IMPROVE YOUR CREDIT SCORE. Effective Credit Management At Your Fingertips

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1 IMPROVE YOUR CREDIT SCORE Effective Credit Management At Your Fingertips

2 Introduction In this ebook, you will get valuable information including: What is a credit score The score breakdown Managing your credit score Factors that do not impact your credit score

3 What is a credit score A better credit score can lead to substantial savings. On a $160,000 mortgage, the difference in the amount of interest you save with a higher credit score could be as much as $140,000. Apply the tips in this ebook to guide you to a better credit score. Your credit score can have an impact on many of your life s defining moments, such as getting a mortgage for a new home or a lower interest rate on a student loan. Credit scores may also be a factor in evaluating if you are a good candidate for renting an apartment, qualifying for a car loan, or getting a job offer hence it is critical to learn how to make this mysterious number work for you. You could call it the secret sauce of the financial world but, in a broader context, a credit score (which ranges from 300 to 850) is attached to each individual in the United States once he or she starts a credit history. Banks, credit card companies and other entities use this score to evaluate the financial risk of extending credit to people. Credit scores are maintained by three organizations (Equifax, Experian, TransUnion), and each one uses a slightly different formula to calculate your score. The exact formula for calculating an individual s credit score and what makes the score go up or down is a highly guarded secret by the bureaus. Fortunately, there are several concrete steps you can take to manage your score and see improvements.

4 The Score Breakdown Consumer credit scores are also referred to as FICO scores, because the algorithm that determines the rating was introduced by the Fair Isaac Corporation. The score can range from 300 to 850 and falls into standard categories that are meant to indicate your ability to manage borrowed money or credit. Most financial institutions have their own definition of what constitutes good or bad credit risk, but it is generally categorized as follows: 300 The Five Components of Your Credit Score: Poor credit 35% Payment History 550 Average credit (subprime) 30% Amount Owed 620 Acceptable 15% Length of Credit History 680 Good credit 10% Type of Credit in Use 740 Excellent credit 10% New Credit 850

5 Managing your score actively is a lifelong commitment and can pay off handsomely if done right. In fact, this is one of the most important factors in determining and ensuring financial stability and health. Learn how to manage your credit early, and stick with it for the long haul to get the best results. The first step is to get your credit report. Credit score knowledge and repair begins with your credit report. If you don t have a current copy of your credit report, request a free copy, familiarize yourself with it and check for errors. Your credit report contains the data used to calculate your score, and it may contain errors. In particular: Check to make sure that there are no late payments listed incorrectly for any of your accounts. Check that the amounts owed for each of your open accounts is correct. If you find errors on any of your reports, dispute them with the credit bureau in question. Remember, there are three different bureaus (Equifax, Experian, TransUnion). What You Can Do Today Let s take a closer look at each of the five components listed above and find out the tangible steps that can improve each component of the score.

6 Payment History 35% Contributing 35 percent to a credit score calculation, this category has the greatest impact on improving your score. Payment history consists of: Number of accounts Any late payments How much is owed How recently an event occurred TIPS: Past problems such as missed or late payments are not easily fixed, but consistent behavior will reap good results. Pay your bills on time. Delinquent payments, even if only a few days late, and collections can have a major negative impact on your credit score. Set up payment reminders. Making your credit payments on time is one of the biggest contributing factors to your credit score. Leverage payment reminders through your financial institution s online banking and mobile apps. Enroll in automatic payments. Have payments automatically debited from your bank account to pay your credit card and other loan providers. Gotcha: Remember to pay these off when you can instead of relying on a minimum payment to avoid paying unnecessary interest. Missed payments? Get current and stay current. Good behavior is rewarded, and it counts for more than older problems. Even if you had poor credit management in the past, you can improve your score by getting current on your payments and staying consistent. Positive information on your credit report will demonstrate that you are managing your credit well, and that counts. Gotcha: Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.

