YOUR CREDIT JOURNEY
Understanding credit data and the importance it plays in today’s society isn’t as convoluted as the credit experts make it seem. Consumers spend many unwanted hours and dollars researching every angle they can to chase the almighty 850 score.
How does obsession and necessity differ or compare during this impeded journey? One must look deep inside to see if this is a forced journey or a planned expedition. Either way the road will be bumpy at times, exciting, and adventurous but mostly it will be rewarding.
Behavioral tendencies contribute a fair amount to how successful you will be credit score wise or worthy to a lender’s underwriting guidelines. We live in a competitive environment and the mysterious three number score attached to your credit data measures your ability to repay a loan with others also trying to obtain a similar loan. Sure you are offered the consolation prize (a higher rate) for having a lower score but chances are the prize given helps the grantor more than the recipient.
Like any uncertain excursion the first thing you need is a map, in this case the map will be a copy of your credit report. Your report can be obtained by any of the three major credit providers, Equifax, TransUnion, or Experian. This map will offer and force many detours and when you come to the many forks in the road it will be best to already know the road signs.
To interpret the signs better it will help you to know the credit reporting agencies host over a billion credit accounts daily. Your credit data along with over 250 million other reports rely exclusively on the accounts being reported correctly to each credit bureau. One might think with today’s technology this would be a simple task but unfortunately there are way too many variables for this to happen.
Common mistakes found on a credit report come straight from the creditor you currently do business with or the ones from the past. Employees from these companies are responsible to make sure your account is being reported correctly and timely to the credit bureaus. Once it has been reported it becomes your responsibility to check the accuracies and authenticities. I guess it would help if you knew what to look for, so I will become your tour guide.
In order to understand your credit data you will have to look over the entire report. It will help if you locate the oldest accounts being reported. Circle the open date on both the open and closed accounts. The overall aged account plays a significant role. Be sure to keep the oldest revolving credit account open and up to date. For you first time travelers, a revolving credit account will be a credit card. The other accounts, mortgage loans, auto loans, bank, finance, and student loans will be categorized as an installment loan.
Credit scoring algorithms although complex can be very simple. Key factors are going to be the age, combined age, high credit, balances, usage, variety, and payment history. The weight is distributed among the factors with the balance to high credit ratio along with the age of the account being at the top. Discipline will come into play when you are at the fork in the road and you want to make a purchase with a credit card. Do you go to the left and charge the item without regard to a higher percentage balance to high credit ratio on a most recently obtained card or do you make the purchase on an older charge card? Do you go to the right, charge only the amount you are prepared to pay off before the creditor reports to the credit bureau? You may be thinking, doesn’t the creditor report to the credit bureau each time I pay on the account? The answer is no they don’t, also it’s important to know the report date and due date are entirely different. Both are important in, if you pay after the due date your credit score will drop considerably, and if you pay before the report date your score will likely stay the same or increase. So, it would be wise to know from your creditor when they report to the credit bureaus whether you are able to pay the balance in full or not.
A major bump in the road is the misconception is when high credit instead of credit limit being reported has the same impact on the credit score. When a credit card grantor approves your request for an account, a credit line or credit limit is established.
Unfortunately the credit limit is not always the number being reported to the credit bureaus. This is a common mistake, which will affect the score in a harmful way. Commonly, the high credit or usage is reported instead or worse it will show zero. Since credit scoring is based on the balance to credit limit algorithms you can imagine what happens to your score if one or several accounts fall into this category. I will give you an example: your credit limit on revolving credit card A is $5,000 but you have only charged $2,000 and you have a $500 balance. You will be scored based on the $2,000 being reported which will lower your score. Point Deduction Technology software will determine how many points you may actually lose from the reporting errors.
What is Point Deduction Technology? Point Deduction Technology® is Scientific Analytical Mathematical Software, based on rigorous credit weight algorithms, analyzes credit data to identify where the impacts are placed on a credit file. The software analyzes an electronic version of a credit report and assigns a point deduction number per item, both positive and negative. The numbers assigned range from 0 to 100+ depending on the type accounts being reported. The software also determines where most errors occur on a credit report and how many points may be recovered by having the credit data corrected. This Technology will serve as your compass. You will be able to move forward towards your goals and if you get lost along the way, you will be able to get back on track.
If this is your first trip or if you have traveled already, your first step will be to obtain a copy of your credit report. Identity theft is rapidly growing worldwide so it’s important to know what may be reported. Will checking your own credit lower your score? The reporting agencies distinguish between soft and hard pulls. When your credit is checked before issuing its line of credit it’s called a hard pull and it counts against your score. Personal requests fall under soft pulls, which do not reflect negatively on the evaluation.
