CREDIT SCORES
Here is some good information I
found on www. bankrate.com that helps to explain how a credit score is
determined. I thought it would be appropriate to make my first posting about credit scores much like an artist needs a clean canvas your credit report should be as "clean" as possible before you decide to start looking into getting a new mortgage.
Good luck in your new
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your real-estate needs in Central Indiana, (Avon, Brownsburg, Camby,
Coatesville, Danville, Fishers, Fortville, Greenfield, Greenwood, Lapel,
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Plainfield, Speedway, Westfield or Zionsville)! - Michelle Honeycutt
As you've probably heard by now,
you're entitled to free copies of your credit reports. Federal law gives you
the right to request your three credit reports, one from each of the three
major credit reporting agencies, every year through AnnualCreditReport.com.
You can get them all at once or
throughout the year. Personal finance gurus often recommend pulling one report
every four months so you're regularly tracking your records. Either way,
checking your credit reports is a smart move when you consider that information
from your credit report determines your credit score.
But once you get that report, what
do you do with it?
How about giving it the six-minute
treatment? While you definitely want to read the full report in detail, a quick
check on a handful of indicators can give you an instant appraisal of how good
--or bad -- your credit is right now.
Here are six markers that can
provide an X-ray of your credit health.
Delinquencies
Delinquencies
are "huge influences" on the credit score, says Stephen Brobeck,
executive director of the Consumer Federation of America. In fact, they make up
35 percent of your FICO score.
If you see notations that bills have
been paid 30, 60, 90 or 120 days late, "that's very damaging" to your
credit, he says.
The other factor that's important
here: the timeline. How late was the payment, and how long ago did you make
this mistake?
The later the payment, the more it
hurts your credit, says Evan Hendricks, author of "Credit Scores &
Credit Reports: How the System Really Works, What You Can Do."
But the more time that has passed
since you made a late payment, the less it will affect your credit, he says.
Debt-to-credit
limit ratio
Credit
scores typically look at your debt-to-credit limit ratio or "utilization" in two ways:
They compare the balance on one revolving account to your available credit from
that lender. For instance, if you have a credit card with a $1,000 balance and
a $5,000 credit limit, this ratio would be 20 percent.
Scoring formulas also look at your
debt-to-credit limit ratio a second way: calculating the total of all your
debts on revolving accounts against your total credit lines on those same
accounts.
So if you have four credit cards
each with a $5,000 credit line ($20,000 in credit), and you have a $1,000
balance on two of them and nothing on the other two ($2,000 in debt), this
ratio would be 10 percent.
"In an ideal world, you would
want to have (those ratios) under 10 percent," says Hendricks. "But
certainly you want to keep them under 40 percent. There's no magic
number."
But if you're running up a balance
of $2,000 to $3,000 with a card that has a $5,000 limit, "that's really
going to hurt your score," says Brobeck. "And what's worse is running
up balances on several cards."
Collection Agencies
Most of the time, if you have an account
that has gone to collections or been written off as a bad debt, you know about
it, says Rhonda Bailey, credit counselor and credit report review manager for
the nonprofit Credit Counseling of Arkansas, but not always.
"There are those few instances,
like an old utility bill after you've moved, (where) the collection agency
didn't find them and (the consumer) forgot about it," she says. "I
see that occasionally."
If you find an item that isn't
yours, you can dispute it and have it removed from your report.
If the item is yours, you have some
decisions to make, Bailey says. Can you afford to pay it?
It's a good idea to check your
state's statute of limitations, which is the period of time creditors have to
sue you over a debt. Your state attorney general's office can give you that
time limit, she says.
Separate from that time limit, the
item can stay on your credit report for seven years. The longer it's been on
your report, the less it affects your score.
Judgments,
liens, bankruptcies
It is hoped that you would know if
you've had any major financial difficulties that involved judgments, liens or
bankruptcies. However, if someone else is using -- and trashing -- your
financial identity, a notation on your credit report could be your first clue.
Ditto if a less-than-scrupulous
collector has tagged you with someone else's debt or taken action against you without proper
notification.
When you get that report, scan the
"public records" section, says Michelle Dosher, managing editor for
consumer publications for the Credit Union National Association. "If there
are any liens or bankruptcies, it's a good way to check."
Active accounts you
closed -- or never opened
You closed a store card after you moved. Or you finally got around
to asking your daughter to close the card account you co-signed for when she
was in college.
The
next time you pull your credit report, if enough time has elapsed, it should
show that those accounts are closed, says Dosher.
Glancing
at your credit report "is a way to verify that you have closed them and
the dates are correct," she says. If what should be a closed account your
credit report lists as open, that's a good time to contact the issuer and find
out why.
Another
thing to look for is accounts you don't remember opening in the first place.
Absent a mix-up, that could be an "indication of identity theft,"
says Dosher.
Inquiries
Your
credit report will tell you who else has been viewing your credit report.
Called "inquiries" in credit-speak, they come
in two kinds.
Hard inquiries are when you have actually requested new credit -- filled out an application,
signed paperwork, etc. -- and asked a lender to check your history. When you
get a hard inquiry, your credit can take a small dip. Hard inquires could
affect your score for one year, but you'll see them on your report for two
years.
Soft inquiries are what credit bureaus put on your report when someone reviews
your credit file but you haven't asked for new credit. If you pull your own
credit report, that's a soft inquiry. You'll also see one if a prospective
lender pulls your credit for marketing purposes. Soft inquiries don't affect
your score.
Hard
inquiries are "such a small part of your credit score," says Kelly
Rogers, chief development officer for the nonprofit Consumer Credit Counseling
Service of Orange County, Calif., and adjunct faculty at Chapman University.
"But it's such a great way to see if anyone's been using your
information."
