Credit scores are a useful tool that lenders use in determining creditworthiness. The higher the scores, the less likely a person will default on any type of loan or obligation. How a person uses his revolving credit lines has a big effect on scores. Abusive use of credit lines, in which they sit near "maxed-out" condition, will injure scores and effect whether you are approved for a credit request. Your timing with what is going on in the marketplace comes into play. When there are many defaults on loans and foreclosures on homes, an approval for any request is risky business to a lender or bank, so scores need to look their best before you apply.
FICO Core Calculations
Credit scores are based on math algorithms created from software programs that credit bureaus use in determining credit scores. Fair Isaac Corporation was the creator of credit scoring, thus the term "FICO scores." Scores are affected by each reporting from credit vendors and can change daily. The two things that seem to affect scores more than anything else is your payment history and how much you owe.
Credit Line Balances vs. Availability
A big percent of your credit scores are made up of the total level of debt you are approved for as compared to current balances. This is particularly true with revolving lines of credit, since they can move up and down throughout the month. The higher the balance, as compared to the maximum amount it can be, causes your scores to drop. The good news is that you can control this by: keeping the balances low (30 to 40 percent of the credit line) or spreading out the use of the revolving accounts to keep them all a low percentage of use.
A warning about some credit card providers: Some do not report the maximum amount that the account is approved for; rather, they report the highest use it has ever had. If it is approved for $5,000, and your balance is $2,500, this is a simple 50 percent of usage; however, if the highest use of the account is $3,000, the balance of $2,500 divided by $3,000 = 83.33 percent, which is incorrect, and injures your scores.
Payment History
Late payments within the past 12 months have the most effect on your current credit scores, and will continue to injure them each month less and less as time goes by, until the late payment is no longer relevant to current activity. Revolving lines of credit are particularly vulnerable to this, since you can get a "double hit" of injury to credit scores by having high balances on credit card or other revolving accounts, and having a late payment reported. The software considers that you are all but "maxed out" and cannot handle the debt that is created by the balances.
Time Frame
If you are paying down credit cards and revolving credit accounts to increase your scores, understand that no impact will be made to scores until the new lower balances actually reach the credit bureaus and your reports: all three of them. Credit card companies report to credit bureaus at various times of the month. You could ask each of them when they report balances, then wait a week after the date of the latest reporting card or account in the month, then access your credit scores. Do not use these credit cards in the meantime, since you want to maintain these lower balances to keep your scores as high as possible.
Warning
If you are applying for any type of credit, go to Annualcreditreport.com and request all three of your credit reports. These are all free to you once per year. You can access your scores at the same time, but there is a small cost for each of them. Pay close attention to your revolving lines of credit. Be sure they are paid down, and have no late payments showing in the past 12 months. Look for errors, duplications and outdated accounts. Dispute these for removal by calling the customer service phone number shown on page one of each report. Allow 30 days for the bureaus to respond with a corrected report. Doing this, along with paying down your credit cards and revolving accounts, will increase your credit scores.
0 comments:
Post a Comment