I have NO CREDIT Scores, what should I do ?
Step 1:
You should go to your bank and give them $1,000 (if possible, if not
whatever you can or even more if possible) and ask them for two “secured” credit cards. They should give you a “Visa” and a “Mastercard”
against the funds that you gave them.
Use these cards monthly for gas or something nominal and pay it off in full each
month. This will build a credit history
for you. Within 6-12 months you will
have established credit scores. Once you have established credit you can ask for your secured funds (deposit) back.
Step 2:
If possible have a family member or great friend add you to
one or more of their accounts as an “authorized user.” You will gain all of their past history so if
they have had a card for several years or more that is most effective. You obviously want to make sure they had a
good credit history with these accounts.
These 2 simple steps can spring board you forward and you should have some great scores within a couple months.
Some quick facts for you to keep your scores high:
- Don’t close out credit cards your scores are generally kept
higher when you have the ability to use credit, but choose not to.
- Try to keep your credit card debts below 40% of the
maximum allowed
- Keep inquires down. New credit applications or
credit checks. This affects your scores because the bureaus do not know if you
have taken on “new debt” so they lower your scores a bit in the short term to
wait and see if you went on a “new “ shopping spree and don't yet have a history
to show the ability to repay those newly incurred debts. Makes sense, right?
- If you were late contact your lender and ask
for a “one time forgiveness.” Most lenders/creditors have a policy were they will remove it – “once."
- Paying off an old collection could hurt you. This makes no sense to you and me, but the
credit report has washed it down the road and “forgot” about it and has penalized you less and less each
month as that “bad debt” has gone by in the rear view mirror; however, if you pay it off today it updates
that collection to today’s date and now it shows as a “paid” collections and
your credit scores have likely dropped due to that update. We recommend that you consult us first so we
can review it and determine what is best.
- Credit Counseling, I have never seen this as a “good”
thing. Many of them tell you to stop
paying your debts so they can then negotiate them. I would use caution when entering into any agreement
and consult us at the same time.
Below is a pie chart
and further explanation of credit scores:
What is a credit
score? What do the numbers mean and how does this affect your ability to borrow
money and at what rate? To answer these questions one must first decipher
what a credit score is. A credit score
is a three-digit number ranging from a 300 to an 850 that is generated by
mathematical algorithms of the information contained in your credit report. Your
credit score indicates whether you have bad (a lower credit score) or good (a
higher credit score). The FICO is probably the most well-known credit scoring
module. It is a branded name so to say like Band-Aid or Q-Tip and is almost
synonymous with the term “credit score”. FICO was developed by a company called
Fair Isaac and has become the global standard for measuring risk in the
mortgage, banking, credit card, auto and retail industry. The credit history or
credit report is a record of an individual’s past borrowing and repaying
history. Lenders like to see that a consumer’s debts are paid regularly and on
time.
Credit scores are designed to predict risk or the likelihood
that you will become delinquent on your accounts over a 24 month period. The
higher the credit score or FICO is the lower the risk you are from a lender’s
standpoint. Credit is extremely important because 90% of all financial
institutions use the credit score in their decision making process. Not only is
your credit score important in determining whether you will be approved for a
car loan, a credit card, a mortgage…ect., but it also determines what rate is
given. Those with a lower credit score will pay a higher rate than those with a
higher FICO score because they are considered more of a risk and therefore pay
a higher premium.
There are three FICO scores given to a consumer, one for
each credit bureau, which are Equifax,
Experian and TransUnion. These
are the three major credit bureaus in the U.S. These are all publically traded
companies which are not owned by the government; however, the government does
have legislation over these agencies as to how they should operate according to
the Fair Credit Reporting Act. These agencies collect and maintain credit
information in an individual’s credit report and sell this information to
lenders, creditors and consumers.
Each of the three credit bureaus uses a different model for
calculating your credit score. These credit bureaus collect data independently
of one another and do not share this information. In addition to this, creditors
may only report data to one or two of the agencies as opposed to all three. You
may have a collection account that was reported to Experian but not TransUnion
and thus your Experian score will be lower than your TransUnion and vice versa.
Data from your credit report goes into five categories that
comprise your FICO score. These are:
Payment History (35%)
This includes any delinquencies and public records . A record of negative
information can result in a lowering of a credit score. Risk scoring systems
look for the following negative events: collections, late payments,
charge-offs, repossessions, foreclosures, bankruptcies, liens and judgments.
Within these items the FICO determines the severity of the negative item, the
age or when the negative event occurred and the numbers of these negative
events that occurred. Multiple negative items as well as newer negative items have
more of an impact on the FICO than less severe and older items. You may have a
recent late on your car payment which will have more of an impact that a late
which occurred eight months ago.
Amounts Owed (30%)
This is how much you owe on each of your accounts. The amount of available
credit on revolving (credit cards) accounts compared to what you owe has a large
significance in the scoring. This is termed “Revolving Utilization” or “open to
buy” This is calculated by taking the aggregate credit card limits and
multiplying the results by 100. The higher the percentage is the more of a
negative impact this has on the score. A general rule of thumb is this
percentage should not be more than 30%.
Length of Credit
History (15%) This is when you opened the accounts as well as the time
since the last activity. The age of the credit is determined by the oldest
“account opened” date as well as the average age of the accounts opened in the
file.
Types of Credit Used:
(10%) This includes a variety of accounts you have such as revolving
(credit cards), installment (loans) and mortgages.
New Credit (10%)
This includes your pursuit of new credit which includes credit inquiries
(companies that pull your credit) as well as the number of recently opened
accounts. There are several kinds of inquiries that may or may not affect the
credit score. There are “soft inquiries” which remain on the credit report for
6 months, but are not visible to lenders or credit scoring model. These are the
following:
Pre-screening inquiry where a credit bureau
sells an individual’s contact information to an institution that issues credit
cards, loans or insurance.
-A creditor may also periodically check a
customer’s credit report.
-A credit counseling agency.
-A consumer can check their own credit.
- Employment screening.
- Insurance related inquiries
- Utility related inquiries.
Overall, credit makes the world go around as the expression
goes. It affects your ability to borrow money and at what rate. Those with a
lower credit score may be paying much more each month in higher interest rate
loans than those with higher credit scores or they may be unable to obtain the
loan at all if their credit score is too low. A low credit score can result in
someone being unable to obtain a new car, boat, mortgage, credit card or loan
they may need. Understanding what credit is and how to maintain a strong credit
score is becoming more and more important in our society. As a culture it’s
imperative to understand the importance of credit. Just as we want to build up
our careers, income and net worth all the while maintaining a healthy and
active lifestyle, so must we maintain healthy credit.