Establishing credit for the first time can become overwhelming since there will be many opportunity offers in front of you. My suggestion is you research secured credit card offers. A secured credit card means you will be asked to open a savings account with a major lender who will then match your credit line with your deposit. Although your deposit secures the credit line banks are still at risk so it’s important you keep balances low if you are unable to pay it off each month. You will make payments and by doing it on time, will create a credit score. If possible you should open multiple (two or three) secured credit accounts. Your deposited money is held safely in the bank and will be returned to you in the future once your balance is zeroed and the account is closed. Secured credit cards also help you if you have had some past bumps in the road. It is the best way to re-establish credit.
While building a successful credit profile you must follow the rules of the road. It would be helpful if you can charge and pay your account in full each time before the report date monthly. You must make sure the minimum payment is made by the due date each month. Don’t apply for a bunch of new credit right away. Test drive the credit you have recently established to make sure you stay on the right road. Your experience will help grow your credit score and in time other credit offers will become available.
For those who have already established older accounts, control your speed, (balances) and don’t be so quick to close needed accounts. Open accounts spell available, potential debt, so better to close them, runs the legend. But experts agree that most creditors want to see at least two or three pieces of active credit to prove you can manage debt responsibly.
What is revolving credit? Credit Cards issued and used by consumers such as bank cards, departments store, and gas cards are categorized as Revolving Credit. Your Revolving credit does not require a set number of payments and you may use or borrow up to your preset credit limit. Since your available credit decreases and increases as funds are borrowed and then repaid, the credit scoring algorithms will insure higher scores if used properly.
What is installment credit? Installment is a type of credit that has a fixed number of payments, in contrast to revolving credit. Granted credit lines are conditionally set up based on fixed monthly payments at regular intervals. Installment loans are designed for big purchases such as, housing, automobiles, furniture and personal loans. Nearly all installment loans will be collateralized by items you intend to finance, with the exception of student loans. Your payment history will be reported to the credit bureaus so it’s important all scheduled payments are made before the due date each month. If you default on a payment, all previous payments will be forfeited and the lender may take possession of the items you financed. Scoring algorithms suggest future automobile and home loans in your credit profile to maximize your credit score.
How does my credit data effect my credit score? Payment history tops the list so making your payments on time is critical. Most the over 50 scoring algorithms list payment history at a 35 percent factor in the make up of your score. Occasionally the payments made will not always reflect the true payment history on your credit report. Check the date of last activity and months reviewed to verify the last time your payment was recorded. Also check to make sure any unwanted late payments haven’t been reported. Making a payment late will quickly lower your credit score and only time will completely recover all the lost points. Thirty percent of your credit score consists of credit utilization. Let me explain the importance again on why you must make sure your true credit limit and balances are being reported correctly. Payment history and credit utilization make up 65 percent of your score yet studies show this is where most common errors occur. Focus on this road even when it gets bumpy at times to allow enough time to correct the mistakes. On a side note, be sure to continue utilizing your revolving credit, rather than closing an older account, make a small charge and pay it off immediately. Going longer than six months without utilization may drop your score.
How long you have had established accounts is also important. Too many times an older revolving account is forgotten about and a creditor may actually close the account. Important factors expressed here is you will be based on the length of time each account has been opened separately and combined overall. You will also be scored on the most recent action taken. Be sure to check the open date on every open account to verify its accuracy. All accounts will readjust the average length so be careful when opening up too many new accounts. Long term positive financial behavior results in a higher credit score.
New credit and a combination of different type accounts contribute to your credit score. Combining a good blend of revolving credit and installment loans offers lenders less risk predictability during the repayment process. One would figure having a good credit score with established long term accounts with no reported late payments or other derogatory accounts and low balances compared to credit limits is all you need, right? Unfortunately the errors and omissions in credit reporting become an integral part to the equation.
Your destination has been mapped out, the detours and roadblocks accounted for, warning and speed signs identified, gauges checked, compass and tools available, a how to guide for emergencies, the right amount of fuel, and the time it will take to start the journey.
One important step is how to finance this voyage. I would suggest setting up a strict budget to assure a vacation like atmosphere verse a long walk because you are broke down and the side of the road hungry and lost. Check your map and look for the toll roads you will be on so you will stay prepared. The money you invest into. establishing and maintaining a healthy credit profile will ultimately save you thousands in higher interest rates. Follow the information provided and with the right patience, courage, and confidence you will accomplish your credit and financial goals. Don’t focus on the credit scores only the credit data, remember if the data is right your score will keep becoming maximized. See you on the road.