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Credit Reports and Credit Scores

What does it all mean?

Your credit report is a personal file about your financial history. It includes both positive and negative accounts. It shows if you have paid on time or if you have been late, and when the last time you paid the account was. It will show the high balance, the credit limit and your current balance. There are three companies or credit bureaus that maintain these records, Experian, Equifax, and Trans-Union. A creditor may report to all, some or none of these bureau's.

Most have heard of a credit score. This is a three digit score that ranges between 300-850, the higher your score the better. This score is called your FICO score. Fair Isaac and Company created this scoring system that has gained in popularity over time. The score is figured using complex algorithms that are not published. However, here is a general synopsis on how the scored is reached:

Payment history accounts for 35% of your score.
Being over extended accounts for 30%. For example, if you have four credit cards and each one has a credit limit of $5,000 and they all have $4,500 charged on them, this will lower your score.
How long your credit has been established will account for 15% of your score.
A good mix of credit accounts for 10% of your score. Do you have a mortgage, credit cards, and finance company accounts? If you do, it will improve your score. Do not open accounts to improve your score!
Are you taking on more debt? This accounts for 10% of your score. Opening several credit accounts in a short period of time will lower your score.

In short, here is what you need to know: Eliminate all outstanding unsecured debt and your score will greatly improve. It is important to pull your credit because there may be many accounts that are on your report that are old and you have forgotten about or perhaps, some of the accounts do not belong to you.

The ratings on your credit report indicate your payment history and are given a number rating of 1-9. "R" stands for revolving credit such as a credit card. An "I" stands for installment loan such as a car loan or mortgage. The following is a break down of each rating:

R1: Pays (or paid) within 30 days of payment due date or not over one payment past due.
R2: Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
R3: Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.
R4: Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
R5: Account is at least 120 days overdue, but is not yet rated "9".
R7: Making regular payments through a special arrangement to settle your debts.
R8: Repossession (voluntary or involuntary return of merchandise).
R9: Bad debt; placed for collection; moved without giving new address. Charge Off: This debt has been written off as uncollectible.

Credit scores can range from 300-850, the higher the better. Credit scores are a quick way for a lender to decided if you are a good risk or not. Your credit score is not the only thing that is important however. Mortgage companies are especially are going to look very closely at your debt to income ratio (DTI). Your DTI is simply the ratio between your monthly debt and monthly income. The creditor wants to know that you will have enough money left over at the end of the month to pay them.

The competition in the mortgage and credit industry is fierce and the requirements needed to obtain a loan are consistently diminishing. Many people who have credit cards today never would have qualified just 20 years ago.

Contact us to speak to one of our financial consultants today!

Today, people with credit scores in the mid to low 500's can not only get credit cards but mortgages as well. Why? The answer is simple. First, as we stated before competition is growing in the lending industry and creditors can't make money unless they are lending money. Two, creditors are paying more attention to the DTI than credit score. All they want to know is that you have enough money left over at the end of the month to make the payment. This is just one more reason why eliminating your debt is so important. Decreasing your DTI needs to your first priority.

Here is the distribution of credit scores throughout the United States, keep in mind the range is 300-850:

Up to 499
500-549
550-599
600-649
650-699
700-749
750-799
800+

1%
5%
8%
12%
16%
19%
28%
11%

If a fair score is defined as 650 or better 74% of the nation has a pretty good score. If so many Americans are in financial trouble why are their scores so high?

There are a few answers to this. First, your credit score can be repaired regardless of the tough times you may have had or are having you can always rehabilitate your score. Second, if a person is just beginning to accumulate too much debt and delinquent payments the score will not just plummet, it takes some time for the score to really bottom out.

When retailers are offering instant credit at their stores they are usually only looking at your credit score. If they see a number that fits their parameters they will extend credit. However, if you are already accumulating too much debt you're digging a big hole for yourself. Store cards typically charge very high interest rates and after your fist purchase you've got yourself trapped.

Take the first step. Call us. The consultation is free; there is no obligation at all. Talk to one of our Financial Counselors and discover how debt management can work for you. Take the first step to financial freedom. Call us today at 1-888-4PAYDEBT for more information.