Credit Score Basics

Jury gives woman $3 Mil

In credit reporting case

Dayton, OH A 77 year old woman, Dorothy Bach, was awarded $3 million dollars by a jury in Federal District Court. The judgment, against First National Union Bank, was for violations of the Fair Credit Reporting Act. The 2005 award was reduced on appeal in 2007 to $800,000.

Read Appeal Case

Major National Firm

Forced Out of Credit Card

Arbitration Business

Minneapolis, MN National Arbitration Forum (NAF) signed a settlement with the State Attorney General to cease arbitrating credit card cases a week after a law suit against them was filed July 14, 2009. An April law suit filed in New York by a former employee of NAF, Deanna Richert, alleged the firm referred in house to the major US banks as “Famous Parties” and performed various tasks to insure they would win their cases. NAF issued several public statements strongly denying any wrong doing or favoritism.

Read AG’s Complaint

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Guide to Credit Scoring

Introduction

Credit scoring is an objective risk assessment tool provided to lenders. A credit bureau risk score - commonly known as a FICO score - is a snapshot of your credit risk picture at a particular point in time. It's a number lenders use to help them decide: "If I give this person a loan or credit card, will I get paid back on time?"

There are different types of credit scores. Credit bureau scores are based on information in consumer credit reports. Most of the information in your consumer credit report comes directly from the companies you do business with, but some information comes from public records. And some potentially important information is not included at all - such as most of the rental payments made to apartment complexes or private landlords. You are never asked in advance if you agree the information is accurate which makes checking the accuracy of the information in your credit file extremely important. Finally, some companies - primarily collection agencies - use credit files as a COLLECTION tool - a use that is definitely detrimental to a credit score.

What's in a Credit Bureau Score?

      Credit bureau scores are based on five main categories of credit information. These are, in order from the MOST to LEAST important:

                         1. Late payments, Delinquencies, Bankruptcies
                               2.   Outstanding Debt
                               3.   Length of Credit History
                               4.   New Applications for Credit
                               5.   Types of Credit you Use

     As you can see, making all payments on time, keeping outstanding balances low in relationship to the maximum available limit on unsecured and credit card debt and avoiding frequent applications for new credit will make it more likely you will be improved for new loans in the future.

What's a Good Credit Score?

     It varies from lender to lender. However, the average US consumer has a credit score of about 685. Usually, most lenders will give not only approval but also their lowest interest rate to people whose score exceeds 720. As you move farther down in the lower 600's and below, both approval for a loan and the interest rate you pay become less likely to be pleasing to you. Over all, the highest possible is 850 and the lowest 350. Also, it is possible to have a "thin" file - which means there are not enough accounts in your credit file for the scoring formula to produce a score for you.

More Detail regarding Importance of Scoring Factors

        Although Fair Isaac has never released all the details of scores formulas, they have released some information regarding the most important components. Other than removing the negative items that reduce the score, these areas are the ones you should concentrate on to increase your score:

                       PAYMENT HISTORY ( about 35% of total score)

       Your payment history on credit cards, retail accounts, installment loans and mortgages is taken into account when calculating your score. Specifically, how late your payments were, how much was owed, how many late payments and how recently they occurred are all taken into account. If you have a number of accounts and most show no late payments, your score will be improved. How old the late payments were can be very important. A late payment last month could drop your score by close to or over 100 points. A late payment from 5 years ago will still have some negative but not any where near as drastic.

                      AMOUNTS OWED (about 30% of total score)

       While owing a lot of money on many accounts might indicate that you are overextended, your FICO will not necessarily be harmed by large outstanding amounts. What is more important is how many accounts have balances and how much of the total credit line is being used on credit cards and other "revolving accounts". In an attempt to improve their credit scores, people sometimes make the mistake of closing down credit card accounts where they have small balances and consolidating their debt under one credit card. This can actually worsen your score since the percentage of your lines of credit that is still owed would actually go up.

                        LENTH OF CREDIT HISTORY (about 15% of total score)

         If you are just trying to establish a credit record, you have few options to improve score here, since how long your credit accounts have been established is what counts. This does however say a lot for keeping an account even if the interest rate or other factors become unfavorable - just use it rarely, but keep it open.

                       NEW CREDIT (about 10% of total score)

        Applying for too much new credit is probably one of the easiest ways for people to inadvertently harm their credit score. Fair Isaac says that if you request your credit report YOURSELF from one or more of the credit agencies this does not count since it is a "consumer-initiated" inquiry. Until recently, your score would have gone down if you made a number of applications for credit cards or mortgages with in short period of time - even if all you were doing was shopping around for the lowest rate or best overall deal. Now, Fair Isaac claims that they lump together inquiries all within a few days as one inquiry. We have still seen multiple inquiries count as that - or a "final check" additional inquiry before loan funds are handed over count as 2 or 3 inquiries. It's a better idea to run your own report yourself, take it with you and show it to the institution while telling them IF they approve you AND you take the loan, then they can run a report themselves to confirm what you are showing them.

                        TYPES OF CREDIT (about 10% of total score)

            This factor takes into account your mix of installment loans, mortgages, retail accounts, credit cards and finance company accounts. Fair Isaac, however, is a little vague about how it weighs your mix of account types. Rumor in the credit industry is that the "Pay Day Loan", "Rent to Own" companies and the like actually hurt you when compared to similar pay history with more main stream lenders. Try applying to a small local credit union before taking a loan from one of these type companies.

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CAD Credit