FICO
Where does it come from?
FICO is short for the credit score system offered by Fair Isaac Corp., the company that invented the credit risk score model most widely used by the financial industry.
What is a credit report?
A credit report lists credit card accounts and loans you have, as well as how timely your payments are.
It also details whether you have been sought out for not paying bills.
The report includes all your identifying information, financial accounts, court records such as bankruptcy and a list of those who have requested a credit report on you recently.
Who creates credit reports?
A consumer reporting agency collects credit information, keeps it in a database and sells the data for a fee. Three major agencies operate in the United States; smaller ones are in local markets.
Where do you find your credit information?
You are entitled to a free one from each of the three major credit agencies, Equifax, Experian and TransUnion, each year.
Go to www.annual creditreport.com to get those. This free credit report can be requested through the Web site, by phone or by mail.
Check your credit history thoroughly. You're looking for errors, wrong information and negative information that might count against you. File a dispute with the three credit reporting bureaus if you spot any errors. Most credit reports have some serious error in them, so fixing these will boost your score.
The Web site www.myfico.com is a good source of information about credit scores and how to improve them.
What is a credit rating?
A credit rating is a score from your credit report.
The FICO score runs from 350 to 850. The higher the number, the better. Your target should be to have a credit score of at least 720.
A higher score could translate into a lower interest rate on a loan.
Amid the current economic crisis, people with reasonably good credit have found that mortgages are harder to get as lenders try to stem losses from loans to the weakest borrowers.
Mortgage brokers warn that people with any red flags on their mortgage applications will face delays and will pay higher fees. Potential problems include low credit scores or high credit card balances or listing a suspiciously high salary for a given job.
Who can see your credit report?
The credit bureaus can give information to:
- Creditors who have granted you credit or might in the future.
- Potential or current employers.
- Potential or current insurers.
- Government agencies reviewing your finances or government benefits.
- Anyone with a valid business reason, such as a potential landlord.
Why do people get turned down for credit?
- Too little time at a job or living at a residence.
- Too much debt.
- Errors on a credit report.
- Creditors' strict standards.
MENDING YOUR CREDIT WAYS
How can you improve your credit report?
A poor credit report doesn't always mean you won't be approved for credit. Creditors set their own standards and look at your credit history in different ways. Some look only at recent years to evaluate credit, or to examine whether bill-paying history has improved. But if you have fallen behind on payments, do all you can to fix your credit record.
- Understand what kind of debt you're facing. Don't ignore your bills. Contact creditors about a new payment schedule. Or negotiate with your creditors for a lower interest rate. Paying less in interest means more of your monthly payment goes toward paying down your balance.
- Make a list of everything you owe, the interest rate each debt carries, and the minimum payment due each month. Then, establish priorities for your debt: mortgage, real estate taxes, credit cards and medical bills should be paid in that order.
- Realize that the most crucial component of your credit history and credit score is your ability to pay your bills on time each month. Pay everything on time, even if you can only make the minimum payment.
- Even one late payment can greatly harm your credit history, even though it can take a year's worth of on-time payments to start to heal your credit history and raise your credit score.
- Pay down the debt with the highest interest first.
- Don't charge more than 25 percent of your maximum available credit limit. If you carry a credit card balance that is a higher percentage of your available credit limit, your credit score will go down. Creditors believe that if you charge the maximum on your credit cards, it means you can't properly manage your credit.
You're better off spreading out your debt between three or four different cards than having it all piled on one card.
- Don't open and close a lot of accounts. Every time you apply for a new credit card, that creditor pulls a copy of your credit history from the credit reporting bureaus.
That inquiry gets reported on your credit history.
- Don't share credit, except with a spouse.
- If things don't improve, stop using your credit cards. Take them out of your wallet so that you won't be tempted.
- It's easy to tell someone that you'll co-sign a credit card, student loan or a mortgage loan application, especially if it's someone you've known for a long time. Once you're a co-signer for a loan, you're legally obligated to make those payments - whether or not you can afford them. So think carefully before you agree to co-sign a loan, and nip the problem of bad credit before it begins.
