Thursday, June 21, 2012

TRUTH ABOUT CREDIT SCORES AND WHY THEY MATTER


THE TRUTH ABOUT CREDIT SCORES

Credit Scores have become more important in the last few years. Increasingly, companies rely upon them for new roles:

Car Insurance: What does good credit have to do with safe driving? It is probably “risk-aversion.” Those with poor credit scores are thought of as being risky for loans. It may well be that they constitute riskier drivers as well.
Getting Hired: It seems oddly backward at first. If you have poor credit because you are out of money, you might be the hardest working candidate that could be hired. But, chances are, a poor credit score might just keep you from getting a call back for that second interview. Employers who use this information will get your permission to check your credit during the interview process.
Renting: You already know that credit scores affect your ability to get a home loan, but harmful information might also tank your rental application on that great apartment you wanted.
Credit Decisions: Instant decisions can be made with in store promotions and credit cards, as well as other kinds of loans.

There are only five elements of the “FICO” score, and surprisingly, the amount of money you have in the bank is NOT one of them! Seriously, you could have a basement full of gold, ten million in the bank and own most of Poplar Avenue and still not be approved for $1,000 store credit card at Sears!

Here, in order, are the magic five factors:
1.  History of Your Payments: A full 35% of your score is determined by whether you make regular and timely payments.
2. Debt Portion Used: 30% of the score has to do with what part of open credit you have that you use. If you only use about a quarter or less of all your available credit, you are understandably seen as a good risk.
Alternatively, if you are maxed-out consistently, you are a much riskier bet, and get a lower score.
3. Years of Credit History: 15% of your score is determined by the length of time that your accounts have been open and used. Thus, even if you have never missed a payment or been late, you cannot have an ideal credit score until you have had credit for several years.
4. New Credit Opened: 10% of a total credit score is subject to recently opened credit. It makes one appear less stable to run up a lot of debt in a short time. (I guess that would hurt our government’s score, huh?)
5. Credit Mixture:  The last 10% considers the multiple types of debt you use.  For instance, having a house note and credit card will count much more than just a card.
In summary, reliable long-term debt-users get good scores. However, it should be pointed out that a good score means you have probably paid bucket-loads of interest at some point.  For instance, on a 30-year mortgage, more monthly interest than principal is paid till around year 19 in most cases.

If you are a great credit risk with a high score, you can likely be relied upon to pay lots more interest over time.

If you want to see your credit reports for free, you are entitled to one from each bureau every 12 months. However, the scores themselves are not free. But, be careful, there is only one government-approved site to use. Do not fall for others that claim to be “Free.” The official free site is www.AnnualCreditReport.com. 
But, be careful. As we learn in Proverbs 22:7, “The rich rule over the poor, and the borrower is servant to the lender.”