Be familiar with credit score

This was originally published on Monday, October 31 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Halloween is a time to be spooked by zombies and witches. As we grow older, our fears become less of the supernatural and more of the actual. In the personal finance world, many fear the unknown such as their credit score.

Your credit score is your financial report card. It lets you know how well you are doing financially. Your credit score is a tool used to measure how reliable you are in repaying your debts. Your credit score is also known as your FICO score.

Fear stems from the unknown. If you take time and understand what and how your score is calculated perhaps it would be less scary.

There are three credit bureaus that keep track of your score: Equifax; Experian and TransUnion. The three bureaus usually have three different scores, because each company uses your information differently and not every credit issuer reports to every bureau.

There are five major factors that go into calculating your score.

  • Payment history is about 35 percent of your score. This factor will show lenders your accounts, past or current. This section also tells the bureau how well you meet your payment deadlines and if you are behind, how many days you are past due. It also reports if you have missed payments. This category also shows if your accounts have been turned over to a collection agency or if you have filed for bankruptcy.
  • Current amount owed will factor for about 30 percent of your credit score. Recorded in this area are the number of credit accounts you have such as credit cards, loans, mortgages or in-store credit cards. Your balance on each account is also noted. High balances or large amount of debt from many sources will lower your score. Also, having a lot of credit with no debt could have an adverse effect on your score. Usually small debts that are paid off in full will raise your score.
  • Length of credit history will calculate for about 15 percent of your score. This section concentrates on how long you have maintained your credit. For most creditors, time equals stability. Having a credit card but not using it can actually drop your score compared to carrying a balance on a few different accounts and paying them off on time.
  • Types of credit used will count towards 10 percent of your score. Being more varied in the types of accounts you use will increase your score. A person who carries only one credit card may have a lower score than a person who shows that they can responsibly manage more than one account.
  • New credit inquires accounts for the last 10 percent of your score. There are two types of inquires that can be made a soft inquiry and a hard inquiry. A soft inquiry can be from a financial institution or potential creditor just wanting to look at your score, a perspective employer or you viewing your credit history. Soft inquires don’t affect your score. Hard inquires come from a financial institution that you have applied for a line of credit or loan, such as a car dealership. The increase in hard inquires lowers your score. Usually, if someone has opened a lot of accounts in a short time period, it may suggest potential financial troubles.

Become familiar with your credit score. It’s a valuable tool that can keep you from being frightened of your financial well-being.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like him to cover, email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

No need to rewrite history to repair your credit rating

This was originally published on Monday, September 30, 2013, in the Pacific Daily News.  Click here to subscribe to the PDN.

Your credit report is used for more than just getting loans.

A good or bad credit score can determine many other things and many feel that the way you handle credit is the same way you handle responsibility.

Having a poor credit rating though is fixable. It may take some time, but it is definitely worth it.

If your identity has been stolen, there are certain steps to fixing your score.

I recently covered how to repair your credit if you find yourself in this predicament.

You can find past articles on the Money Matters blog atwww.moneymattersguam.wordpress.com. But what if your credit was due to late payments? Although you cannot rewrite history, the passing of time will eventually restore your good credit rating.

Also take these tips into consideration:

• Timely payments. It cannot be stressed enough how much this will start to increase your score. It will not happen immediately since missed payments stay on your report for seven years after making the payment. Decreasing your debt is important, but paying your creditors back in a timely fashion is better to improve your score. Stay on track by signing up for auto-pay or having an allotment made from your paycheck or banking account. You will be less tempted to spend it elsewhere.

• Do not over extend yourself. The last thing you want to do is start paying your credit with other credit.

By moving credit around, you are costing yourself more in interest fees. Do not agree to payments that are going to cause more financial hardships. If you are having trouble making payments, contact your financial institution. Revisit your monthly budget. If you can afford an extra payment every other month or $20 more a month, do it. It will add up and minimize the time and interest of the debt.

• New credit. Some believe that opening up a new credit card or loan can improve your score. Yes and no. Do not open up a new account just to have a better score, especially if that is going to create more bills that you will struggle to pay. Pay off the accounts that you have first, open a new account only if you can afford to pay off the balance or make the monthly payments.

