What you may not know about your credit score can hurt you. Did you know that the average American credit score is 669-699. Sounds good, right? It may sound amazing, but if you, the average person, increased their credit score by 50 points, they would reduce their mortgage interest rate by 0.5%. 20% of US residents have a credit score below 520.
Today we are going to detail some things you need to know about your credit score.
1. Check your credit score
This is essential to improve or maintain your credit score even though it seems so simple. To get serious about your credit score, you need to know your credit report and use an accredited reporting agency. By using the Annual credit report website, you can get a free credit report. Federal law allows you to get one every 12 months.
Sign up for a credit monitoring service to stay on top of your report. These reports are different from your credit score, but are just as important, if not more so, as they are the factors that make up your credit score.
2. Know Your Ratio
Your credit report is not your credit score, but what determines your credit score. Knowing what’s on your report is also the best way to defend against identity theft.
Credit checks do not check if the information is correct. If the computer associates information with you, it will count for you. One of the first steps for cybercriminals is to try to get incorrect information (like an address you weren’t associated with) on the report.
Here are the elements that make up a credit report:
- Identification data: Name, address associated with you, DOB, SSN. Important to note—If you don’t recognize an address or if your name is misspelled even by one letter, you may find yourself merging with others who have the same name, but aren’t you not !
- Commercial lines
- Requests: Any claim covering a period of up to two years and the last 12 months will carry the most weight.
- Public record: The report will say “No public records” if there are none on the report.
- Collections: Up to two to three years of any account used for collections Pro Tip—To “clean up” your report, you can request verification and validation of debt because some collections may not appear on your report. Be aware that paying off an old collection account that is more than two years old will cause that account to be “current” on the next report and cause your credit score to drop (it appears to the computer system as a newer account which was in a state of collection).
3. The Big 3 and you
Staying on top of your credit score and report is crucial for any real estate transaction or acquisition and type of loan. Your FICO credit score is determined by factors at the time of the report. It is important to verify your report.
The big three credit bureaus (Equifax, Trans Union and Experian) are there to make money, they are private, for-profit companies and monitoring your credit report is not a responsibility they take on. The most widely reported consumer complaint is the inaccuracy of their reports. 90% of credit reports contain some error!
4. Your FICO score
FICO makes 91% of all credit scores. This is the numerical score resulting from all the factors in your report. Your credit score will determine your ability to get the interest rate you want on mortgages and even impact insurance premiums.
To determine your ability to acquire a certain interest rate, your lender will carefully consider this number. 670 and below is counted as subprime. At 740 or more, this is the start of what can be used for the premium interest rate.
The average in the United States is between 669 and 699, with about 28% of the country below 620. Due to these averages and most people approaching subprime level, many are looking for ways to improve their score . A one percent difference in an interest rate for a home can mean the difference of thousands of dollars.
5. Vantage and Ultra FICO Scoring
At any given time, you may have three separate FICO scores from each of the credit bureaus. What the Vantage Scoring system is set up to do is have a single combined count of each of the Big 3 scores and provide a tri-merged report or Vantage Score.
Lenders also have the option of using this score, so be sure to have the conversation with your lender about which score they use. Consumers can ask lenders to pull the Ultra FICO score if they fall just short of a necessary score. This report will include things like your bank account (checking and savings) and other money market accounts to possibly give your score a little boost.
It also allows lenders and creditors to see a lot more information than they normally would.
6. Factors used to determine your score
- 35% payment history
- 30% Amounts due
- 15% Length of credit history
- 10% new credit
- 10% Types of credit
7. What can help you increase your credit score?
- Keep accounts open: Especially if the account is fully paid and it is a long standing line of credit. The more accounts you have, the better it will do for your score.
- Make payments on time: To avoid additional charges, you will want to ensure payment is sent by the due date. You have 30 days before a payment is overdue.
- Keep utilization below 30%: This is the balance between the amount you owe on all your accounts and the amount available.
- Keeping a small balance on a credit card: This one might shock you. The best course of action is always to pay it all back, but if you were looking for a small bump (five to ten points) in your score, a small balance remaining on your card will actually help.
- Keep hard demands to a limit: Keeping Hard Requests below one every 12 months will help your score.
- Home Equity Loan: This is reported as a mortgage and will actually help your score.
8. What will lower the scores?
- Closing an account: First, if you close an account with a long history, it will significantly lower your credit score. Some people will close an old account they haven’t used and then open a new account to get benefits. In turn, they negatively impacted their credit score by lowering their account history, adding a new account, and adding an in-depth investigation.
- Payments more than 30 days late: A 30-day overdue payment, or no payment at all, will be flagged and your score will drop.
- Usage is over 30%: If you have an overall usage of more than 30% of your available credit, your score will begin to drop.
- Adding a new account: New accounts will immediately lower your score and remain down until the account has been seasoned for at least six months.
- Obtaining a loan or co-signing: Once you sign on the dotted line for any loan, including co-signing, you are legally responsible for the full amount owed, even if someone else pays it.
- Home equity line of credit: The difference is that it will be reported as a credit and the credit will be maximized.
9. Student loans and credit score
It is important to know how the Big 3 will count student loans as they relate to your credit score. Because the overall amount due has a role, but the declared amount will be 1% of the total balance.
10. What are lenders looking for?
When you apply for a home loan, lenders will review these items in a report:
- Credit score
- Housing Payment History – Pro Tip: If you’re a tenant, make sure there’s a paper trail.
- Late payments
- Short sales
- Collection accounts
- Disputed Accounts
- Public record
Bonus Tip: National Consumer Relief Plan
Why the NCAP matters to you is because it led Experian to launch a survey that found that 96% of people’s reports containing some sort of civil judgment, tax lien, or public record were invalid or inaccurate!
So, many still have inaccuracies like this, and when corrected, they can increase credit score by as much as 40 points!
If you fall into this category, understanding what may be inaccurate and what can be corrected is essential.
By Mark Sinclair
The Epoch Times Copyright © 2022 The views and opinions expressed are solely those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.