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UNDERSTANDING CREDIT SCORE SERIES 2

by Corey Goldstein

As I shared with you in my last post, credit scoring is based on a predictive model which determines if a person is going to file bankruptcy or not. This week’s post is all about the critical factors that determines one’s credit worthiness, “lend ability” and financial attractiveness. My hopes are that you gain insight and understanding as to how you can increase your credit scores and turn your financial trajectory in the direction you most want. Said another way, I want you to be cause in the matter of your own success and not a victim of the past.

As I originally claimed, there are 22 critical factors and I have since expanded my list to 40. This further “buffed up” list allows for greater depth of understanding and clarity so you can take better actions for yourself when looking for financing. Let me to put this in perspective.

If you owned a bank, you would want is many ways in which to charge people fees and higher interest. You would come up with unique ways in which to charge people, such as expensive late fees which would trigger higher interest rate, thereby justifying your action. You would want to come up with products and services that look valuable but ultimately are just selling air… Just like credit monitoring. You would come up with expensive annual fees, “exclusive” cards that charge exorbitant fees for exclusivity. All devised to extract money out of your client’s pocket. With that being said, let’s discuss the credit scoring components and what they do:

Credit scoring components measure positive and negative credit worthy traits. There are far more negative ways to describe your credit report versus positive.

The negative traits are identified through a list of risk scoring reasons. To explain how certain damaging consumer behaviors are reported to the credit bureaus, I’ve included these below.

By understanding these factors and reasons, you will be able to make the necessary tweaks and adjustments to get the maximum performance from your credit scores with little to no expense.

You can find these codes contained on an actual tri-merge credit report that you can to obtain from your loan professional.

  •  Amount owed on accounts is too high – high balances are precursor to financial meltdown
  •  Delinquency on accounts- the level of delinquency can cause big swings in credit scores
  •  Too few banks revolving accounts- major credit cards are huge indicators of credit worthiness
  •  Too many bank or national revolving accounts – having 18 major credit cards can be difficult to manage
  •  Too many accounts with balances- each additional balance carries an extra default risk
  •  To make consumer finance company accounts- lenders outside of traditional lending options carry a stigma, high interest and elevated default patterns
  •  Account payment history too new to rate – it takes more than just a couple of on-time payments on the new account to build the gate credit history
  •  Too many recent inquiry is the last 12 months – desperate attempt for new credit are indication of financial crisis and rejection
  •  Too many accounts recently opened – a glut of new credit can be difficult to manage
  •  A portion of balances to credit limits is too high on revolving accounts – I credit utilization ratio contemporarily lower credit scores
  •  Amount owed on revolving accounts is too high – excessive balances on credit cards can hurt no matter what your credit limits are
  •  Length of revolving credit history is too short – a rush to open new credit card reduces your average revolving count age as him
  •  Time since delinquency is to recent or unknown – it takes a while for the swelling to go down when you are late
  •  Length of credit history is too short – no credit is still better than bad credit
  •  Lack of recent bank revolving information – a lack of major credit card account history reduces repayment predictability
  •  Lack of recent revolving account information – failure to use any type of a violent account causes you to lose experience points
  •  Is no recent non-mortgage balance information – a home loan is a great credit builder, but it does not do it alone
  •  Number of accounts with delinquency – multiple late fees and doubled minimum payments on the beginning of financial ruin
  •  Too few accounts currently paid as agreed – failure to maintain current payments on a majority of accounts carries additional penalties
  •  Date of last inquiry to recent – and Corey can lower your score up to five points for the first 12 months
  •  Length of time since derogatory public record or collection is too short – consider this is your cooling-off period
  •  Amount past due on accounts – higher overdue balances are more difficult to recover from
  •  Serious delinquency, derogatory public record or collection filed – major debt problems can limit new credit opportunities
  •  Number of bank or national revolving accounts with balances – expect a penalty from high balances on major credit cards
  •  No recent revolving balances – unless the revolving activity can deny your credit profile of the ideal mix of credit accounts
  •  Number of revolving accounts – too few revolving accounts make measurement of credit worthiness difficult, while too many can be difficult to manage
  •  Number of established accounts – the accounts are generally at least two years old and provides better long-term repayment predictability
  •  No recent bank card balances – Norman credit cards are at risk of closure by lender doing inactivity
  •  Time since most recent account opening is too short – expect a temporary drop in scores immediately after opening a new credit account
  •  Is too few accounts with recent payment information – your credit history from 2 to 7 years back is less relevant than more recent usage of credit
  •  Lack of recent installment loan information – installment loans are important indicators in the credit mix component of scoring
  •  Proportion of loan balances the loan amount is too high – installment loans provide greater booster scores once the balance is less than half the opening balance. Down payments are completely ignored
  •  Amount owed on delinquent accounts – credit scores drop is late payments mount
  •  Serious delinquency and public record or collection filed – a default a credit account causes additional damage when collections and legal actions commence
  •  Serious delinquency – severely late payments can result in subsequent collections and legal action if not corrected
  •  Derogatory public record or collection filed – deferrals of default to debt collectors and civil action against you will reduce your credit scores

These credit scoring factors make up FICO based risk models that are used by the major consumer credit reporting agencies.  Some factors are far more heavily weighted in credit scoring, while others yield little influence.  Credit scoring formulas are secret and this is been compiled over years of study and thousands of credit cases.   My suggestion to you, would be to review this list of critical factors ask yourself a question does this apply to me? If the answer is yes, begin the focus on turning around that situation and watch your scores follow suit!

In my next article, we will discuss what to look for in each individual section of your credit report!  Nothing better than 800.

 

Corey Goldstein is the CEO of Fix My Report…for more information visit www.fixmyreport.com.