A Comprehensive Overview of Your Credit

An individual’s credit is one of the most complicated numbers to determine.  The Fair Issac Corporation keeps how they truly determine an individuals credit score very secretive.  They give an outline on how your score is determined, but they do not give the common man any specifics.  Since Americans do not have a deep insight  on how our credit is determined we may not pay close attention to our credit score.  We used to view our credit on a good or bad scale.  Approximately, three years ago if an individual had “good” credit they could obtain a mortgage, car loan, business loan, and credit cards.  If they had “bad” credit then they could obtain some help from lenders at an increased interest rate.  Nevertheless, as population we knew even with a bad credit score we would we would receive some sort of loan. 

In today’s economic environment what was considered good credit and what was considered bad credit has significantly changed from three years ago.  In the past a person with  a mid-600 credit score could have been classified as having “good” credit and a person with a score below the mid-600s could have been classified as having bad credit.  In the early to mid 2000s lenders were practically giving away money to individuals who should not have qualified for a loan.  These companies were acting fiscally irresponsible.  In 2007 when America had the decline in the real estate market, stock market, and overall economy took a serious decline the lenders did a 180 on lending practices and went to the other-side of the spectrum.  The lenders have now stopped extending credit to a majority of Americans.  It has become increasingly difficult to obtain a loan and it seems that an individual can only obtain a loan at a decent rate if they have an impeccable credit history and a current credit score in the mid to high 700s.  The lenders have gone from essentially approving most individuals to reviewing each applicant in detail.  If there appears to be any reason the lender can decrease the available balance on a person’s credit cards or deny them a loan they will capitalize on the opportunity. 

Today millions upon millions of Americans are endanger of losing their home, car, boat, life savings, child’s tuition, etc. and therefore may be unable to repay their debts to their lenders.  As a result, many of the lenders are not extending loans because they are affraid many of their customers are going to default on their loans.  Due to a combined efforts of frivolous spending by Americans and the irresponsibility of the lenders, obtaining a loan has become virtually impossible for the common American.  Therefore, America is in a catch 22.  A person is unable to receive a loan because they have bad credit, however, they cannot show they are deserving of higher credit because of their inability to obtain a loan. 

Finally, due to our current economy many lenders started to adopt new types of  methods to determine a person’s credit score.  The lenders have also started to utilize different analysis techniques to determine if a customer is a suitable candidate to lend money.  Below we have placed a great video which discusses the different types of credit scores and analyses techniques being used in today’s financial arena.

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Reporter:  Thanks to the economic meltdown improving your credit score has become the latest rage these days.  Did you know that credit scores are getting even more complicated?  Lenders are now starting to look at new specialty scores to make decisions that could affect your financial future. So here to help us stay on top of the numbers here with us is Lynnette Khalfani-Cox founder of themoneycoach.net and the author of Zero Debt. Lynnette welcome to Good Money.

Lynnette:  Thank you.

Reporter:  So before we get into some of to some of the changes that are abreast could you just give us a little recap of what goes into calculating our credit scores?

Lynnette: Sure, first and foremost there is an actual formula that Fair Isaac the company that develops your credit score has told us that impact your credit rating. First and foremost your payment track record 35% percent of your credit score is based on how well you pay your bills. The key first and foremost is to always pay everything you owe month after month. The second biggest component is something called your credit utilization rate.  In essence its how much credit card debt that you are carrying the credit scoring model likes to see you caring as little debt on those credit cards as possible.  That is 30% a credit score. 15% of your credit score based on the length of your credit history. The longer you have had established traditional forms of credit like a student loan, a mortgage, a car loan, a credit card, etc. the better that is for you.  That boosts your credit score.  10% of your credit score is based on the mix of credit in your files.  Again having credit cards, mortgages, student loans if you can show that you can juggle all those forms all those credit responsibly and pay them on time you will actually get brownie points for doing so.  That’s 10% of your score. And the final 10% is based on inquiries or new applications for credit that you are out there seeking.  In general you do not want to be out there applying for a lot of new credit.  An inquiry stays on your credit report for two years and counts against you for 12 months.