• Old credit. If you have paid off a credit card, don’t close the account. Keep the account open and use it sparingly, and pay off the balance right away when you do use it. This account could also be used for dire emergencies.

• Bargain. Contact your creditors and ask to remodify a loan or settle a balance for less. The worse thing they can say is no, but if they can work something out, you will be glad you asked. If you make a deal, be sure to get it in writing, the same goes for the IRS. You may be able to remove a lien off your credit report if you enter into an agreement to repay back taxes.

Once you have worked hard to get your credit score healthy again, be very diligent and stay on top of your bills. Review your score occasionally to ensure that your efforts are making a difference. It is possible to repair your credit score, but it will take some time, new habits, patience and discipline.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Understand the impact of your credit score

This was originally published on Monday, September 23, 2013, in the Pacific Daily News.  Click here to subscribe to the PDN.

Knowing how your credit score is calculated is the first step in repairing your credit.

The second step is understanding your credit score and how it affects you. By understanding your score, you will know how it can rise and fall and take the appropriate actions to repairing it.

• What is not recorded on your score?

Your payment history, your account balances, the length of your history and the type of accounts you have. The information can be both positive and negative.

Many people feel that once you receive a poor score, it will follow you forever.

That is not true.

Depending on what type of negative information is on your report, it usually takes between seven to 10 years to clear.

Late payments, Chapter 13 bankruptcies, foreclosures, collections and public records will take about seven years to clear.

For a Chapter 7 bankruptcy, it takes ten years to clear your report. Unpaid taxes or tax liens can stay indefinitely. Older negative information does not impact your score as much as something that has happened more recently.

Being 30 days late on a payment can hurt your score by as much as 100 points and remain on your report for many years. That is why making timely payments is crucial.

• What is not recorded on your score?

Your age, sex, marital status and race aren’t reported on your score. How much you make, your occupation and employment history also aren’t recorded on your score and does not have any effect on it.

Although your balance on your credit cards or loans are reported on your score, the interest rates are not.

Likewise, child support, alimony and rental agreements aren’t considered on your score.

• What is a good credit score?

There are several different credit scores besides just the three credit bureaus and FICO. Even among these four scores the ranges vary.

Most lending institutions and the three credit bureaus use the FICO score model to calculate your credit score. The FICO score ranges from 300 to 850.

Most people have a credit FICO score between 650 and 750. A FICO score of 700 and higher is considered very good to excellent, 620 to 699 is considered fair to good, while a score below 620 is consider poor to bad.

• How my credit score affects me?

Having a good credit score can help you get a loan with lower interest rates. But it also can impact other aspects of your life.

It can affect future employment. Under the Fair Credit Reporting Act, future employers with your permission can look at your credit report to make hiring decisions.

If your job requires a security clearance, a poor credit score could have your clearance revoked or, worse yet, have your employer let you go.

Federal law also allows landlords to look at your credit report with your permission. Utility and cell phone companies also may take a look.

A low score might cause you to put a heftier deposit to acquire their services. Your credit score can interfere with home or car insurance. If your score is low, it could reflect that you aren’t a responsible person.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com

 

After troubles, how can I fix my credit score?

This was originally published on Monday, September 16, 2013, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I recently went through some very tough financial troubles that ruined my credit score. I worked very hard to get out of it, but how can I start improving my score?

Answer: Many of us are feeling the rise of inflation and cost of living. Unfortunately, many of us find ourselves in some serious financial troubles including foreclosures and bankruptcy. It is important to remember that you are not rebuilding your credit score but rebuilding credit history and worthiness.

Before you can repair your credit score, it is important to understand how your score is calculated.

Your credit score, also known as your FICO score, is a tool used to measure how reliable you are in repaying your debts.

There are three credit bureaus and usually they have three different scores. That is because each company uses your information differently. Do not assume that the three bureaus have the same information, not every credit issuer reports to every bureau.

There are five major factors that go into calculating your score.

• Payment history. This is about 35 percent of your score. This factor will show lenders the accounts you had or currently have along with how well you meet your payment deadlines and/or how many days you are past due or have missed. This category also will show if your accounts have been turned over to a collection agency or if you have filed for bankruptcy.

