As your post-holiday credit card statements arrive in the mail, you´ll probably think about what you spent. But have you thought about how much of your personal and financial information was exposed? Sounds like the perfect time to check your Credit Report!
In the past you had to be careful of the carbons when they “swiped” your credit card. Today credit thieves have a whole new high tech and low tech bag of tricks. The only way to make sure you’re safe is to take precautions and regularly check your credit report for inaccuracies, you know, the key changes on your report that could either indicate identity theft or a reporting error.
Parents, start building your children’s credit early – and do it well. Build credit early for your children – even before college starts, if they plan to take out student loans. Sign over an account that they must pay on time each month. Get a credit card with a low limit, and a bank account that you help them manage monthly. Avoid opening several charge cards at once in their name – not only will they be hard to repay, but having new accounts when they have a short credit history will cause their credit rating to drop. Encourage them to get a part-time job.
“The Credit Card Act of 2009 sought to temper aggressive marketing of credit cards to students by restricting campus promotions and requiring students younger than 21 to have a co-signer, unless they have enough income to get their own card.” And banks are unwilling to offer credit education to their customers. “They do not tell us that no credit is as bad as poor credit. Banks and educational institutions certainly do not think it is their responsibility to conquer the critical task of teaching children about credit.”
Be careful of online loan rate comparisons, timing is everything. Online loan rate quotes are easy to get – type in some personal information and you can get a quote on a car loan, personal loan, student loan, or mortgage in seconds. This is free and convenient, leading many people to compare several companies at once in order to make sure that they get the best deal possible.
The problem is that since online quotes are a fairly recent phenomenon, Credit Bureaus count each such quoted estimate as a “Hard Inquiry.” This means that if you compare too many companies online by asking for quotes, your credit score will fall due to too many “Inquiries.” This does not mean that you shouldn’t seek online quotes for loans – not at all. In fact, online loan quotes are a great resource that can help you get the very best rates on your next loan. What this information does mean, however, is that you should research companies and narrow down possible lenders to just a few before proceeding.
Information you as a consumer should know about Credit Bureaus. The Credit Bureaus make money selling your information. The three major Credit Bureaus are in business for two main reasons only and those reasons are to make money, and be profitable for their shareholders. They make their money by selling consumer information to other businesses who lend money. With this information those businesses can assess the risk level of potential borrowers. Many of those businesses are:
Credit Card companies
Employers (with your permission only)
The Bureaus enjoy greater financial success if you have low scores. As a rule, credit card companies do not spend nearly as much money buying the personal information belonging to people that have good credit.
Accumulation of new debt is the remaining 10% of your credit score. It is comprised of how much new debt you are applying for. It takes into consideration how many accounts you currently have open, how long it has been since you opened a new account, and how many requests (Inquiries) you have for new credit within a 12 month time period. If you go out today and apply for credit, that creditor requests information from the Credit Bureaus. This counts as a Hard Inquiry on your report. If you have a lot of Inquiries in a short period of time, your scores will be impacted. If you request your own report, that is considered a Soft Inquiry and doesn’t count against your score, or show up on your report.
A healthy mix of credit accounts, represents 10% of your credit score. The Credit Bureaus take into account the “mix” of credit items you have on your report. This part of your credit score is affected by what kinds of accounts you have and how many of each.
The Bureaus will score you higher if you have an open mortgage, 3 credit cards, 1 auto loan, and a small amount of other open accounts. This mix tells the Bureaus that you can handle any type of loan. If you have a ton of credit cards, your scores will be lowered. If you have several mortgages, your scores will be lower. Any, “unhealthy” account mixes lower your scores. The preferred number of credit cards is 3. This means you will actually have a higher credit score if you have 3 open credit cards than if you have two or less. BUT, don’t run out and cancel your cards just yet. REMEMBER, 30% of your score is comprised of your balances in relation to your maximum credit limit. So keep your cards open, but focus on having 3 LARGE balance cards for ultimate impact. Maintain a healthy mix of accounts and your credit score will be golden.
Length of credit history, or your “time in the bureau”, accounts for 15% of your credit score. The older you are, and the longer you have had credit accounts for, the higher the score. This is broken down into 3 sub categories:
Time since accounts opened.
Time since accounts opened, by specific type of account.
Time since account activity.
Your credit history length is important when it comes to understanding your score as a longer credit history is looked upon more favorably than a shorter one. Someone with a credit history of 6 months isn’t going to look as impressive as someone with a history of 6 years. It takes time to establish a payment history. Those with longer credit histories typically have higher incomes as well.
The second largest factor in your credit scores is the amount you owe in relation to your high credit limits termed Credit Utilization Ratio, or CUR. This accounts for 30% of your score calculation. If you are carrying high credit card balances, you can actually hurt your credit scores almost as much as paying the account late every month. This aspect of your credit score has several different factors. The first factor is your relation of balances you owe on all of your accounts in relation to the high credit limits on those accounts. Once again, this takes into consideration balances on ALL of your accounts combined. Your credit score also takes into account balances in relation to high credit limits on your individual accounts also.
The three major Credit Bureaus: Equifax, Experian, and TransUnion, all work off of a similar scoring system. This system is based on a singular postulation: will you become 90 days late in the next 2 years? The scoring system they all use, (with minute variables) can be broken down into 5 categories; or 5 pieces of a pie. I will discuss the first part of that credit pie today.
Your payment history is the largest aspect of your credit score, as you might expect. In total, your pay history accounts for 35% of your total score. This portion of your total score calculation is based on your prior payment history with your creditors. Late payments, defaulted accounts, bankruptcies, and all other NEGATIVE information on your credit report have the greatest effect. The more recent the late payment, the greater the damage is to your credit score. If you go late on your mortgage this month, the Mortgage Industry Option scoring model could drop your scores over 120 points. That is with only one 30 day late payment!