Three Things About Credit Everyone Should Know and No One Talks About

Three Things About Credit Everyone Should Know and No One Talks About

In my work in credit repair, there are three things about credit and credit scores that come up the most that cause people the most grief and confusion.

1. Number of Credit Scores:

You don’t have one credit score. You don’t even have three. You have around 40 of them and I have seen them vary over 100 points between scores. Most people think you only have one score from each of the three credit bureaus (Experian, Equifax and Trans Union). You actually have 30 scores based on the FICO model, and three scores based on the Vantage 3.0 model, plus an insurance credit score that is used for determining your insurance rates.

None of them are your real credit score and none of them are wrong, but the only one that matters is the one your lender uses. The more dings you might have on your credit score, the more the odds are that your score varies across all models. If you’ve got no dings and perfect pay history, than you have less to worry about. 

The credit scores that you get for free from Credit Karma, Wallet Hub and your credit cards all come from the Vantage 3.0 model, but I’ve never heard of a lender actually using that score, despite Vantage’s claims they have 50% adoption. For example, mortgage lenders use Experian FICO 2 scoring model, the Trans Union FICO 4 and the Equifax FICO 5, also sometimes referred to as the tri-merge. You also have six scores for auto lending and any number that can be used for credit cards. The most commonly used score is the FICO 8.

Should you care? Yes and no.

If you want the least costly options to monitor your credit health, pull all three of your credit reports for free at www.annualcreditreport.com and then watch your score on Credit Karma for free. Credit Karma will only give your Vantage scores for TransUnion and Equifax, but it will give you a general picture.
If your credit is less than perfect or you’ve had any kind of financial trauma in the past (divorce, bankruptcy, exes that might have messed with you or a common name) and you would like to make a big purchase like home or auto or you’re looking for a business loan, it’s a good idea to go to www.myfico.com and spend the $60 pull their 3B report. That way you can see all thirty of the scores. I know people whose common FICO 8 score wasn’t high enough for a mortgage, but their actual mortgage scores were high enough.
Pulling your scores saves you a hard pull on your credit from a lender, and it gives you the time you might need to address any errors, negotiate any unresolved items, or go through credit repair. The internet is rife with stories of people looking at their score on Credit Karma and thinking it was 700, which is good credit, and then going to a car dealership and finding out it’s only 600 and being turned away. Time is on your side when addressing credit issues, and knowledge is everything.

If you’re trying to improve your score, going through credit repair, or just like to keep a pulse on things, www.creditchecktotal.com is an Experian company that will give you your FICO 8 scores. Their service is $1 for a 7-day trial, and then it’s $30 a month. You can’t cancel online, but when you call to cancel they will offer you $15 a month. This seems to be the best option out there for actual credit scores used by underwriters.

2. Having a good credit score is about cultivating positive pay history and usage.

You actually have to use credit to have a good score. Not having any credit that reports to the bureaus will put you in the 500 to low 600s, and that’s the same as many people who have defaulted on credit cards or gone through bankruptcy. 

You obviously don’t want to be drowning in credit card debt, but usage of a credit card that shows you’re responsible and reliable will give you the best score. You want 10-30% balance of your total credit reporting over time. The balance that reports is your statement balance. It’s generally calculated by the balance three days after your payment is due. It’s essentially what’s left after you pay, so even if you’re paying in full every month, if you use it all month and make multiple payments, you still want the amount reporting to be low. Under 10% is best, especially leading up to a big purchase, but no balance at all can hurt you as well.

The difference between a maxed balance and 10% usage reported can be a 100 point difference, just in one cycle. That’s the difference between a 3% rate on a car loan and a 15% rate. It’s the difference between getting the dream house and not qualifying for the mortgage. So yes, pay on time, but also watch your reported balances. You can always call your card and ask what day the balances get reported.

3. The worse your credit is, the better it can get.

Seems counter-intuitive right? But the truth is, the lower your score, the more dings you have that can be contested and removed. The worst thing for your score is to have unpaid judgements, collections and charged off cards or loans that all report a balance. The good news is that most of these accounts will settle for 30-40 cents on the dollar, and once they are settled you can often get them removed. When someone works with us for credit repair, we contest every negative remark on your report, because the burden of proof is on the creditor doing the reporting. If they can’t or are unwilling to prove that something actually happened, then the credit bureau has to remove it.
We recently had a client who had been a realtor and when the market crashed in 2009, she didn’t get a paycheck for a year. She wound up giving a BMW X5 back to the bank, and she had a $5300 bill that was haunting her. We negotiated a $1580 settlement, and the account now shows paid as agreed. All the negative language has been removed. She’s gone from an average 523 to 680 in six months. Another six months of on-time payments and low credit card usage and she will be over 720.

headshotOn a similar note, we had someone with 26 judgements and collection accounts from a business gone bad when an office manager ran off with her money in the middle of the night (literally). We were able to clear about eight of those accounts without her paying and the rest we negotiated payoffs and got all but two deleted. She also saw a 150 point jump on her FICO 8 scores, and she’s dreaming about buying a house, something she had written off as impossible.

Credit is complex, but it doesn’t have to be terrifying. You can only start where you are, so don’t beat yourself up if you’ve had some issues. Everything is negotiable and recoverable. First step, get educated. Second, forgive yourself for anything that’s gone haywire. And third, use your knowledge to create better financial health for yourself.

 

 

Text: Cassie Price – Wealth Generation Collective
Pictures: @TBM4W and Cassie Price (@eco_mba)

This article was featured in Issue No. 1 / Winter 2016 issue of The Business Magazine for Women. You can read the rest of the magazine here:

tbmfw-issue-1

 

 


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