• Current amount owed. This will factor for about 30 percent of your credit score. Recorded in this area are how many accounts you have such as credit cards, loans or in-store credit cards and your balance on each account. High balances or large amount of debt from many sources will lower your score. Also, having a lot of credit with no debt could also have an adverse effect on your score. Usually small debts that are paid off in full will raise your score.

• Length of credit history. This will calculate for about 15 percent of your score. This section concentrates on how long you have maintained credit. For most creditors, time equals stability. Having a credit card but not using it can hurt more than carrying a balance on many different accounts and paying them off on time.

• Types of credit used. This will count towards 10 percent of your score. Being more varied in the types of accounts you use will increase your score. A person who carries only one credit card may have a lower score than a person who shows that they can responsibly manage more than one account.

• New credit inquires. This accounts for the last 10 percent of your score. There are two types of inquires that can be made.

A soft inquiry can be from a financial institution or potential creditor just wanting to look at your score, your perspective employer, or from you viewing your credit history. Soft inquires do not affect your score.

Hard inquires come from a financial institution that you have applied for a line of credit or loan. The more hard inquires you get, the lower your score becomes. Usually, if someone has opened a lot of accounts in a short time period, it may suggest potential financial troubles.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at  moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Tips for improving your credit score

Last week, we talked about preparing to buy a home by ordering and reviewing your credit reports and scores.  Today, we’ll discuss improving specific areas of your creditworthiness, to put you in the best position possible as you apply for a mortgage.

Establish a pattern of paying on time. On your credit reports, each account includes a record of your payment history. Each month will be marked as “Paid as agreed,” or late, along with the length of time in which the payment was late, in 30-day increments.

When lenders look at your credit history, they want to see that you consistently pay on time. When considering a mortgage application, with a term that can last as long as thirty years, lenders look to your past history to predict the future pattern of your payments.

If you frequently pay late, and your late payments are recent, this can indicate credit risk to a financial institution. To lessen the potential costs that come with that risk, a financial institution may charge higher interest rates than they would offer to a lower-risk applicant.

If you have this pattern, first recognize that this negative information stays on your credit report for a finite period of time: in most cases, seven years.  With time, you can replace negative marks with positive ones. Next, your most recent behavior will be considered more heavily when your application is evaluated.  If you take the time to establish a good pattern now, that can lessen the effect of negative information.

To change this pattern, find the source of the problem. If you’re simply forgetting that certain bills are due, then email reminders, calendars, and automatic payment plans can help a great deal. Experiment with different tools to find what works for you.

If you haven’t been able to pay bills on time because you have been experiencing shortfalls, this requires a deeper fix. The first step is to carve spending down to your most basic needs. Make a list of your essential expenses, and total them. If this amount is less than your monthly income, it’s a question of sticking to those monthly expenses, as you would stick to a list at the grocery store. It can be difficult, but with time, you will adapt to the new spending level, and establish a healthy pattern of paying bills on time. Another option is to look for ways to increase you income, so that you can comfortably pay your bills on time.

Bring down your credit balances. As we talked about in an earlier column, the amount of credit you use will impact your creditworthiness. Lowering your credit balances will help improve your score.

Limit your applications for new credit. If lenders see that you are opening several new credit accounts in a short period of time, they can view this as a credit risk. It’s best to limit new credit applications only to what you need, and to refrain from new credit applications in the immediate period of time before you search for a mortgage.

Hang on to your credit cards. When you close your accounts, this lowers the total amount credit available to you. Rather than closing them to avoid credit card use, keep them for emergencies and store them away.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com

Know yourcreditscore inside and out

Your credit reports and credit score are among the most important tools that financial institutions use to evaluate your mortgage application. Your credit reports inform your score, and a drop or a rise in your score can have a great effect on the amounts you pay throughout your loan term.

As a mortgage applicant, it is very important to review your own credit reports for accuracy. It’s also important to review your own negative financial habits, as they are reflected on your credit reports, and work to correct them far in advance of shopping for mortgage loans.

With enough time, you can change your current financial habits into healthier behavior. Those behaviors aren’t just important for your application—they can preserve the quality of your credit through your mortgage term, and keep you out of financial trouble.

