.750% % 1.250% 2.500% 3.000% 2.750% 2.250% 2.250% % 1.500% 3.000% 3.000% 3.000% 2.750% 2.750% % 1.500% 3.000% 3.000% 3.000% 3.000% 3.000%

25 How do people score? Above % 745 to % 690 to % 620 to % Below %

26 Your Credit Score is part of your Credit Report Your are entitled to 1 free credit report each year from each credit reporting agency However, there is generally an extra charge for your credit score ($5.95 to $6.95)

27 How do I get my Free Credit Report? Go to From this website you can access all 3 Credit Bureaus. Consultation with your local bank.

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