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sabrinamariIf you haven't read Part 1 of my FICO post, scroll down and read it first. Otherwise, this won't make much sense.
But if you've already read it, this post will explain how FICO calculates its scores so that you can manipulate the system to your own advantage. It will also show you how to get your credit reports (but not your credits scores) for free, and tell you how to look for and fight errors and bad items that drag down your score. I take this information from a pre-existing but now defunct podcast series, "Creating Wealth on Your Current Income".
Now, the exact formula for calculating your FICO score is a closely held secret. But we do know the broad outlines of how it is done.
There are 5 categories of information that affect your FICO:
1. 10% of your score has to do with applications for new credit. Whenever you open a credit account, your FICO comes down a little bit---not much. The longer it's been since you opened a new credit card, mortgage or loan account, the higher this part of your score rises.
2. 10% is based on the types of credit you have---installment credit (like mortgages), revolving debt (like major credit cards), store charge cards, etc. All these affect your score. One type of credit always brings your score down: the kind where the ads say,"No interest for a year!" or "No interest till _____!". Credit card companies know that 90% of people will not pay off this kind of debt before the interest kicks in---then they will have to pay exorbitant interest starting from the FIRST DAY they charged the item. Avoid these promotions like the plague.
3. 15% is based on the length of your credit history---how long you have held and managed a credit account is essential to your score. Older accounts raise your score higher. So when you pay off a credit card, think carefully before you close it---especially if it's one of your older accounts. In general, most financial gurus tell you not to close paid off credit card accounts for this reason and one more (see below). Dave Ramsey disagrees. He believes in a no-credit-card life. Someday, I want to buy a house, so I need a high FICO. Thus, I keep my credit card accounts open but mostly empty.
THE LAST TWO CATEGORIES ARE WHOPPERS!
4. 30% of your score is based on how much you owe. This is broken down into 2 subcategories:
a. Your total outstanding debt
b. How many accounts make up your balance
If you are using a high percentage of your total available credit, your FICO score is very badly affected. If you are using a low percentage of your total outstanding credit, your FICO score is sent soaring.
Examples:
You have $10,000 in total available credit. You have $9,000 on your credit cards. You are using 90% of your available credit. You are considered a very risky borrower.
IF...you are currently using 75% or more of your available credit...you are RISKY, and this part of your score is very low.
50% or so...you are considered about average, and this part of your score is about average.
Less than 50%...you are considered above average, with a better than average score.
Less than 30%...optimal! This is the best category with the highest numbers for this part of your score.
This is the second reason not to close paid off credit card accounts: closing them lowers your total available credit and converts your existing debt into a larger percentage than before!
The more different accounts you are using for your charges, the lower this part of your FICO score. $10,000 split on 6 different cards is worse than $10,000 split on only 2 cards.
5. 35% of your FICO score is based on your payment history, or how consistently you make your payments on time.
This is great news: the two biggest categories of FICO are the two you can most easily control.
To make progress fast:
1. Always pay at least the minimum early or on time.
2. Pay down your debt consistently and don't charge anything more!
Traps to watch out for:
1. Be careful if you have an old unpaid debt hanging around---like several years old or more. Your FICO score only looks back 2 years, so that old debt will have fallen out of its formula. If you pay it off, it will suddenly jump forward and be part of the calculation, lowering your score once more.
2. FICO (and your credit reports) track how many times you have been more than 30 days late, more than 60 days late and more than 90 days late with a payment. Being over 90 days late has the same impact as either a bankruptcy or a foreclosure. NEVER be over 90 days late with a payment.
3. 86% of all credit reports contain errors; 30% contain errors that seriously affect/lower credit scores. So get your credit reports and check them carefully, contesting any errors you may find. When you contest a bad item, a credit reporting company has 30 days to authenticate it. If they can't authenticate it (if it's a mistake, if the original company lost their records or if they discarded their records and can't trace the claim) the item MUST BE REMOVED.
This means that accurate bad items can sometimes be fought and removed. You may want to think about the ethics of this. I did, for about 30 seconds, then realized I had no pity for credit card companies, credit reporting companies, or any of the large companies affiliated with the credit industry...but that's just me. Do what you think is right.
To raise your score:
1. Never pay anyone to 'repair your credit'! You can do it all for free online yourself, or buy a small kit to make it all easier for $16-$50.
[Link to helpful (but unnecessary) kits: http://www.myfico.com/Products/Products.aspx]
You can get one free credit report from each of the three credit reporting companies once each year. You can't get your scores for free---you must pay between $7 -$10 each for those (or you can pay just a little bit more for a MyFICO.com kit that walks you through everything). Go here for the free reports:
http://www.annualcreditreport.com
Many companies charge hundreds or thousands of dollars for false "credit repair". *Never* fall for this. Either do it yourself online or pay under/about $50 for a kit that will get you your reports and scores and help you fight errors and bad items more easily.
