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7 New Year's Resolutions to Improve Your Credit

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7 New Year's Resolutions to Improve Your Credit

Whether or not you are a believer in New Year's resolutions it is a smart idea to take an honest look at your credit from time to time in order to see how it can be improved. Good credit can help you to save tons of money, get approved for the loans you need, and can even help you to land a better job. It is 100% worth your time, energy, effort, and money to work towards achieving and maintaining the best credit possible.

Here are 7 steps that every single person can take to make steps toward having better credit this year.

1. Pay every bill on time.

The importance of paying your credit obligations on time, every time cannot be overstated. In FICO's credit scoring model a whopping 35% of a consumer's credit scores are assigned based upon factors included in the "Payment History" category of a consumer's credit reports. If late payments do occur you can bet the bank that they will have a very negative credit score impact.

2. Cut spending.

Overspending is perhaps the #1 cause of credit problems for most Americans. When consumers charge more than they can afford to pay off in any given month not only do they hurt their credit scores by doing so (yes, credit card debt can in fact lower credit scores even when payments are made on time), but they also set themselves up for financial problems and serious credit problems in the future. In fact, overspending can lead to late payments, collections, judgments, and even bankruptcy if the problem is left unchecked.  

3. Make a plan.

Failure to plan is the same as planning to fail. A well planned budget is a crucial step towards healthier credit. Smart consumers tell their money where to go instead of wondering where the money went after it has already been spent. CLICK HERE for a free copy of the HOPE4USA Basic Budgeting Worksheet to get started.

4. Establish credit.

Credit cards can be extremely useful tools in building or rebuilding better credit, as long as they are managed properly (on-time payments and never revolving a balance from month to month). Even consumers with credit issues can qualify for many secured credit cards. CLICK HERE for a list of credit cards to compare and see which ones might be a good fit for you.

5. Become familiar with your credit reports and scores.

Every consumer should be in the habit of checking all 3 of his credit reports often. The credit bureaus and your creditors are obligated by law to report accurate information on consumer credit reports. However, it is up to you and you alone to ensure that the information contained on your credit reports is actually correct.

You can access your 3 free credit reports each year at www.annualcreditreport.com (credit reports only, not scores). You can also access your credit scores for a fee or as part of a free trial offer from a credit monitoring service. CLICK HERE to compare credit monitoring services which may offer free or low cost credit scores as part of their introductory offer.

6. Correct errors.

Errors occur on credit reports all the time. In fact, in 2013 the Federal Trade Commission released a study which found over 40 million errors to be present on consumer credit reports. If you discover incorrect or suspicious information on your credit reports then you have the right to dispute that information according to the Fair Credit Reporting Act.

Disputes can be handled yourself or you also have the right to hire a professional credit expert like our HOPE4USA team to assist you. CLICK HERE to schedule a no-obligation credit analysis with a HOPE4USA credit expert to learn more about how our team can help you fight for the better credit you deserve. Fixing credit problems can certainly be a difficult job, but it is not a job that you have to do alone.

7. Establish goals.

The final tip is perhaps the first step that you should take as you set out on your journey toward better credit. Identify the reason why you want to achieve better credit. Do you desire to purchase a home for your family? Is your goal to have the strong credit you need to finance your education or the education of your children? Do you need better credit to start or build a business? Building better credit can be a long, hard journey (especially if you are working alone without professional help). Your "why" can help you to stay the course even if you feel frustrated or impatient at certain points within your journey. Your "why" is also the reason that all of your hard work will be worth it in the end. 

michelle-black-credit-expert

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

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What Is Revolving Utilization and Why Is It So Important to Your Credit Scores?

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What Is Revolving Utilization and Why Is It So Important to Your Credit Scores?

If you want to have great credit scores then pay your bills on time every month. The previous statement is great advice; however, it is incomplete. Simply paying your bills on time is not enough to achieve and maintain great credit scores. In fact, only 35% of your FICO credit scores are based upon your payment history. The other 65% of your FICO scores have nothing at all to do with how timely you pay your bills.

30% of your FICO credit scores, plus a significant portion of your VantageScore credit scores, are calculated based upon the "Amounts Owed" category of your credit reports. The primary factors considered within the category are based upon those little pieces of plastic you carry around in your wallet: your credit cards.

What Is Revolving Utilization?

Revolving utilization is a term used within the credit world to describe the proportion of your credit card balances to your credit card limits. Your revolving utilization ratio is also known as your debt-to-limit ratio or your credit utilization ratio. It measures how much of your credit limits are in use on each of your credit card accounts and expresses that calculation as a percentage. Here is a quick look at how revolving utilization is calculated.

