KNOWING THAT ‘BIRDS OF A FEATHER’ FLOCK TOGETHER
You’re known by the company you keep. If you can only obtain financing from a ‘FINANCE company’ versus a regular bank or credit union, this doesn’t help your FICO score and can actually lower it. This tends to demonstrate that a regular credit lender wouldn’t accept you as a customer so you had to go to one of the local loan sharks.
How do you know that you are dealing with a ‘FINANCE Company’? Simple, they will tell you that they are ‘XYZ FINANCE Company’.
BELIEVING THAT A HIGH INCOME CAN COVER A ‘MULTITUDE OF SINS’
Your credit scores are not dependent on the size of your income. However, let’s say you are a high income earner like a doctor and your credit score is in the toilet. You walk into a Mercedes Benz car dealership.
You work hard and have tremendous responsibilities. You feel, ‘I deserve to treat myself to that 500 SL’. The car dealership pulls your credit score of ‘500’ and says, ‘No problem, doctor. We’ll get you the financing.’ And you get the car through exorbitant interest rates because your credit score is low.
Even when you have a large income, you can have a poor credit score. Even when you are an above average wage earning family, you can have a poor credit score.
Your income is an indication of your capacity to earn money but your credit score reflects on your willingness and habits of paying what you owe.
NOT BEING AWARE THAT CREDIT SCORES CAN AFFECT YOUR INSURANCE RATES
Many insurance companies are tying your credit scores into your insurance rates. You can go to www.namic.org which is the National Association of Mutual Insurance Companies to learn how Connecticut deals with this issue. More specifically, go to:
http://www.namic.org/reports/credithistory/creditlaws.asp and you can learn how Connecticut treats this issue.
The insurance companies trade organization, NAMIC, has been pushing for legislation that instead of having an ‘insurance score’ that they use your credit score as a gauge of your risk of making a claim or having an accident as a driver of an automobile.
You have an ‘insurance score’ which can be a computation of your credit score and your past claims record. This is a controversial area which is developing and seeks to tie your insurance rate into either your credit score or your ‘insurance score’.
At present we have a list of the ‘best’ insurance companies who either do not pull your credit reports when extending insurance or use it on a limited basis are as follows:
- Chubb Insurance: www.chubb.com (866) 324-8222
- Dairyland Insurance: www.diarylandinsuranc.com (800) 532-2525
- Sagamore Insurance: www.sagamoreinsurance.com (800) 317-9402
- State Farm Insurance: www.statefarm.com (301-766-2311)
- Amica Insurance: www.amicamutual.com (800) 242-6422
HOWEVER, CAUTION: PLEASE CALL THEM AND ASK FOR THEIR UNDERWRITING STANDARDS AND SOME PULL YOUR CREDIT SCORE FOR HOMEOWNERS INSURANCE AND NOT FOR CAR INSURANCE. YOU MUST CALL THEM AND ASK FOR THEIR LATEST UNDERWRITING STANDARDS. CHECK IT OUT!
NOT FULLY APPRECIATING THAT A ‘DEBIT CARD’ IS NOT A ‘CREDIT CARD’
Even if your debit card has a Visa or Master Card logo on it, the use of your debit card does not appear on your credit report.
Only information on your credit report is used to develop your FICO score.
NOT UNDERSTANDING THAT CO-SIGNING ON A LOAN CAN LOWER YOUR CREDIT SCORE
Many people who co-sign on a loan for another person don’t realize the total ramifications.
If you co-sign on a loan for someone and that person defaults on the loan, then you are responsible for the debt.
If the person for whom you co-signed on a loan has late payments, those late payments are going to be reflected on your credit report and will lower your credit score.
If you have co-signed on a loan for someone, and you go to obtain a loan yourself, the fact that you have co-signed on a loan can affect your debt-to-income ratio and lower your chances for obtaining a loan for yourself.
If you want to help your son or daughter obtain financing for a car, you could 1) emphasize the importance to them of making all their monthly payments in a timely fashion or 2) you could obtain a separate loan in your name and use that money for a large down payment on a car for your son or daughter which could mean the difference between them obtaining financing and not obtaining financing.
BEING AFRAID OF CREDIT CARDS
Many people either pay for everything in cash via a debit card or money order. And there are many people who file for bankruptcy and take a solemn pledge, ‘NEVER USE OR HAVE ANOTHER CREDIT CARD.’ And if you’re going to pay via a money order, where can you get the cheapest money orders? WALMART. for $1.00 a money order.
First, it’s important to have a checking account and a savings account which helps your credit score. And it’s important to use your checking account properly. THOU SHALL NOT BOUNCE CHECKS! THOU SHALL KEEP YOUR CHECKING ACCOUNT IN BALANCE!
Second, the primary information on your credit report which is used to develop your FICO score is USE OF CREDIT CARDS. Yes, your credit report contains information on your car loans, mortgages, and personal loans. But having read many thousands of credit reports, I can tell you that the preponderance of account information on most credit reports will be your use OF CREDIT CARDS.
And if you don’t have a car loan or a mortgage, then you will have no credit history on your credit reports and, therefore, either no FICO or a very low FICO score. As a practical matter, if you want to improve your credit score within 12-24 months after you file for bankruptcy, you must have and properly use 2-3 credit cards. Even if you haven’t filed for bankruptcy, it’s still important to prove that you can handle credit cards.
Information which usually doesn’t appear on your credit reports is as follows: rent payments, telephone payments, cell phone payments, electric payments, gas payments, buying food or gas or clothing, child support, alimony payments, renting a movie, paying for a haircut, medical payments, dental payments, insurance payments, donations to charity, dues to a union or club and car repair bills, just to name a few.