Once you have your credit reports: go through and highlight errors and bad items. Follow the online links to each company you are given, and go to the screen that lets you contest bad items. You will be given a format that lets you list each items you want to fight/contest. Use the highlighted reports to guide you in filling these out. You will then be told that the company will contact you within 30 days with the results of their investigation.
Watch your email. You will be sent links to the results. Often, you will win and the item(s) will be dropped!
That's it---you're now a FICO expert.
But if you've already read it, this post will explain how FICO calculates its scores so that you can manipulate the system to your own advantage. It will also show you how to get your credit reports (but not your credits scores) for free, and tell you how to look for and fight errors and bad items that drag down your score. I take this information from a pre-existing but now defunct podcast series, "Creating Wealth on Your Current Income".
Now, the exact formula for calculating your FICO score is a closely held secret. But we do know the broad outlines of how it is done.
There are 5 categories of information that affect your FICO:
1. 10% of your score has to do with applications for new credit. Whenever you open a credit account, your FICO comes down a little bit---not much. The longer it's been since you opened a new credit card, mortgage or loan account, the higher this part of your score rises.
2. 10% is based on the types of credit you have---installment credit (like mortgages), revolving debt (like major credit cards), store charge cards, etc. All these affect your score. One type of credit always brings your score down: the kind where the ads say,"No interest for a year!" or "No interest till _____!". Credit card companies know that 90% of people will not pay off this kind of debt before the interest kicks in---then they will have to pay exorbitant interest starting from the FIRST DAY they charged the item. Avoid these promotions like the plague.
3. 15% is based on the length of your credit history---how long you have held and managed a credit account is essential to your score. Older accounts raise your score higher. So when you pay off a credit card, think carefully before you close it---especially if it's one of your older accounts. In general, most financial gurus tell you not to close paid off credit card accounts for this reason and one more (see below). Dave Ramsey disagrees. He believes in a no-credit-card life. Someday, I want to buy a house, so I need a high FICO. Thus, I keep my credit card accounts open but mostly empty.
THE LAST TWO CATEGORIES ARE WHOPPERS!
4. 30% of your score is based on how much you owe. This is broken down into 2 subcategories:
a. Your total outstanding debt
b. How many accounts make up your balance
If you are using a high percentage of your total available credit, your FICO score is very badly affected. If you are using a low percentage of your total outstanding credit, your FICO score is sent soaring.
Examples:
You have $10,000 in total available credit. You have $9,000 on your credit cards. You are using 90% of your available credit. You are considered a very risky borrower.
IF...you are currently using 75% or more of your available credit...you are RISKY, and this part of your score is very low.
50% or so...you are considered about average, and this part of your score is about average.
Less than 50%...you are considered above average, with a better than average score.
Less than 30%...optimal! This is the best category with the highest numbers for this part of your score.
This is the second reason not to close paid off credit card accounts: closing them lowers your total available credit and converts your existing debt into a larger percentage than before!
The more different accounts you are using for your charges, the lower this part of your FICO score. $10,000 split on 6 different cards is worse than $10,000 split on only 2 cards.
5. 35% of your FICO score is based on your payment history, or how consistently you make your payments on time.
This is great news: the two biggest categories of FICO are the two you can most easily control.
To make progress fast:
1. Always pay at least the minimum early or on time.
2. Pay down your debt consistently and don't charge anything more!
Traps to watch out for:
1. Be careful if you have an old unpaid debt hanging around---like several years old or more. Your FICO score only looks back 2 years, so that old debt will have fallen out of its formula. If you pay it off, it will suddenly jump forward and be part of the calculation, lowering your score once more.
2. FICO (and your credit reports) track how many times you have been more than 30 days late, more than 60 days late and more than 90 days late with a payment. Being over 90 days late has the same impact as either a bankruptcy or a foreclosure. NEVER be over 90 days late with a payment.
3. 86% of all credit reports contain errors; 30% contain errors that seriously affect/lower credit scores. So get your credit reports and check them carefully, contesting any errors you may find. When you contest a bad item, a credit reporting company has 30 days to authenticate it. If they can't authenticate it (if it's a mistake, if the original company lost their records or if they discarded their records and can't trace the claim) the item MUST BE REMOVED.
This means that accurate bad items can sometimes be fought and removed. You may want to think about the ethics of this. I did, for about 30 seconds, then realized I had no pity for credit card companies, credit reporting companies, or any of the large companies affiliated with the credit industry...but that's just me. Do what you think is right.
