Credit: Unraveling the MysteryWhat to know about your FICO® scores, how to improve them and save money

Steve Wagner – MBARealvest Financial Corporation

Credit

• Costs of Poor Credit

• FICO® History

• Factors which influence your FICO® score

• What is not in the score

• How to improve your score

Obvious & Hidden Costs of Poor Credit

• Higher interest on loans (credit cards,cars, homes, furniture etc.)

• Higher insurance rates

• Lower competitiveness when applying for a job

FICO® History

• Fair Issac Corporation – founded in 1950’s– William R. Fair, a mathematician with degrees from the California Institution of

Technology, Stanford University, and the University of California at Berkeley

– Earl Isaac, an electrical engineer

• Created and copyrighted FICO® in 1990’s

What Factors into FICO® Score?

• Payment History – 35%• Amounts owed (as % of available credit) – 30%• Length of credit history – 15%• Type of credit – 10%• New credit – 10%

FICO® Score FactorsPayment History -35%

• Payment History – last 12 months is most significant and one late payment might cost you 15 – 40 points

• Payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)

• Negative public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items) and how long it has been

• Severity of delinquency (how long past due)

• Amount past due

• Number of past due items on file

• Number of accounts paid as agreed • Items in dispute are not included so make sure to dispute

FICO Score FactorsAmounts Owed – 30%

• Amount owing on accounts– Cutoff Brackets seem to be: 0-19 percent, 20-39 percent, 40-59 percent, 60-79 percent, 80-99 percent,

100+ percent (with similar score penalties for each bracket move)

• Amount owing on specific types of accounts • Total owed on individual lines and in aggreagate• Number of accounts with balances • Proportion of credit lines used (proportion of balances to total

credit limits on certain types of revolving accounts)

• Proportion of installment loan amounts still owing (% of balance to original loan amount on certain types of installment

loans)

FICO Score FactorsLength of Credit History – 15%

• Time since accounts opened, by specific type of account

• Time since account activity

FICOFactorsNew Credit – 10%

• Number of recently opened accounts, and % of accounts that are recently opened, by type of account and time open

• Number of recent credit inquiries • Time since credit inquiry(s) • Re-establishment of positive credit history following past

payment problems

FICO Score FactorsTypes of Credit – 10%

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

FICO® Scores

• A FICO score takes into consideration all these categories of information, not just one or two.

• The importance of any factor depends on the overall information in your credit report.

• Your FICO score only looks at information in your credit report – lenders look at more than the score.

• Your score considers both positive and negative information in your credit report.

FICO® – What is not in the Score

• Race, color, religion, national origin, sex, age and marital status.• Salary, occupation, title, employer, date employed or employment history

(however, these are very important to lenders)• Where you live • Any interest rate being charged on a particular credit card or other account.• Any items reported as child/family support obligations or rental agreements.• Certain types of inquiries (requests for your credit report).

– Consumer initiated “Soft Pulls”

– “Promotional Inquiries” for pre-approval purposes

– Administrative inquiries

• Any information not found in your credit report. • Any information that is not proven to be predictive of future credit performance. • Whether or not you are participating in a credit counseling of any kind.

Improving your FICO® credit score Payment History – 35%

• Pay your bills on time.Delinquent payments and collections can have a major negative impact on your FICO score.

• If you have missed payments, get current and stay current.The longer you pay your bills on time, the better your credit score.

• Be aware that paying off a collection account will not remove it

from your credit report.It will stay on your report for seven years.

• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.This won't improve your credit score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time

Improving your FICO® credit score Amounts Owed – 30%

• Keep balances low on credit cards and other “revolving credit”.High outstanding debt can affect a credit score.

• Pay off debt rather than moving it around.The most effective way to improve your credit score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.

• Don't close unused credit cards as a short-term strategy to raise your score. In fact, older cards help your score in the Length of Credit History category

• Don't open a number of new credit cards that you don't need, just to increase your available credit.This approach could backfire and actually lower your credit score.

Improving your FICO® credit score Length of Credit History – 15%

• If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Opening many accounts

can look risky if you are a new credit user.

Improving your FICO® credit score New Credit – 10%

• Do your rate shopping for a given loan within a focused period of time (14 days).

FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

• Re-establish your credit history if you have had problems.Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.

• It's OK to request and check your own credit report.

This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

www.CreditKeepers.comwww.AnnualCreditReport.com

Improving your FICO® credit score Types of Credit – 10%

• Apply for and open new credit accounts only as needed.

• Have credit cards - but manage them responsibly.In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.

• Note that closing an account doesn't make it go away.A closed account will still show up on your credit report, and may be considered by the score.

• The quality of the lender is also a factor. Banks and captive lenders (like some car manufacturers) are better than general lenders (like some auto dealerships and finance companies)

FICO® Score Improvement Plan

• Make a Plan with goals and timetable

• Review your credit report regularly and dispute inaccuracies in writing

• Review your outstanding credit balances and pay down to below 19% (zero is best!)

• Review the age and types of your credit sources and adjust as necessary

Credit Mix

• 3 revolving lines (preferably with major credit cards)

• 1 Installment loan in credit report

• The best scenario is to have a mix of secured and unsecured, revolving and installment credit

Credit Laws of Life

• Don’t spend more than you make

• Don’t borrow what you can’t pay back

• Pay back what you borrow

Credit Scores

760-850 EXCELLENT

700-759 VERY GOOD

660-699 GOOD

664 AVERAGE FICO SCORE

620-659 NOT GOOD

580-619 POOR

500-579 VERY POOR

Illinois average = 681

For More Information

Fee free to contact me:

Steve Wagner630-433-6646

stevenswagner@comcast.net

www.FinancialProtectionPlan.com