Reporter:  All right but now there is some companies that are going to start competing with FICO. Isn’t that right?  So does that mean we will have different credit scores depending on the company?

Lynnette:  Well yes, uuuh, in a nutshell there are new credit scores that are emerging and that are coming on the scene to rival the FICO credit score. One of them is called the Vantage score and it and this is a score that was developed by the big three credit bureaus (TransUnion, Equifax, and Experian).  It actually launched a couple years ago but frankly almost no lenders looked at.  But now the Vantage score has about a 6% adoption rate. Meaning 6% of banks, credit card issuers, and lenders actually look at and use that score. FICO by and large is still the dominant player in this industry. They have a 75% market share so you definitely need to be most concerned about that score.

Reporter:  About FICO.

Lynnette:  But these new players are coming and different types of credit scores are also starting to be analyzed.

Reporter:  Now are you just in the dark of which credit companies your lender is looking to figure out your credit score.

Lynnette:  You can assume that most lenders are looking at the FICO credit score. But what consumers also need to know about are these other what I call secret credit score that most people frankly have never heard of. For example there is something called the industry options score. Which means that specific industries weigh your purchases or spending patterns and behavior in their industry more heavily than they do with others. So let us say you are going for an auto loan. An auto dealer or finance company might care more about how you have paid your car loans in the past then other things. They’re going to look at whether you have been late, whether you have had car repossessions, etc. That kind of thing.

Reporter:  What about an Application Score; what is that?

Lynnette:  An application score tells a company the likelihood you’ll actually apply for an offer that they make. If you’ve got one of those pop-up adds on your computer or you have gotten a credit card in the mail they are saying hmmm is this person likely to apply or respond to a credit card offer we make.

Reporter:  And what about a Retention Risk Score that is another one of these little secret scores right.

Lynnette: Sure, a Retention Risk Score that essentially tells a credit card company, a bank, or a lender how likely are they going to keep you as a customer. Are you likely to just take that low balance transfer off for that initial deal and you know kiss them goodbye later when a better deal comes along or when a competitor sort of woos you. They want to know how loyal is this person going to be.  That is indicated in retention risk score.

Reporter:  I am assuming the Collections Score means how well you pay your bills or…?

Lynnette:  No, actually the collection score will give a lender or a bank an indication how likely you are as a customer to have your account go into collections.

Reporter:  Aaaaahhhh, ok.

Lynnette:  Some of it is modeled even more finally to tell them if you do go into collections are you likely to pay up. You know and of course those numbers get smaller and smaller.  If you have been in collections the chances are you’re having financial problems or the likelihood of you repaying a debt is increasingly smaller.

Reporter:  What about the Payment Projections Score and the Revenue Score? Tell us about these two.

Lynnette:  Sure, those scores in essence….. the Revenue Score is going to tell a bank how profitable a customer is this person going to be for us. Do they charge a lot other credit cards?  Do they go out and pay them off immediately and so hmmmmm we don’t get a lot of interest out of this person?

Reporter:  That is unbelievable because that is sort of a responsible person.

Lynnette: That is what you should be doing absolutely.

Reporter: Yeah yeah.

Lynnette:  They do want to track and see how big of a revenue generator you are going to be for the company. So all these things matter tremendously….

Reporter:  So they want to be responsible but not too responsible.

Lynnette:  Well you know the banks are in business to make money right? And they make money by extending loans and they provide is loans at a certain stated interest rate and that’s their profit.  So at the end of the day yes they want you to pay back but I’m sure they would not mind if you take a little bit of time in doing so.

Reporter:  Lynnette Khalfani-Cox, thank you so much.  And you can get more for of Lynnette’s tips at themoneycoach.net.

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