7 What else can you do? If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. Seeking assistance from a credit counseling service will not hurt your credit score. Managing your credit more effectively and making payments on time won t rebuild your credit score immediately, but should bring eventual increases.

8 Amount Owed 30% The amount owed contributes 30 percent to a credit score s calculation and can be easier to clean up than payment history. However, that requires financial discipline and a good understanding of the tips below. The following perspectives are taken into consideration when the bureaus evaluate this category: Total amount owed Amount owed on different types of accounts Credit utilization ratio small balance vs. large Number of accounts with balances Percent of credit line in use Installment loans TIPS: Reducing the amount of debt you owe is easier said than done, but it is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Use your credit report to make a list of all of your accounts. Go online or check recent statements to determine how much you owe on each account and the interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments toward the highest interest cards first, and continue maintaining minimum payments on your other accounts. Keep balances low on credit cards and other revolving credit. High outstanding debt can affect a credit score. Pay off debt rather than moving it around. The most effective way to improve your credit score in this area is by paying down your revolving (credit card) debt. Owing the same amount but having fewer open accounts may lower your score. Don t close unused credit cards as a short-term strategy to raise your score. Gotcha: Don t open a number of new credit cards that you don t need just to increase your available credit. This approach could backfire and actually lower your credit score.

9 Length of Credit History 15% The age of your oldest credit account, the age of your newest account and an average age of all your accounts makes up 15 percent of your score. If you have been managing credit for a short time, don t open a lot of new accounts too rapidly. New accounts will lower your average account age which will have a larger effect on your scores if you don t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user. New Credit 10% Getting new credit has the least impact on your score, contributing only 10 percent. Research shows that opening several credit accounts in a short period of time represents a greater risk, especially for people who don t have a long credit history. Your score reflects your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. TIPS: Do your rate shopping for a given loan within a focused period of time. Credit scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them in full on time will raise your credit score in the long term. Note that it s OK to request and check your own credit report. Doing so won t affect a score as long as it s ordered directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

10 Type of Credit in Use 10% The weight of different types of credit varies, but this component only contributes 10 percent to the calculation of your credit score. Types of accounts you will need to manage include: Credit cards (Visa, MasterCard, American Express, Discover, etc.) Retail accounts (credit from stores where you shop, like department store credit cards) Installment loans (loans where you make regular payments, like car loans) Finance company accounts Mortgage loans TIPS: Apply for and open new credit accounts only as needed. Don t open accounts just to have a better credit mix it probably won t raise your credit score. Have credit cards, but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will rebuild your credit scores. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly. Note that closing an account doesn t make it go away. A closed account will still show up on your credit report and may be included in a score.

11 Negative Factors and Their Impact Late payments or other negative events such as bankruptcies are not the only factors that result in a lower credit score. A lower rating can be the consequence of a very short credit history or inactivity. However, as soon as you start building a credit history with regular payments this issue is addressed. Factors that can hurt your score for a long time include: Bankruptcies - stay on credit report for seven to 10 years, depending on type Foreclosures Lawsuits Wage attachments Liens Judgments

12 What Does NOT Factor Into Your Credit Score Your age Your race, color, religion, national origin, sex and marital status Your salary, occupation, title, employer, date employed or employment history Where you live Any interest rate being charged on a particular credit card or other account Any items reported as child/family support obligations Certain types of inquiries (requests for your credit report, consumer-initiated inquiries, promotional inquiries, employer inquiries) Any information not found in your credit report Any information that is not proven to be predictive of future credit performance Whether or not you are participating in credit counseling of any kind

13 Conclusion A typical $160,000 mortgage that is fixed for 30 years could look startlingly different from one borrower to another based on their credit scores. Given today s interest rates, here is what it would look like for someone with an excellent versus subprime credit score. Credit Score Excellent Subprime Typical Interest Rate 3.9% 8.6% Interest Paid $ 89,000 $ 229,000 Develop your credit management muscle early, and exercise patience and discipline consistently. Remember that good credit is achievable no matter where you start, and it pays off handsomely. Learn More