And remember, if the information doesn’t appear on your credit report, it does not help your FICO score and if the credit bureau from whom you obtain a car loan doesn’t report to a major credit bureau, then your car payments aren’t on your credit report. Also, if you have filed for bankruptcy and don’t reaffirm on a car loan or a mortgage, then in many instances those payments are NOT REPORTED TO A CREDIT BUREAU.
BEING AFRAID OF CREDIT CARDS
If you have filed for bankruptcy and you don’t have a car loan and you have no credit cards, you will have no CREDIT HISTORY and, hence, a LOW FICO SCORE. You can insist that you won’t have a credit card once you have filed for bankruptcy, and I can understand your position that you want to return to old-fashion values of paying for everything with cash. But ironically this excellent value or way of doing business will result in a low credit score. If you want to develop a good credit score, you have no practical choice but to have 1-2 or even 3 credit cards.
The mistake consumers make with credit cards is that they SUBSTITUTE the credit card for CASH instead of as a CONVENIENT METHOD OF PAYING. Use the credit card but have the cash in a savings account at all times to completely pay the account in full. That means you must ‘save’ some of your income. Our slogan with the PennyWatchers is ‘a penny saved, is A MILLION EARNED.’ It was Benjamin Franklin who said, ‘A penny saved, is a penny EARNED‘ but no one listens.
And there are people who have good credit scores and are afraid of credit cards. Yes, credit cards are dangerous but like all dangerous reptiles they can be handled safely and since we are in a jungle, you have to learn to handle them safely with discipline and focus. That’s why we have an entire program called, ‘PennyTracking’ to help you come into financial focus and stay focused.
NOT REALIZING THE IMPORTANCE OF PAYING ON TIME! PAYMENT HISTORY
A blistering 35% of your total FICO score is dependent on your Payment History and that means: DO YOU PAY YOUR BILLS ON TIME? 35% of your FICO is developed from the pattern of your payments. If you don’t pay on time, then you’re going to lower your FICO score. I repeat: 35% of your total FICO score is dependent on whether or not you make timely payments on your reported debts. This is the single largest factor in developing your FICO score.
You must become fanatical about paying AHEAD OF TIME! Why? Let’s say your payment date is the 5th day of the month, but you have a grace period until the 15th to pay your bill. You pay your bill on the 10th day of the month and you don’t incur a late fee but you have hurt your FICO score. If your bill is due on the 5th day of the month, you should strive to pay the bill on the 1st day of the month. Why? First, paying on time is the best way to pump-up your FICO credit score.
Paying ahead of time prevents either an error on the creditor in accidentally reporting that you paid late, or even more cynically, creditors have deliberately made consumers late on their payments in order to collect late fees. Let’s say that you have to pay on your credit card by the 10th day of the month. You mail the payment on the 8th day of the month and the check physically arrives on the 10th day of the month and the creditor deliberately waits until the 11th day to post the payment to your account.
Then you’re ‘a day late and a dollar short’. The creditor gets to collect a $28.00 late fee. How much did the credit card industry collect last year in late fees? Answer: $300,000,000.00. There have been class action law suits against credit card companies for this practice of deliberately posting the account so as to collect late fees.
You are graded on how late you made your payments. If you are one day late, you are reported as 30 days late and if you are 31 days late, then you are 60 days late. See the Equifax Key Sheet.
In developing your FICO credit score, your Payment History is analyzed as follows:
- Account Payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgages, etc.)
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.) collection items, and/or delinquency (past due items)
- Severity of delinquency (how long past due)
- Amount past due on delinquent accounts or collection items
- Time since past due items, or adverse public records or collection items were reported
- Number of past due items on file
- Number of accounts paid as agreed
NOT REALIZING THAT YOUR CREDIT BALANCES ACCOUNT FOR 30% OF YOUR FICO SCORE AMOUNTS OWED
FICO here looks at how much you owe divided by your credit line. If you owe $250.00 on a credit card with a line of credit of $1,000 then your ratio is 25%. Simply divide $1,000 into $250.00 = 25%. You should not exceed in any one month 25% of your credit line.
However, we have seen where a client used $800 on his line of credit of $1,000.00 and paid off the $800 immediately, and was offered an increase on his line of credit. Carrying balances of more than 25% of your line of credit for long periods of time will either cause you to have an AVERAGE FICO score or WILL LOWER your FICO score.
Remember 35% of your FICO score is paying your debts on time and 30% is carrying low loan balances and these two factors = 65% of your FICO score.
In developing your FICO score, Amounts Owed are analyzed as follows:
- Amount owing on accounts
- Amount owing on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
- Proportion of installment loan
NOT HAVING A CREDIT HISTORY
How LONG you have had a specific line of credit is important to the tune of 15% of your FICO score. Therefore, when you go opening and closing accounts, this lack of steadiness can hurt your FICO score. Transferring credit card balance to get a better rate is certainly a good idea but do not go doing it every other month. And actually you should avoid transferring to different credit cards because it generates inquiries and generating inquiries does not help your FICO score.
I recommend that you stay with one or two major credit cards and if you are offered a more competitive rate by another company, simply call your present card company and ask them to lower your interest rate because you have this hot offer in your hand. This strategy has worked and you do not go closing one account and opening another account.
So far we have discussed what constitutes 80% of your FICO score, namely:
1) 35% Payment History
2) 30% Amounts Owed
3) 15% Length of Credit History
Total: 80%
What are the simple rules of thumb for 80% of your FICO score,
- Pay on time!
- Have low balances at the end of the month
- Stay with your present credit cards. Do not switch credit cards.
In developing your FICO score, Length of Credit History is analyzed as follows:
- Time since accounts opened
- Time since accounts opened, by specific type of account
- Time since account activity
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