Credit Limit: $5,000
Balance: $3,500
Revolving Utilization: Balance ($3,500) Divided by Limit ($5,000) = Revolving Utilization (70%)

Why Is Revolving Utilization Considered in Your Credit Scores?

Your revolving utilization is an important consideration in your credit scores for one very simple and important reason: it is statistically predictive of higher credit risk. When you carry outstanding credit card debt on your credit reports you represent a higher credit risk than someone whose reports show paid off credit card balances.

All debt is not created equal. When you take out a mortgage loan or an auto loan, for example, you are opening an installment account. Credit cards, by comparison, are revolving accounts. Installment debt is much less risky for lenders to extend because the debt is generally secured by some sort of collateral (aka your house or your vehicle) which the lender can seize and resell in the event you stop making your payments. However, credit card debt is different.

Because of the nature of credit card debt, it is much more predictive of increased credit risk than installment debt. Think about it. If you begin to struggle financially due to an illness, divorce, job loss, or even poor financial management habits like overspending, which is the first obligation you will probably allow to slide in the event that you have more bills than money at the end of the month? Most likely you will not skip your mortgage payment, your rent, or your auto loan payment if you can help it. Credit card payments, however, are much more commonly skipped in the event of a financial shortage.

Additionally, increased credit card balances might indicate that a financial problem is looming. If a consumer loses his job then it is very common to rely upon credit cards to help finance every day expenses until a new source of income can be secured. As you can easily see, if your reports show that you are revolving balances on your credit cards from month to month, especially high balances when compared with your credit limits, it might make you appear to be a higher credit risk in the eyes of a lender.

The Good News

Although revolving unpaid credit card debt on your credit reports from month to month will almost certainly lower your credit scores, you can currently regain those lost points rather quickly, as soon as you start to eliminate the debt. The other goods news is that the score increase you may be eligible to earn from paying down your credit card balances and lowering your credit utilization can be earned incrementally (instead of an "all or nothing" scenario). In other words, as you pay down your credit card balances little by little you should begin to experience small credit score increases. You do not have to pay a credit card balance all the way down to zero on your credit reports before you can hope to receive a score boost.

 

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

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How Credit Scoring Actually, Really, Truly Works

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How Credit Scoring Actually, Really, Truly Works

Credit scoring is a complex process, a process driven by secretive software systems that are designed to evaluate the information contained in your credit reports and assign your credit scores based upon that data. If the information on your credit reports shows that you pose a higher risk to lenders then a credit scoring model will assign you lower credit scores. It probably will not come as a shock to you that higher credit scores can benefit you tremendously while lower credit scores can ultimately cost you a lot of money and cause a lot of unnecessary stress.

The unfortunate truth is that if you consistently struggle with poor credit scores then you could easily pay hundreds of thousands of extra dollars in interest over the course of your lifetime for your mortgages, auto loans, credit cards, and personal loans. For this reason, among others, it is a wise idea to learn everything you can about how credit scores are calculated and then use that knowledge to earn the best credit scores possible for yourself.

Credit Scoring by Category

Your FICO credit scores, the scores which are most commonly used by lenders, can potentially range from a low of 300 points to a high of 850 points. Altogether that means that you have up to 550 points up for grabs whenever a FICO scoring model calculates your credit scores. These 550 potential points are broken down into 5 separate scoring categories.

1.      Payment History - 35% (or up to 192 available points)

2.      Amounts Owed - 30% (or up to 165 available points)

3.      Credit History - 15% (or up to 82 available points)

4.      Mix of Credit - 10% (or up to 55 available points)

5.      New Credit - 10% (or up to 55 available points)

*The points above are given for example purposes and are not exact.

For more information about these 5 credit scoring categories check out our previous article, Where Do Your Credit Scores Come From?

How You Earn Credit Score Points

Most consumers have a completely inaccurate view of how credit scoring works. For example, one of the most common questions I receive as a credit expert goes along the lines of "Michelle, how many points will "X" lower my credit scores?" or "How many points will I lose because of "X" action?" However, the idea that any action or item on your credit reports will lower your credit scores is actually incorrect due to the fact that credit scores are always built from the bottom up.

When analyzing the data on your credit reports credit scoring models like FICO will ask a series of questions (aka characteristics) about your credit report and the answers to these questions (aka variables) will ultimately determine the credit score you are assigned. Here is a hypothetical look at how the process works in reality:

The Question (aka Characteristic)
What is the age of the oldest account on the credit report?
The Answer (aka Variable)

·        Less than 1 year old: 40 available points

·        1-2 years old: 50 available points

·        3-5 years old: 60 available points

·        5-10 years old: 70 available points

·        Greater than 10 years old: 82 available points

*Hypothetical variables and point values were used in the scoring sample above.

