It is a number between 350 and 850 that represents what tradeline organizations (credit cards, lines of credit, store accounts, lenders, etc ....) think your credit and transaction history represents. The higher the score, the less risk it will be for them to extend you further credit. "Perfect credit" right now would be a score of 740. The highest score Kevin has ever seen was an 823!
Who are the Credit Reporting Agencies, and Who Uses their Info?
There are 3 agencies that track your credit - Equifax, Transunion and Experian and each of them has a file on anyone who has ever been given credit. Each organization has their own secret formula for calculating your score. A mortgage lender will get an overall picture of your credit worthiness by pulling scores from all three agencies.
How to have a GREAT Credit Score!
Make all of your payments on time, and have a good payment history. Be aware though that if you have a late payment and are assessed a late fee, it is not necessarily reported to the credit bureaus. Have low balance ratios. Example: if the card limit is $1000, a low balance ratio would mean you owe 33% or less than that, or $333 or less on that card. Anything over a 65% balance ration will raise a red flag with your lender. Have a reasonable # of tradelines open - Kevin mentioned that FIVE is a good number. A mortgage, car loan, student loan, and 2 credit cards is an example of good combination.
What Other Things Affect Your Credit Score?
When you open up a new credit card account, your credit score could take about a 30 point hit initially, until a your payment and usage history can be determined. When your mortgage lender pulls your credit report you will NOT take a credit hit. However if you start talking to several lenders and there are more than 3 credit report pulls in less than 2 weeks your score may be reduced by 10 points per pull. Usage on your debit card does NOT report to your credit score.
If you are taken to collections on something, this will definitely have a negative effect on your score. If you are able to resolve the issues the creditor does have the ability to call the credit bureaus and have the item removed, you just have to convince them to do it! The more credit applications you make, the more hits your score will take. It usually takes 30-60 days for your credit score to be adjusted for these types of things..
If you have been involved in a foreclosure on a home mortgage your score likely take about a 200 point hit. As far as the lender is concerned, being 120 days or more late on your mortgage affects your credit the same as a foreclosure. Being involved in a short sale affects your score less - check with your lender or financial advisor about the specifics for you.
If you are applying for a mortgage DON'T do anything until your loan closes that will affect your score, like buying a boat, applying for new credit cards, renting a summer home, etc... These are all things Kevin has seen clients do that ended up affecting their ability to close their loan and/or the rate they got!
Why Worry About Your Credit Score?
More and more orgagnizations we deal with on a regular basis are pulling our credit scores to get an idea of the kind of people we are - employers and prospective employers, insurance companies, car dealers, mortgage lenders, landlords, department stores, etc.... Did you know that a good credit score can make a difference in up to $100/month on insurance premiums? Your credit score will also determine the interest rate you get on your mortgage, which of course you want to be as low as possible!
How Can You Establish Good Credit, and Help Your Kids Establish Credit NOT Debt?
Get a secured credit card from a bank or credit union. Credit unions are especially great in working with young people. Ask the tradeline that you use if they report to the credit bureaus, and if they don't, request that they do. Gas cards are easy to get. Put your child on one of your existing credit cards or lines of credit, but make sure the limit is low and they know that it is still your account! Their credit will get "credit" too for the usage.
Stop applying for credit if you want to improve your score! Close accounts you do not use, but keep a minimum of 4 lines open even if you don't use them. Don't close the older more mature accounts as this history really helps you.
Find Out Where YOU Stand!
You have several options here. You can go to each of the credit bureaus independently and get reports, or you can go to http://www.experian.com/ and order your Personal Three Bureau Credit Report and Score. There is a fee for this. To see your report only but not your score for free, go to http://www.annualcreditscore.com/ and get one report per year free.
As a disclaimer we will say that we at Colorado Landmark are NOT credit experts. Please contact Kevin Teel or your preferred lender, or one of the 3 credit reporting agencies to verify statements made in this post, or to answer any questions you may have on this topic.
Thank you Kevin for the great class!
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