- Be patient. Negative information cannot be removed from your credit record, but over time, a better record of payments will be established.
What if you're still having trouble with credit?
If you're having trouble creating a workable budget and sticking with it, try to work out a repayment plan with your creditors.
Consider getting help from a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But not all are reputable. Beware of those with high fees or hidden service charges.
Most credit counselors offer services through local offices, the Internet or the telephone.
If possible, find an organization that offers in-person counseling.
Many universities, military bases, credit unions, housing authorities and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of referrals.
For a list of credit counseling agencies in Virginia, go to www.tinyurl.com/5k2fop.
- Beware of cons. Credit repair scam artists will charge you as much as $1,500 and promise you things such as a new Social Security card and perfect credit.
Remember that if it sounds too good to be true, it probably is.
WHAT TO AVOID
What are the worst ways to harm your credit?
It's easy to make mistakes when it comes to your credit. Some mistakes are so harmful that you would never want them to appear on your credit report.
- Charge-offs
Missing payments for six months or more could cause your creditors to decide your account is uncollectible. When this happens, the creditor writes off the account and updates your credit report as "charged off" or "written off and uncollectible." Charged-off accounts stay on your credit report for seven years.
- Debt collections
Creditors may hire a third-party debt collector to try to collect payment from you. Your credit report may or may not be updated to reflect a collection status. Sometimes the debt collector or the original creditor places a note on your report.
- Bankruptcy
Filing bankruptcy lets you legally remove liability for some or all of your debts, depending on the type of bankruptcy you file. The bankruptcy details will be on your credit report seven to 10 years.
- Foreclosure
If you default on your mortgage loan, your lender will repossess your home and auction it off to recover the amount of the mortgage. A home foreclosure can severely harm your credit and limit your ability to get any new credit. A foreclosure stays on your credit report for seven years.
- Tax liens
When you don't pay property taxes on your home or property, the government can seize the property and auction it off for the unpaid taxes. Even if your home is foreclosed because of a tax lien, you still are obligated to pay the mortgage loan. Not paying your mortgage will also hurt your credit. Unpaid tax liens are on your credit report for 15 years, while paid tax liens stay for 10.
- Lawsuits or judgments
Some creditors may sue you for a debt if collections fail. If a judgment is entered against you, it will be on your credit report for seven years from the date of filing, even after you satisfy the judgment.
TAKE A LOOK AT YOUR REPORT
These three agencies have your information
Equifax
P.O. Box 105873
Atlanta, GA 30348
(800) 685-1111
Trans Union
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
(800) 916-8800 or (800) 888-4213
Experian (formerly TRW)
P.O. Box 2104
Allen, TX 75013-2104
(888) 397-3742
Questions and concerns about consumer reporting agencies can be directed to:
Federal Trade Commission Consumer Response Center - FCRA
600 Pennsylvania Ave. NW
Washington, D.C. 20580
(877) FTC-HELP (382-4357)
Delicious
Digg
Reddit
Facebook
Google
Yahoo
Skip third parties
Also skip third party websites like freecreditreport.com. Basically they're selling some credit watch service that you're automatically signed up for when you request the reports. They'll cancel it at no charge but of course you have to call an 800 number and sit on hold rather than being able to cancel on the web site. www.annualcreditreport.com is the official site.
FICO is garbage
The FICO computer model scoring thing is garbage, but unfortunately lazy lenders rely heavily on it. As someone who didn't have much debt I had a low FICO score. Job at NASA, no debt, real savings, and I couldn't qualify for a credit card even thought hey were giving college kids with no job 5 cards. About a year ago I started to engineer my score. Got a secured credit card with BofA for $5300. After that tradeline was on my reports I was able to get cards with several others. Now I tend to think about how every credit card transaction takes money away from businesses and creates an added cost for me. I'm thinking about going back to all cash instead of enriching the banks.