There are quite a few other factors considered within the "Credit History" category of your credit reports as well, so the example above is really an oversimplification. However, it does serve to give you a better idea of how the credit scoring calculation process operates.  

This question (characteristic) and answer (variable) exercise is repeated over and over again by the credit scoring model until all of the factors considered from your credit report have been completely analyzed. Next the points you earned above (based upon the variable which applied to your credit report) would be added to the points earned from the other credit categories and finally totaled together to come up with your overall credit score.

·        Payment History Category = 150 points earned

·        Amounts Owed Category = 120 points earned

·        Credit History Category = 60 points earned

·        Mix of Credit Category  = 30 points earned

·        New Credit Category = 40 points earned

·        Overall Credit Score = 700 (Remember, your scores begin at 300, not 0)

The Story Continues - Scorecards

Now that you have seen a hypothetical example of how a FICO credit score might be calculated, it is time to complicate the story even more. Credit scoring models also have another component known as "Scorecards." Scorecards make up the framework or skeleton of any scoring model. They separate consumers into like or homogenous groups and each group is scored a little bit differently than the other. Therefore, if your credit reports are being scored by a scorecard designed for consumers who have filed bankruptcy you would not be eligible to earn as many points in each category as you would be eligible to earn if your reports were being scored by a scorecard designed for consumers with no derogatory information (aka clean files). For more information about scorecards, click here.    

Feeling Overwhelmed?

As mentioned above, credit scoring truly is a very complex process. However, what is simple to understand is that credit scores are generated solely based upon the information contained within your credit reports. Therefore, if you maintain credit reports which are free from negative information, keep your payments on time, and keep your credit card balances paid off monthly then you will be well on your way to credit score success. Understanding how credit scoring works is important, but as long as you focus on developing healthy credit management habits you can achieve and maintain the good credit rating you desire.   

Need help overcoming past credit problems? CLICK HERE to schedule a professional credit analysis with a HOPE4USA credit expert today.

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

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5 Steps to Prepare for a New Auto Loan

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5 Steps to Prepare for a New Auto Loan

Having good credit is an important goal for every adult to set, but it is never more important for a consumer to have good credit than when he is preparing to make a major purchase - such as a home or a vehicle. If you are planning to apply for a new auto loan in the near future then check out these 5 steps to make sure your credit reports and credit scores are ready before you ever submit your first application.

Step One: Don't Allow Impulse to Drive You.

Give yourself enough time to bring about actionable changes on your credit reports. Buying a car is often very impulsive, certainly more impulsive than purchasing a home. However, deciding to purchase a new vehicle on impulse may be a financial mistake. Trying to purchase a vehicle without making sure your credit is in tip top shape first can result in higher interest rates, less favorable terms, higher monthly payments, and even an outright denial for a loan.

Step Two: Check Your Credit Reports.

Checking credit reports several times a year is an important habit for every consumer to develop. The importance of checking your credit is only compounded further when you are preparing to apply for a loan. Thanks to the Fair and Accurate Credit Transactions Act (FACTA) everyone has the right to a free credit report from each of the 3 credit bureaus every year via www.annualcreditreport.com. Surprisingly, even though the right to access these free reports has been available since 2003, only 4% of the available free reports are claimed annually.

Unfortunately there is currently no law which grants consumers free access to their 3 credit scores. Still, there are several websites online which offer a free or $1 view of all 3 of a consumer's credit scores as part of a trial offer for their credit monitoring services. Greatcredit101.com offers a comparison between several of the most popular credit score offers.

Step Three: Correct Errors.

If you think that credit reporting errors are rare, think again. In fact the Federal Trade Commission conducted a study on credit reporting accuracy in 2013 which concluded that over 40 million mistakes could be found on the credit reports of American consumers. Errors happen, but thankfully you have the right to dispute errors when they occur. Consumers can dispute credit report errors on their own or with the help of a reputable credit repair professional. (CLICK HERE to schedule a no-obligation credit analysis with a HOPE4USA Credit Expert.)

It is worth noting that auto lenders will not be checking all 3 of your credit reports and scores like a mortgage lender would do. However, that does not mean that you should try to take a shortcut and focus on correcting the errors on only 1 of your 3 credit reports. Different auto lenders will use different credit reports in their application processes. In other words, if you apply for a loan with ABC Bank they may pull an Equifax report but if you apply with XYZ Bank they might pull a report from Experian instead. Take a tip from the Boy Scouts and "Be prepared!" so that regardless of which credit report is pulled you will not have to worry about any unpleasant surprises.

Step Four: Take a Long, Hard Look at Your Credit Card Balances.

