Filed under:hznp.com — smith @ January 9, 2009 edit
I am interested in knowing ways to "speed up" credit recovery from a
misstep in the past. Particularly of interest, what sorts of things
can be personally done to expedite a "good" credit rating. In
calculating a FICO score, what things are weighed more heavily and can
be used as a vehicle to tip the scale more towards a good credit
rating. What are the factors used? Which are the most advantageous
near-term, and possibly into mid-term planning (Near term I define as
0-2 yrs, mid-term 3-5 yrs)
For example, I've head of techniques such as:
Save up some money in an interest bearing account. Then, take out a
personal loan for roughly the same amount and pay down that loan using
your savings. The high-interest personal loan is somewhat offset by
the savings account interest, making it more like a long-term lower
interest loan but with a higher "positive effect" on your credit.
I'm fully aware that truly only time will fix everything, but what
interests me is what sorts of quick credit-building techniques can be
used to offset things while that time passes.Hi legomaniac-ga,
Thanks for your question.
First of all, please do visit the previously asked question that
aceresearcher-ga suggests in the comments section. It’s a great answer
and there is a lot of helpful information therein.
FICO scores are a product of the Fair Isaacs and Co. and are used by
creditors to determine a consumer’s likelihood to become delinquent in
their payments. There are other credit scoring products, some
generated internally by creditors, but since you mentioned FICO scores
specifically, I’ll focus on that. You should be aware that a credit
score can be a lot like the price of an airplane ticket—it can go up
and down very frequently depending on the available data.
About FICO Scores FAQ
http://www.myfico.com/myfico/FAQ.asp#Q27
Certain factors do come into play when a credit score is calculated.
Obviously, missed or late payments, defaults, repossessions,
bankruptcies, etc. will impact a score. Some of the less obvious
problems include: having too little of a credit history; having no
credit history; having a lot of credit card accounts that are maxed
out or that are near the limit; having too many credit cards—it’s not
just your debt that the score measures—it’s the potential to be in
debt. It may be prudent for you to close credit card accounts that you
are not using and have no need of. Even if they are at 0 balance,
they’re being open can impact the score.
Another factor that may effect a score is the number of inquiries you
have on your credit report. Every time a credit report is run (with a
few exceptions), an inquiry is generated. This can lower (or
raise—depending on the type of credit scoring mechanism) your credit
score. Certain creditors see too many inquiries as a sign that a
consumer is “shopping for credit.”
Credit Scoring FAQ – Missouri Department of Insurance
http://www.insurance.state.mo.us/consumer/faq/creditScoring.htm
Credit Scoring – FTC
http://www.ftc.gov/bcp/conline/pubs/credit/scoring.htm
The actual formula for determining FICO scores isn’t known, but the
following approximated factors come into play:
35% Payment history
30% Outstanding debt
15% Length of your credit history
10% Recent inquiries on your credit report
10% Types of credit in use
Credit Scoring
http://cobrands.business.findlaw.com/debt/nolo/ency/CFEE8F98-D0D8-4D64-A040221D061458E5.html
See also:
How Credit Scores Work
http://www.howstuffworks.com/credit-score.htm
You brought up the time factor. While it is true that only time will
make bad credit go away, the good news is, it may not be for as long
as you think. The older bad credit is, the less it impacts your score
and your credit report. Certain things such as credit inquiries must
be removed after two years. Judgments, tax liens, collection accounts
(that is, accounts sent to an outside collection agency, and late
payments are removed after seven years. Bankruptcies remain on your
report for up to ten years. Certain states have legislation in place
to remove satisfied (paid) judgments or Chapter 13 bankruptcies in
shorter time frames.
Fair Credit Reporting
http://www.ftc.gov/bcp/conline/pubs/credit/fcra.htm
Now, what can you do?
If you haven’t already done so, obtain a copy of your credit report
from all three credit reporting agencies: Equifax, Experian and Trans
Union. Look over the reports and make certain that everything on the
report is accurate. If they list credit card accounts as being open
that you’ve closed, that’s inaccurate and you want that corrected.
Dispute any errors.
Be judicious about how often you apply for credit. This will keep your
number of inquires down.
Pay on time and over the minimum payments if you can. If you have
delinquencies, contact the creditors and attempt to make some kind of
arrangement. If you have unsatisfied judgments or collection accounts,
do what you can to pay them. It looks better to have items paid than
not.
I’ll insert a caveat in here. Keep your documentation—receipts,
correspondence, court papers, who you spoke with and when, etc. This
will save you time in the long run.
One suggestion is to close unused credit card accounts. This will
reduce your potential indebtedness and may have a positive impact on
your score, “If a creditor says you were denied credit because you are
too near your credit limits on your charge cards or you have too many
credit card accounts, you may want to reapply after paying down your
balances or closing some accounts. Credit scoring systems consider
updated information and change over time.”
