One of the components of our value proposition as financial advisors is to bring to the table other trusted advisors that are part of a team to better serve the financial needs of our clients. Brad Davis, of Absolute Mortgage, has been an important part of our team for close to ten years. Brad has always served the mortgage needs of our clients in a very knowledgeable and respective manner, and has always brought a great deal of experience and wisdom to their financing needs. We hope you enjoy his blog.
One of the most misunderstood aspects of obtaining a bank loan is a credit report and its importance in the decision to extend credit. In this article we will explain how a credit score is calculated, the meaning of credit scores, when derogatory items fall off a report and how to opt-out from having your credit history sold to businesses.
There are three major credit bureaus in the United States: Transunion, Experian and Equifax. These companies have different names for their respective scoring models but most people refer to their credit score as a FICO, named for the Fair Isaac Company. Bill Fair and mathematician Earl Isaac developed the first algorithmic model to predict credit risk in 1958. Conrad Hilton was one of their first customers in his attempt to measure risk for the Carte Blanche credit card.
How a FICO Score is calculated
Payment history = 35% (late payments, collections, charge offs short sale, etc.)
Amount owed = 30% (try not to use more than 50% of your limit)
Length of credit history = 15% (do not close older accounts. They improve your score)
New credit = 10% (new accounts lower your score temporarily)
Types of credit used = 10%
Meaning of credit scores
<630: Bad credit
You likely landed here because of bankruptcy, or because you’ve missed payments consistently—or, as is often the case with younger folks, you have no credit history at all. You’ll face higher interest rates and fees, and your choice of credit card is restricted. If you find yourself in this bracket and still want a credit card, a secured card is likely your best bet.
630-689: Fair (average) credit
Your score is average, and it’s probably because you have too much “bad” debt. If you’re carrying high credit card debt or if your balance often grazes your credit limit, bureaus won’t trust you, and therefore lenders won’t either.
690-719: Good credit
Your lending rates are low and you can choose from most cards including those that earn rewards.
If you’re in this bracket, congratulations! Go ahead and look for cards with great fringe benefits and other incentives
Maintaining a good credit score
Refer to the previous comments about how your FICO score is calculated to maintain and improve your score. For those who have credit blemishes, here is a list of items and how long they will remain on your credit report. Most will diminish in their importance with the reestablishment of good credit and after approximately two years. However, a word of caution when repairing your credit: Do not pay any credit card or loan late or your score will be severely damaged.
Late items and how long they will remain:
- Late payments: Seven years
- Bankruptcies: Seven years for completed Chapter 13 bankruptcies and 10 years for Chapter 7 bankruptcies
- Foreclosures: Seven years
- Collections: Generally, about seven years, depending on the age of the debt being collected
- Public Record: Generally seven years, although unpaid tax liens can remain indefinitely
One last warning: Your credit information is sold to third parties by the credit bureaus. Yes, this really occurs. Opt out today by dialing 888-567-8688 or online at www.optoutprescreen.com.
Brad Davis is a mortgage broker and banker with Absolute Mortgage Banking in San Ramon, Ca. Approved with over 25 different banks and lenders Brad is determined to find the best rate loan terms for his clients.