Arguably the most actionable way for a consumer to see a credit score improvement within a relatively short period of time is to pay down his credit card balances. Credit card balances almost always have a negative credit score impact even when the monthly payments for the accounts are made on time. Believe it or not, a whopping 30% of a consumer's FICO credit scores are based in large part upon the amount of credit card debt he carries. The lower a consumer's credit card balances the better the impact will be upon his credit scores. (CLICK HERE to read The Ideal Credit Card Balance to Optimize Credit Scores.)

Step Five: Choose the Right Lender for Your Credit.

The last step to preparing for your auto loan is picking the right lender for your credit. Consumers with great credit are often best served by applying for financing with a "captive" lender. A captive lender is simply the financing option available through the manufacturer of the vehicle (i.e. Chrysler Financial). Captive lenders often offer financing at very low rates, sometimes even 0%, as an enticement for consumers with pristine credit to purchase their vehicle over a vehicle made by another auto manufacturer.

Consumers with good, but less than perfect credit should consider checking out the financing options available through their local bank or credit union. Finally, remember that it is smart to ask questions and to rate shop before settling on a lender as well. Purchasing a vehicle is one of the most expensive purchases that an average consumer makes. It pays to take the time to prepare for your best possible outcome ahead of time.

credit-expert-michelle-black

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

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Why You Shouldn't Be Too Excited about the New FICO 9 Scoring System...Yet

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Why You Shouldn't Be Too Excited about the New FICO 9 Scoring System...Yet

Last week, on August 7th to be precise, a highly anticipated announcement was made regarding the upcoming release of the new FICO 9 credit scoring system. FICO Score 9 will become commercially available in the fall of 2014 and will feature some pretty radical and exciting changes in the way that the scoring system calculates consumers' credit scores. The new scoring system features 12 scoring models which will be installed on the mainframes of the 3 major credit reporting agencies - Equifax, Trans Union, and Experian.

The Good News

In Fair Isaac Corporation's press release regarding FICO Score 9 it was revealed that there will be 2 major changes in the way the new credit score system treats certain types of collection accounts. First, paid collections will be ignored and bypassed. The bypassing of paid collections is a departure from previous versions of FICO scoring models which are currently in use by lenders today.

Under previous versions of FICO, paying or settling a collection account usually has no positive impact upon a consumer's credit scores whatsoever. The design objective of FICO scores, in other words what FICO scores are created to do,  is to predict the likelihood that a consumer will become 90 days past due on any account within the next 24 months. The reason that paying collections typically does nothing to help a consumer's FICO scores is due to the fact that current versions of FICO are built to be concerned with the fact that a collection account occurred in the first place. Whether a collection account has a $0 balance or a balance greater than $0, the negative score impact is likely the same. Bypassing paid collection accounts by FICO Score 9 will be a major change could cause credit score increases for many consumers.

The second major change being introduced with FICO Score 9 is how the scoring system treats medical collection accounts. Under previous versions of FICO, medical collections were just as damaging to a consumer's credit scores as non-medical collections. However, according to Fair Isaac Corporation, FICO Score  9 "...will help ensure that medical collections have a lower impact on the score." In fact, consumers whose only derogatory accounts are medical collections could expect to see a credit score increase of around 25 points.

Why You Shouldn't Be Too Excited Yet

FICO Score 9, scheduled to become commercially available in the fall of 2014, promises some changes which consumers and loan officers are excited to see. Unfortunately, the new scoring model will likely not be adopted by lenders for a very long time.

It is timely and expensive for lenders to upgrade to a new credit scoring model. Lenders do not change credit scoring models because a new one becomes commercially available either. It's not like lenders will line up around the block to purchase the new FICO Score 9 as if it were the hottest new smart phone release from Apple. Instead, lenders make a change because their own extensive research proves that the newer scoring model is more effective at accurately predicting risk than the previous version they have been using. Even then the change is likely to be slow because, after all, their current scoring model isn't broken, it just is less effective.

The previous version of FICO to be released, FICO 8, is only now being used by a majority of lenders. FICO 8 was released in 2009. In the mortgage industry where the credit scoring version choice is controlled by Fannie Mae and Freddie Mac, the version released prior to FICO 8 is still in use. It will likely be a very, very long time before the new FICO 9 Score is ever seen on a Residential Mortgage Credit Report (RMCR).

Additionally, there is no guarantee that the new FICO 9 Score will be adopted by lenders at all. Yes, FICO has been the undisputed leader in the credit scoring market for decades and they likely will remain the leader in the future. However, FICO is not without competition. VantageScore is the credit scoring product offered by the credit reporting agencies - Equifax, Trans Union, and Experian. While the vast majority of lenders continue to use FICO credit scoring models to calculate risk, VantageScore has been gaining ground little by little since its unveiling in 2006. 

michelle-black-credit-expert

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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