According to the FTC publication, Credit Score Facts, “Credit scoring is a system creditors use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan. Information about you and your credit experiences, like your bill-paying history, the number and type of accounts you have, whether you pay your bills by the date they’re due, collection actions, outstanding debt, and the age of your accounts, is collected from your credit report. Using a statistical program, creditors compare this information to the loan repayment history of consumers with similar profiles. For example, a credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are — how likely it is that you will repay a loan and make the payments when they’re due.”It Pays to Be a Savvy Consumer

A credit score is a three-digit number that tells the world a great deal about you before they even look at your credit report. Sometimes you see your credit score called an FICO score. That’s because FICO is an abbreviation for Fair Isaac and Company, the company that developed the method used by most people to calculate your score.

Your FICO score is based on the following 5 components: payment history, debt, length of credit history, credit mix, and new credit. See the chart on the next page for more information.

Credit scores were designed to help lending institutions go through the loan review process faster and decide on risk more accurately. Retail merchants, credit card companies, insurance companies, and banks have used scoring methods since the 1950s for deciding whether or not to make consumer loans. Credit scoring is also used by mortgage lenders.

When you apply for credit, most potential lenders will request a copy of your credit report and your credit score from one or more of these credit bureaus. Lenders use the results of the FICO credit bureau score to determine specific reasons for approving or not approving your loan. You should know that the only information used to determine your credit score is the information in your credit file. Your income, savings, and the amount of money you have for a down payment for a mortgage do not affect your score nor is this information found on your credit report..

Your score can be anywhere between 300 and 850. Research studies done by lenders indicate that people who have scores higher than 680 are more likely to make their payments on time. People who have scores lower than 600 generally make payments late and are a higher risk for paying back the money they borrow.

Your credit score is important because it can affect your ability to buy a car, a home, insurance, or rent an apartment, and can also impact your ability to get some jobs. There are three major credit bureaus in the United States—Experian, Equifax, and TransUnion. Because they each calculate your score a little differently, your score will vary slightly from bureau to bureau.

First Things First

The first thing to do is make sure that the credit information that exists about you is accurate. This information resides with the credit bureaus. Ask your FFEF Counselor about obtaining an FFEF CreditScore Review. FFEF offers a Credit Score Review (CSR) which includes a three-in-one report from each of the credit bureaus listed above. This quality report has FICO credit scores and is the same report used by mortgage companies, banks, and other lenders.

The Review will teach you how to improve your credit score and how to dispute any errors. A certified Credit Report Reviewer will counsel with you and review your credit report line by line. This is NOT credit repair. Mention that you read about the Credit Score Review in this newsletter, and you will receive a discounted rate of only $25 for single and $49 for a joint CSR session.

If you find yourself in a position where you need to rebuild your credit and improve your credit score, don’t despair. You’ve taken the appropriate steps with help from Family Financial Education Foundation to learn to live within a budget, set money aside for emergencies and large purchases, pay off debt according to a plan, and ultimately become debt free. And thanks to such organizations as the Federal Trade Commission (FTC), there are tips you can use and definite steps you can take to refurbish your credit and boost your credit score.

Fair Credit Reporting Act (FRCA)

Under the Fair Credit Reporting Act (FRCA), the credit reporting bureaus and the information providers (the people, companies, or organizations that provide information about you to the credit reporting bureaus) are responsible for correcting inaccurate or incomplete information in your credit report. If you see inaccurate or incomplete information in your credit report, take steps to get it corrected.

1. Contact the creditor or other information provider in writing to state what information you think is inaccurate. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a credit reporting company, it must include a notice of your dispute. And if you are correct—that is, if the information is found to be inaccurate—the information provider may not report it again.

2. Have patience and take the necessary time to improve accurate but negative information. The cold hard truth is, when negative information in your report is accurate, only the passage of time can ensure its removal. A credit reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. There is no time limit on reporting information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you’ve applied for more than $150,000 worth of credit or life insurance. There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the last event took place.

3. Add accounts to your file. Your credit file may not reflect all your credit accounts. Most national department store and all-purpose bank credit card accounts are included in your file, but not all. Some travel, entertainment, gasoline card companies, local retailers, and credit unions are among those that usually aren’t included.

If you’ve been told that you were denied credit because of an “insufficient credit file” or “no credit file’ and you have accounts with creditors that don’t appear in your credit file, ask the credit reporting companies to add this information to future reports. Although they are not required to do so, many credit reporting bureaus will add verifiable accounts for a fee. However, if these creditors do not generally report to the consumer reporting company, the added items will not be updated in your file.

4. Keep your credit clean. To help establish good credit and ensure your credit report is painting a positive picture of you, follow these tips:

• Pay your bills on time. You’re already a step ahead when it comes to paying your bills on time because of your involvement with Family Financial Education Foundation. Nothing helps your effort to improve your credit standing faster than keeping current on all bills.
• Avoid consumer debt. Eliminate or reduce the number of credit cards you have and keep the balances low. It’s wise to have just one or possibly two major credit cards and use them only for emergencies. If you must charge something, make sure you can pay it off at the end of each month.
• Limit the number of inquiries into your credit and don’t open several new accounts at once. The fact is, too many inquiries over a short time period may be perceived as an indication that you are seriously seeking credit, perhaps due to financial troubles or desperation. Similarly, opening several new accounts at the same time could also be seen as a sign of a rough financial patch. To avoid this perception, be choosy when you shop for credit and limit the number of creditor inquiries, and keep the number of credit accounts and balances to a minimum.
• Check up on your credit report at least once a year. Chances are that even if you’ve been good about paying your bills on time, there may be incorrect or outdated information on your credit report that is hurting your credit profile. To ensure the accuracy of your credit report, review it at least once a year. Ask your FFEF Counselor about obtaining an FFEF CreditScore Review. The FFEF CreditScore Review will help you understand your credit report and how to improve your credit score and dispute any errors that you find on the report.

5. Apply for unsecured credit. A local department store may be more likely to issue you a credit card than a national creditor. If the store does grant you credit, demonstrate your financial responsibility by paying all of your bills on time. Just remember that the interest rates or finance charges of the typical department store card are quite high, even 20% or higher, so be sure to charge only what you can afford to pay off each month and not carry a balance with such a high interest rate.

6. Apply for secured credit. If bankruptcy is in your past or if you have had your credit cards revoked, you need to demonstrate that you can handle credit responsibly. One way to do this is to apply for a secured credit card.