Credit Scoring
http://www.ftc.gov/bcp/conline/pubs/credit/scoring.htm
This may be more of a strategy for the long haul. Freddie Mac’s site
suggests, “Don't close unused credit cards as a short-term strategy to
raise your score. Closing an account doesn't make it disappear from
your credit report.”
Improving Credit Scores
http://www.freddiemac.com/creditsmart/credit_scoring/improving_scores.html
Be judicious about what kinds of credit you do get. Having at least
one credit card is probably advisable; having all revolving debt (e.g.
credit cards) and no installment loans is not.
Credit-Factor.com
http://www.credit-factor.com/SearchResults.aspx?cid=22
Do your best to pay off your debt rather than move it from account to
account.
Improving Credit Scores
http://www.freddiemac.com/creditsmart/credit_scoring/improving_scores.html
What You Should Know About Credit
http://www.banking.state.ny.us/brcred.htm
I’ll end with a word of advice about credit repair scams. Stay away
from them. There is no way to remove accurate information from your
credit report. You can correct inaccuracies, yourself *for free.*
NYC Consumer Affairs Do-It-Yourself Guide to Fixing Your Credit Report
http://www.nyc.gov/html/dca/html/credit.html
Search strategy:
Google search
“Fico scores”
Google/unclesam (://www.google.com/unclesam)
“Fico scores”
improving “credit scores”
“credit scoring”
I hope this answers your question. If you need additional information
or if the links do not work, please ask for clarification and I’ll do
my best to assist you.
Regards,
luciaphile-gaThanks for the answer! That FICO breakdown is great!
I'm interested in specific techniques rather than general patterns of
behavior (such as paying on time, minimizing debt, etc)
The example I used in the original question is the sort of info I'm
looking for.
Once specific technique you cited was:
"Be judicious about what kinds of credit you do get. Having at least
one credit card is probably advisable; having all revolving debt (e.g.
credit cards) and no installment loans is not."
There's an abundance of general infomation about credit scores, I'd
like the more specific things that people have done/tried to raise
their credit score.
Thanks!Hi legomaniac-ga,
Just one question--are you looking at this with a particular goal in
mind (e.g. buying a house) or trying to improve your credit score in
general?
Thanks,
luciaphile-gaWhat originally sparked my curiosity was reading this Google Answer:
https://answers.google.com/answers/main?cmd=threadview&id=112321
It mentioned that credit can be restored fairly quickly (two to four
years). I also had read about the example "credit-repairing personal
loan" from a website somewhere (possibly bankrate.com?). The excerpt
from your answer so far seems to lend some credence to the idea: "Be
judicious about what kinds of credit you do get...all revolving
debt...and no installment loans is not (advisable)."
Not all debt is equal, it seems.
While I have no specific goal (such as a mortgage or car loan), I
can't help but wonder what makes the big credit wheel spin (and what
makes it spin faster or slower). This is why I'm looking for more
specific examples that affect the factors, as they tend to highlight
the mechanics of the system.Hi legomaniac-ga,
Thanks for the clarification. I’ve endeavored to give you some more
specific tips, but I’ve also tried to clarify some of the suggestions
listed in the answer and to attempt to give you a larger picture of
the consumer credit industry.
The first thing you need to do is assess your individual situation.
This is why it’s imperative you know what is actually on your credit
report. The data that Fair, Isaacs Co. uses in deriving the FICO score
comes from the credit report. It doesn’t include income, household
details, etc. It also doesn’t include your savings and checking
accounts. There are some lenders who use this data in their own
internal scores (e.g. so many points for owns a home/so many points
for rents, etc.) or in combination with a FICO score, but the FICO
score itself comes from what’s on your credit report.
101 Credit Score
http://101-creditscore.com/factors.htm
Once you’ve seen what’s on your credit history, you can then determine
points of attack.
* If there’s incorrect and damaging data, fixing that may improve your
score.
* Determine what the problem areas are on which you want to
concentrate.
* Even if it’s all correct, you are now in possession of the same
information potential and existing lenders have and you can do damage
control when you seek credit.
“FICO scores are only ‘guidelines’ and factors other than FICO scores
affect underwriting decisions. Some examples of compensating factors
that will make an underwriter more lenient toward lower FICO scores
can be a larger down payment, low debt-to-income ratios, an excellent
history of saving money, and others. There also may be a reasonable
explanation for items on the credit history which negatively impact
your credit score.”