Here is what you can do:

Evaluate your credit early. If you review your credit reports and scores at the time that you start saving for a down payment, you give yourself plenty of time to correct existing mistakes. You will also have time to establish a lengthy, positive pattern of behavior to replace any negative marks on your credit report.

Order all three credit reports. Experian, Equifax, and Transunion are the three major nationwide credit bureaus. They collect data from lenders on owed balances, credit limits, your history of payments, and other information that can indicate your creditworthiness.

Because a mortgage loan may be the largest loan you ever apply for, you don’t want to leave anything to chance. With all three credit reports, you can review the information that a financial institution will see, and work on improving that information.

You’re entitled by law to one free credit report every 12 months from each of the three major credit bureaus, which you can obtain through the official website www.annualcreditreport.com. You can also link to this website through the Federal Trade Commission, www.ftc.gov.

Review your reports and your spouse’s reports together.  When you’re purchasing a home with your spouse, your mutual credit will determine the results of your application.  This early review helps you lay out a game plan for improving your credit together. Whether the problem is high balances or late payments, you can support and reinforce positive changes in each other, and rehabilitate your credit that much more quickly.

Check your credit reports for errors. Look for any accounts that you didn’t open yourself, and report fraudulent activity as soon as possible. Also pay special attention to credit limits and any late payments that are listed on your credit report. Verify whether or not they were late, and if you find a mistake, go to the lender and correct it. It can take time to process a correction, so an early review is essential.

Order your FICO scores. Your credit score is shorthand for your credit quality. When you see where you fall on the credit quality range, you can determine how much more work you have to do in improving your credit. You will have to pay for FICO scores, so first decide if the snapshot will be worth the cost.

Next week, we’ll review specific steps you can take to improve your credit.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.

Teach teens all about credit reports

April is National Financial Literacy Month, and it’s a great time to start introducing new financial concepts to your teenage son or daughter.

It’s ideal to teach your teenagers about good and bad credit behavior before they start using credit cards. A credit report can help you introduce the topic of credit to your teens, because credit reports record years of credit behavior, and are used by lenders in considering applications for new loans and credit cards.

When your teens understand what credit information is recorded, how it is used and how their positive behavior is rewarded, they can make informed decisions about how to handle their own credit behavior in the future.

Order or review your most recent credit report. Once every 12 months, you are entitled by law to receive a free credit report from each of the three credit bureaus, Experian, TransUnion and Equifax. The credit bureaus jointly run one official website from which to order these free reports: http://www.annualcreditreport.com. (When in doubt, you can always link to this website from the FederalTrade Commission website, http://www.ftc.gov.)

If you like, you can bring your teen in on the process of ordering a report now. A year or a few years from now, if your teenage son or daughter has a credit card or student loan, you both can order and review your teen’s credit report together.

Go over the credit report with your teen. You can use your own report, or if you prefer, a sample credit report, such as the one available at Experian’s website. Go over the basics behind credit reports, and try to frame your explanations in terms of behavior, so that your teens can take on good credit­ building behavior and avoid pitfalls that leave bad marks on their credit reports.

Here is some basic information you can discuss:

How the information on a credit report is compiled. Many financial institutions report payment activity, balances and other information about your credit cards and loans to the major credit bureaus on a regular basis. Financial information on the public record, such as bankruptcies and liens, also are included on a credit report.

How credit reports are used. Financial institutions and other entities can review your credit history on your credit report in making a decision to approve your application for a new loan or credit card, determine your interest rate, or even send you a pre­approved offer. A positive credit history can lead to approvals for new credit at favorable rates; a negative credit history can leave you with a high interest rate on a new credit card, or a decline of your application.

Paying bills before the due date. Each account on a credit report usually lists payment history by month. These months are noted as having been paid as agreed, or paid 30, 60, or 90 days late. You can discuss how a long, positive pattern of on­time payments is a major factor in building excellent credit and obtaining the best interest rates for a car loan, credit card, or even a mortgage in the future.

You can use this credit report as a launching point for a number of other informal lessons on financial responsibility in preparing your teen for financial independence.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. You can email him at moneymattersguam@yahoo.com.