To raise your score:
1. Never pay anyone to 'repair your credit'! You can do it all for free online yourself, or buy a small kit to make it all easier for $16-$50.
[Link to helpful (but unnecessary) kits: http://www.myfico.com/Products/Products.aspx]
You can get one free credit report from each of the three credit reporting companies once each year. You can't get your scores for free---you must pay between $7 -$10 each for those (or you can pay just a little bit more for a MyFICO.com kit that walks you through everything). Go here for the free reports:
http://www.annualcreditreport.com
Many companies charge hundreds or thousands of dollars for false "credit repair". *Never* fall for this. Either do it yourself online or pay under/about $50 for a kit that will get you your reports and scores and help you fight errors and bad items more easily.
Once you have your credit reports: go through and highlight errors and bad items. Follow the online links to each company you are given, and go to the screen that lets you contest bad items. You will be given a format that lets you list each items you want to fight/contest. Use the highlighted reports to guide you in filling these out. You will then be told that the company will contact you within 30 days with the results of their investigation.
Watch your email. You will be sent links to the results. Often, you will win and the item(s) will be dropped!
That's it---you're now a FICO expert.
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no subject
Date: 2008-03-16 03:54 am (UTC)But annualcreditreport.com does not give you the FICO score -- at least not for free. It gives you a chance to look at the information on which the score is based, and to make corrections; once you look that over, you can pay a fee (I forget how much -- something in the $20 range) to find out your score from the one of the three agencies you're querying.
Oh, yeah -- there's three agencies, and you get one free report a year from each agency. I try to check one agency every four months. That way, I keep tabs on my information regularly without using up my free reports.
Good points, Jen!
Date: 2008-03-16 11:42 am (UTC)Of course, if you just want to purchase the original FICO score, it's probably better to get the credit reports for free and buy the FICO from Equifax.
Of course, the MyFICO kits do a good job of organizing the information and explaining it so that it's easy to understand; several of them also make it easier to contest errors. And if you decide you want the scores of all three companies at once, it's probably a better way to go than buying each score individually.
I've gone both routes at different times: get the free reports myself and buy the FICO---as well as buy a kit/service that organizes all the info for me.
I'm glad I did both. Each approach taught me something different. Now that I feel very comfortable with the whole thing, I think that your system (requesting one free credit report from each reporting agency every 4 months, right?) would work very well for me.
Thanks so much for telling us/reminding us about that strategy!
no subject
Date: 2008-03-16 01:28 pm (UTC)And a comment about #1 on your list, applications for new credit: I am in the process of looking for a new home, and that means looking for a mortgage. I've been talking to mortgage companies this week, and their first question is usually "Do you know your credit score?"
The second is, "Can I have your Social Security number so I can run a credit check?"
The advice I've received is that if you are comparison-shopping for a major loan (mortgage, car financing, home equity, etc.) to try to get all of your shopping done in a relatively short period of time so that FICO can tell that you're shopping only for one loan, rather than thinking about getting multiple mortgages each with its own payment. ("She's asked four different banks to loan her how much money? That adds up to a gazillion dollars!")
Do comparison-shop. (I've gotten quotes that vary by as much as $350 per month, all for 30-year fixed loans!) But do as much as you can without having the prospective lender run a check against your score -- that's one more reason to know your own number. When you've whittled down the candidates to a relatively small group, then give them the info they need to run a check. If you're going to be looking a a whole bunch of different lenders, at least to begin, don't give each one of them what they need to run the check.
Do you have any different advice on how to handle loan-shopping?
no subject
Date: 2008-03-16 02:03 pm (UTC)But I have heard that FICO treats all credit inquiries within roughly the same 2 weeks (I will check on the exact period) as a single inquiry, precisely so that people who are mortgage shopping don't see a big drop in their scores.
The advice I've heard is this: pack all that mortgage shopping into a short period to take advantage of this feature of the scoring process.
no subject
Date: 2008-03-16 07:18 pm (UTC)no subject
Date: 2008-03-16 02:34 pm (UTC)The first time I applied for a mortgage was in 1989. Think back to those dusty days, if you can: no web pages. We barely had email, and that was either a student account or something called Compuserve. There wasn't a way to check your own credit score; indeed, there wasn't a law saying that you had to be able to check your credit info for free.
So imagine my shock when, during the application process, the mortgage company said that I had gone without paying my Sears bill for six months! Fortunately, I had been good at keeping my bills and receipts, and could challenge that bit of mis-information.
One more reason to get in the habit of looking at this stuff.
no subject
Date: 2008-03-17 12:14 pm (UTC)Whoah.