“Credit Scores” Financial Strategies Capital Resources, Inc.
http://www.craigturner.com/rm_fico_credit_scores.asp
It may be helpful to think of lenders as people who do not enjoy
surprises. They don’t want to see a chunk of negative history when
they go to run your credit report. They don’t want to be surprised
when you don’t pay your bills. They don’t want to be surprised by a
bankruptcy notification; if a borrower files for bankruptcy, they will
most likely have to write off a large portion or all of the money
they’ve lent (which is why lenders will often work with a borrower who
is in danger of going bankrupt). They don’t want to be surprised,
period. This is why it’s often suggested, that you be proactive when
you apply for a major loan (e.g. house or car) and explain that they
will find negative credit history and present them with a reason as to
why that happened. It won’t hurt you—they’re going to find out
regardless and it may help you—you’re acknowledging the problem and
indicating that you’re handling it responsibly.
This web site provides some examples of why certain items are seen by
the credit scoring model as harmful or beneficial.
Car Buying Strategies
http://www.car-buying-strategies.com/credit-score.html
********************
Let’s look at the FICO breakdown again.
35% Payment history
30% Outstanding debt
15% Length of your credit history
10% Recent inquiries on your credit report
10% Types of credit in use
These are also the types of things that a creditor typically looks at
when they make a decision to grant credit.
Payment history. Has everything been paid on time? If not, how many
late payments are there? How late are the late payments (30, 60, 90,
120+ days?)? How often did the late payments occur? Is there a
pattern? How long ago were the late payments?
Outstanding debt. What is owed? That is, what’s the total amount? Are
the credit card accounts at their maximum? How many accounts are there
in general? What are the balances on the installment accounts?
Length of your credit history. Is there much credit? Is there too much
credit? How many lines of trade are on the report? How long have the
accounts been established? How long has it been since they were
active?
Credit Scoring
http://www.sfs.uic.edu/slmnewsletters/slm.htm
“Know the Score,” by Marty Cramer. Texas Realtor Online, August 2002.
http://www.texasrealtoronline.com/issues/0802/credit/0802credit.html
Recent inquiries on your credit report. How many inquiries are there
on the report? Are they for a particular type of credit?—several
inquiries from mortgage brokers or say, auto finance companies in a
short period of time doesn’t count against you in the FICO score, but
it tells the lender you’re looking for a new car or a mortgage.
“Current FICO software ignores auto and mortgage-related inquiries
made within 30 days of completing a full application and also counts
any similar queries made within any prior two-week period as one
inquiry.”
Multiple attempts for credit cards and finance companies on the other
hand have a negative connotation (when I worked in consumer credit, I
often heard lenders targeting this as a sign of potential trouble).
“Know the Score Before You Borrow,” by Ronaleen R. Roha.
Kiplinger.com, March 6, 2002.
http://www.kiplinger.com/columns/fitness/archive/2002/ff020306.htm
Types of credit in use. Balance is key. I have to generalize, because
I don’t know the specifics of your situation and every lender is
different and regrettably there is no magic formula, but on the whole,
you want to have a mix of trades.
There are essentially three types of accounts you can have on a credit
report: installment, revolving and open. Installment accounts are
taken out for a finite sum and have fixed payments. For example, a car
loan is an installment loan. Revolving trades are accounts, which may
have a varying balance and payments—credit cards are the most common
example. Open accounts are accounts that you must pay in full each
month—something like an American Express card is a good example of
that.
Freddie Mac “Types of Accounts”
http://www.freddiemac.com/creditsmart/establish_credit/acct_types.html
One site suggests that secured debt is a way to improve your score.
“Switch unsecured debt to secured if possible. Use a car title or a
home equity for bill consolidation or education loans.”
“Everything You Ever Wanted to Know about Your Credit Score” NJ
Gateway Federal Credit Union
http://www.njgateway.org/FYI_creditscore.htm
********************
RECENCY
Scoring models and creditors are typically more concerned with what
has happened in the last two years rather than what happened over
older periods of time.
This affects all types of credit behavior—paying bills on time in the
past year; delinquencies, opening up accounts, “new accounts under 12
months old have a downward effect on a credit score, regardless of the
payment history on the account.”
“Raising Credit Scores – A Guide to Helping Your Customers Make the
Most of Their Credit Situation,” by Mari Gottdeiner. Mortgage
Originator, 2002.
http://www.outsolve.com/news/raising_credit.pdf
“The more recent the delinquent behavior, the greater the effect on
the credit score”
“Five Easy Ways to Quickly Raise Credit Scores,” by Mari Gottdeiner.
Mortgage Matters, July 2002
http://www.outsolve.com/resources/5_easy_ways.pdf
NEGOTIATION
It is sometimes possible to work with creditors and have delinquent
information removed. This has to be negotiated with the creditors
themselves and they are under no obligation to remove delinquencies.
If you should come to some arrangement, you would be advised to get
something in writing.
