How Credit Score Points Affect Your Credit

                                            

Your credit score it is one of the most critical factors in your financial life. Your credit score determines if you are approved for a loan or line of credit. Credit scores are used to determine: if you will be hired for a job, interest rates, terms and conditions, downpayment costs, rates for medical and other insurance coverage, approval for cable and internet service and more.

A credit score is a mathematically calculated number developed by the Fair Isaac Corporation (FICO) that lenders use to rate potential customers in determining the likelihood that a customer will pay their bills on time.

A credit score or credit rating is determined by using five main criteria as defined by MyFico.com: your payment history which accounts for 35% of your credit score, the amounts owed which accounts for 30% of your credit score, the length of your credit history which accounts for 15% of your credit score, new credit which accounts for 10% of your credit score, and the types of credit used which accounts for 10% of your credit score.

Payment history shows the history of how you paid your bills either on time or late. Amounts owed shows the total amount of credit you have available. The length of history indicates how long you have had credit. New credit indicates how many times you have applied for new credit. If you open too many new accounts in a short period of time this may lower your credit score. The types of credit used indicate the types of accounts you have such as revolving or installment accounts. Revolving accounts are usually credit cards and installment accounts are usually mortgages, auto loans, etc.

The FICO credit score model ranges from 300-850 with 850 being an excellent score and 300 being the worst score. The higher the credit score the lower the interest rate you will receive for a loan or line of credit. Possessing a good credit score can save you thousands of dollars in interest over the life of the loan or on a line of credit. A good credit score is generally in the range of 720 or above but may vary from lender to lender.

When applying for credit or a loan if all three credit scores are pulled, the middle score is generally the score used with the application.  Your credit score varies from each bureau because each agency collects their own data from various sources and may collect different data for the same account. Your score can vary anywhere from 5-40 points between the three credit bureaus.

Your credit score changes due to updates to your credit file which changes based on account activity such as balance changes or additions to your credit file (i.e. new accounts or deletion of older negative accounts more than 7 or 10 years old). As a result, you may see a difference in your score from one month to the next.  Here are some guidelines to help you determine how payments affect your credit score:

Payments

• Paying a 30 day late payment can increase a score by 3-80
• Paying collection accounts can increase a score by 20-90 points
• Paying public records (judgments, tax liens, Chapter 7 or Chapter 13 bankruptcy) can increase a credit score by 75-150 points
• Paying a charge-off can increase a credit score by 50-100 points
• Paying a repossession can increase a credit score by 50-100 points
• Paying delinquent student loans which can increase a credit score by 50-80 points

The major disadvantage of credit scoring is that it relies on information in your credit report that may contain errors. It is estimated that 75% of credit reports contain at least one error.  That is why it is so important that you check your credit report at least once a year to ensure that all information is accurate and up to date.  

If you plan on purchasing a large item such as a car, house or investment property, it is best to pull your credit yourself to see if any negative items appear so you can fix those issues before applying for a loan. The best way to understand your credit score is to do research and read the information that is included when you order your credit report.

FICO 8: The New Credit Score

Your credit score it is one of the most critical factors in your financial life and determines if you will be approved for a loan or line of credit. A credit score is a number developed by the Fair Isaac Corporation (FICO) that lenders use to rate potential customers in determining the likelihood that a customer will pay their bills on time.

A credit score determined by using five main criteria as defined by MyFico.com: your payment history (35%), the total amount owed (30%), the length of your credit history (15%), new credit (10%), and types of credit used (10%).

Payment history shows the history of how you paid your bills either on time or late but unfortunately does not show if your bills were paid before the due date. Amounts owed show the total amount of debt you owe. The length of history indicates how long you have had credit. If your credit history is 2 years or less this could lower your credit score.

New credit indicates how many times you have applied for new credit. If you open too many new accounts in a short period of time this may lower your credit score. The types of credit used indicate the types of accounts you have such as revolving or installment accounts. Revolving accounts are usually credit cards and installment accounts are usually mortgages, auto loans, etc.

The FICO 8 credit score which was developed in 2009 ranges from 300-850 with 850 being an excellent score and 300 being the worst score. The FICO 8 uses the existing 5 factors from the original FICO score plus 4 additional ones: high credit card usage so keep credit card balances at 20% or below the credit limit; isolated late payments do not weight as heavily on your credit score as multiple late payments; authorized user accounts are factored into your credit score; and small balance collection accounts with a balance of $100 or less are not factored into the credit score.

Your credit score varies from each credit bureau because each agency collects their own data from various sources and may collect different data for the same account. Your score can vary anywhere from 5-80 points between the three credit bureaus.

Your credit score changes due to updates to your credit report which changes based on account activity such as balance changes or additions to your credit file (i.e. new accounts or deletion of older negative accounts more than 7 or 10 years old). As a result, you may see a difference in your score from one month to the next.

If you plan on purchasing a large item such as a car, house or investment property, pull your credit yourself to see if any negative items appear so you can fix those issues before applying for a loan.

The CARD Act and Your Credit Score

Your FICO credit score and is used to determine if a customer will pay their bills on time. A FICO score is made up of 5 factors: payment history (35%), total amount owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). Ninety-percent of the largest banks use the FICO score. Based on the CARD Act effective February 22, 2010 many changes in the act will now affect your credit score in a different way. Here is a comparison of how the CARD act changes affect your credit score:

1. Previously your credit utilization could be 50% or more and it was not seen as a red flag. Since the CARD act, your credit utilization credit usage/credit limit should be 20% or less.

2. Previously if you had bad credit your credit score was greatly reduced by late payments. Now, The higher your score the more points you lose from a late payments or bad credit. The balance on your previous statement is reported to the credit bureaus. If you have bad credit, one 30 day late payment can lower your credit score by approximately 60-80 points and 90-110 points for those with good credit.

3. If you decide to settle do so quickly to increase your credit score. Your payment history is not affected much if you settle a debt, however, if you pay down a debt over a period of time say over 3-6 months this increases your credit score. If you try to settle a debt with the original creditor ask that the account be removed from your credit report. If the account is still open ask that the account be re-aged. Overall settling a debt or debt consolidation can lower your credit score approximately 45-65 points for those with bad credit and by 105-125 points for those with good credit.

4. Previously you could get another home 6 months to one year after a foreclosure if you had bad credit. Now, a foreclosure can lower your credit score by approximately 85-105 points and by 140 to 160 points for those with good credit. If you lose your home to foreclosure, do a short sell or deed-in-lieu of foreclosure and make sure the mortgage company does not report it on your credit report as a settlement usually reported as "settled", "settled for less than the full amount", or "foreclosure", or something similar.

5. Previously you could file bankruptcy and reestablish credit a few months after filing. Now, if you have bad credit and file for bankruptcy your credit score will be lowered by approximately 130-150 points. For those with good credit it can be lowered by approximately 220 to 240 points.

6. Previously you could close a new account and not worry about the impact on your credit score if you had good credit. Now, it's best not to close an account if you have balances on any open accounts because it will lower your credit score. If you have zero balances on all of your credit cards and close an older account your credit score will be lowered but not by much.

7. Previously when paying off debt, paying off the smallest or largest amounts helped increase your credit score. Now, if you are not making any purchases that require viewing your credit score within the next year pay off debt with the highest interest rate first, then tackle debt with the smaller interest rates.