“Raising Credit Scores – A Guide to Helping Your Customers Make the
Most of Their Credit Situation,” by Mari Gottdeiner. Mortgage
Originator, 2002.
http://www.outsolve.com/news/raising_credit.pdf
FINANCE COMPANIES
You also want to avoid accounts from finance companies. Because they
typically charge higher interest rates, having accounts with finance
companies can be considered poor “credit management.” So taking from
that, if you do have these sorts of trades, you may want to see if you
can pay them off or refinance through another more conventional
lender.
“Knowing the Credit Score,” by Christopher M. Wright. Realtor Magazine
Online, 5/01/2002.
http://www.realtor.org/rmomag.nsf/pages/mortcreditmay02?OpenDocument=
AUTHORIZED USER
If you are an authorized user on someone else’s account, although you
are not legally responsible for the debt, your score is affected by
the primary user’s behavior. In other words, if they are delinquent in
their payments, your score will go down. In such a case, it’s
advisable to have yourself removed as an authorized user.
“Five Easy Ways to Quickly Raise Credit Scores,” by Mari Gottdeiner.
Mortgage Matters, July 2002
http://www.outsolve.com/resources/5_easy_ways.pdf
CREDIT CARDS
In my research, I saw two figures suggested for paying down balances.
Several sources caution against paying down your revolving debt to
zero, but recommend paying the accounts down to anywhere from 30 to
50% of the available credit. I will mention that these figures come
from the mortgage industry and that they are generally trying to
qualify borrowers within a short period of time, so this may apply to
your original question about near-term planning.
“Pay down balances on revolving accounts to less than 50 percent of
the limit. The scoring system ‘dings’ credit ratings for balances 50
percent or more of the high credit limit on revolving accounts.”
“Raising Credit Scores – A Guide to Helping Your Customers Make the
Most of Their Credit Situation,” by Mari Gottdeiner. Mortgage
Originator, 2002.
http://www.outsolve.com/news/raising_credit.pdf
As a general rule, lenders do not want to see a lot of accounts that
are at their limits. Again, a sign of trouble and FICO models tend to
target that in their scoring system.
“ . . . here's Rule No.1 on maintaining or getting a higher score:
Don't even come close to ‘maxing out’ on your cards. It's
statistically better to have smaller balances against more cards than
high balances relative to your credit limits lumped on just a few.”
“Play Your Cards Right to Get the Best Deal on Interest Rate,” by
Kenneth Hamey.
http://www.donchasemortgages.com/links_interest.shtml
You do not want to move revolving debt around. By this I mean,
transferring balances repeatedly from card to card. It’s called
“credit surfing” and it can lower your score.
How Credit Scoring Affects You
http://www.callfnmc.com/news.htm
PUBLIC RECORD INFORMATION/COLLECTION ACCOUNTS
If you have unsatisfied judgments or liens on your credit report, find
out what the time limitations are in your state. For example, in New
York, satisfied judgments are removed in five years. Unsatisfied, they
stay on for seven. Let’s say a judgment was filed in 1996 and it
hasn’t been satisfied. That will remain on the credit report until
2003. If you pay it (to the court, always to the court and get papers
to prove it’s been satisfied), it would have to be removed and your
score should increase. That’s a win-win situation.
Be aware that if you apply for a mortgage, your lender will probably
require you to pay off these items as well as collection accounts
before you are granted a loan.
If you are looking to obtain credit in the near future, paying off
judgments, liens and debts may lower your score. The problem is that
paying off the accounts “updates” the delinquency so to speak. Long
term, however, depending on your situation and the state in which you
live, it might be to your advantage.
“Steps to Raise Credit Scores Could Prove Costly,” by Lew Sichelman.
Realty Times, September 19, 2002.
http://www.realestateinsantacruzcounty.com/info35.htm
“Five Easy Ways to Quickly Raise Credit Scores,” by Mari Gottdeiner.
Mortgage Matters, July 2002
http://www.outsolve.com/resources/5_easy_ways.pdf
SIMULATOR
In my searching, I came across a product that might be of interest to
you. There is also a product called myFICO where for a fee of $12.95
you can see what your score is and get an idea of how lenders may view
your credit report and score. According to the web site, this includes
a “dynamic score simulator” that allows will “answer questions such as
‘What happens to my score if I pay off a credit card or open a new
account?’” Please note that it only gives you your score and report
from Equifax and not from the two other credit reporting agencies.
Score Power Report
http://www.myfico.com/myfico/ScorePowerReportDetails.asp
Search Strategy:
Google search
strategies “credit scores”
strategies “fico scores”
I hope this addresses your question more thoroughly and gives you a
clear picture of the consumer credit situation.
Regards,
luciaphile-ga#If you have any other info about this subject , Please add it free.# |
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