FICA Score Information

When it comes to credit scores, the one you may be the most familiar with is the FICO score. The Fair Isaac Corporation developed this score, and it is currently the most widely used credit scoring system in the U.S. Your FICO score can determine your eligibility for loans such as mortgage loans, it can help determine what type of interest you will pay on your loans, and a low FICO score can even affect your ability to gain employment.

Five FICO Categories

It's important to note that the actual algorithm that Fair Isaac uses to calculate your FICO score is proprietary. This means that only the people at Fair Isaac know the exact formula and they guard it very closely. That being said, what is known are the five factors that do go into the formula. They are your payment history, the amounts owed, length of credit history, new credit and types of credit.

Payment History

Your FICO score looks at your debt repayment history. All things being equal, making your payments on time will lead to a better score. If you do have late payments, different factors are taken into consideration. Those factors include the severity of the delinquencies (were you a day late or were you 120 days late?), the number of delinquencies (late on one credit card or late on multiple cards?), and if any of your late accounts have been put into collections.

Amounts Owed

With regard to amounts owed, FICO considers three factors. One factor is the number of accounts with balances (do you have one credit card or do you have 15?). A second factor is the proportion of credit lines used (your total credit card balance divided by your credit card limits). A third factor is the proportion of installment loan amounts still being owed (for example, if you borrowed $10,000 for a car, how much do you still owe on that balance?).

Length of Credit History

In this factor, FICO looks at how long your accounts have been open and how long it has been since activity has occurred on any of the accounts.

New Credit

The new credit factor includes several considerations. Such as the number of recently opened accounts (did you open a new credit card in the last six months or have you opened five new department store charge cards in the last week?). Or the number of recent credit inquiries (perhaps in addition to the charge cards, you also went to several automobile dealerships and asked them about getting a car loan).

It also takes into account the time since recent account openings by type of account. Account types include revolving credit, such as credit cards, and installment credit, such as a car loan.

Types of Credit

This means the number of different types of credit accounts you use. How many auto loans, credit cards, mortgages and other debt obligations do you have or have you had?

For a complete analysis of all the factors that go into calculating your FICO score, see Resource section.

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Free Help for Credit Card Debt Elimination

Help is available to people who want to eliminate their credit card debt. Some reach out to credit counseling agencies, whereas others use the equity in their homes, acquiring extra money with a cash-out refinance. While these methods are useful when getting rid of debt, some agencies charge a monthly fee for assisting debtors, and refinancing a home loan to eliminate debt involves expensive fees. However, there are tactics to get rid of debt for free.

Strategies to Get a Lower Interest Rate

The amount of interest you pay on credit cards each month plays a role in debt elimination. Interest fees are costly, and if you're only paying the minimum payment each month, the bulk of each payment only reduces the interest charges for the month, not the principal balance. Acquiring a lower rate on your credit cards helps you pay down the balance quicker because creditors will apply a larger percentage of payments to your principal. Different methods can help you get a better rate. You can take the direct approach and call your creditors to request a better rate. If this doesn't work, start comparing credit card offers and transfer your balance to a low-rate card.

Review Spending Habits

You can control debt by simply controlling your spending. Rather than buy every item on your wish list with a credit card, practice self control and save for major purchases. Buying items with cash alleviates high debts and interest payments. Credit use helps build a credit history, but if unable to control your spending with credit, it's best to put away credit cards. Disregarding offers for new lines of credit and placing all credit cards in a locked box helps curtail spending. Ask someone you trust to hide the cards or simply cut the cards in half.

Monthly Payment Amounts

Don't expect quick debt relief if you're only able to pay your minimum each month. Eliminating credit card debts will require forwarding higher payments until the debt dissolves. Understandably, not everyone is in a position to drop a lump sum on their debts each month. Still, it doesn't hurt to review your budget and think of ways to cut back. An extra $50 a month on top of a $20 minimum payment can reduce a $1,000 credit card balance in about 14 months.

Personal Sacrifice

Eliminating high credit card balances will involve some sort of personal sacrifice. Depending on the amount you owe, you may consider sacrificing your free time and acquiring part-time employment to bring in additional cash to pay off a large debt. If you normally take yearly vacations or enjoy treating yourself to an expensive luxury, you may forgo these and put the money towards debt elimination.

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How to Buy a Low-Cost House With Bad Credit

Having a low credit score not only affects the kinds of credit cards you can have, but it also impacts the amount of a home loan (if any) you may obtain. You'll also be subject to an increase of several percentage points to your mortgage rate. However, if you have found a low-cost house you simply must have, there are a few different options available to you, even with a low credit rating.

Instructions

1

Pay in cash. If you have enough money to cover the entire cost of the home, it does not matter how bad your credit rating is. By covering the entire price of the home yourself, you do not need to go out and obtain a mortgage. This might be your best option when your credit score is low.

2

Borrow money from friends and family. Although it is possible to put a strain on relationships by doing this (especially where a large amount of money is concerned), most individuals will not charge you an interest rate--and even if they do, it will likely be far lower than what the banks will give you. Make sure you come up with a payment period and timetable for returning the money to your friends and family.

3

Visit your own bank or credit union. Financial institutions are more likely to give you money if they know you. Apply for a mortgage and provide past tax returns (to prove you have income). Although the bank will see your credit score is low, they may offer you some sort of mortgage. Be aware your interest rate may be rather high (several percentage points above the current rate). This is because you are considered a higher risk at defaulting on the loan.

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What Affects Credit Ratings?

Your credit rating, commonly known as a credit score, is based on the information contained on your credit report. Only the information on your credit report affects your score, so if you have an account that does not appear on your report or if someone else's account or other mistake appears on your report, your rating might be affected. Your credit score is based on five major areas of your credit history.

Record of Payments

The biggest factor in your credit rating is your payment history on all types of credit accounts. The scoring formula penalizes you for missing payments, filing bankruptcy or settling an account for less than you owe, but the effects of these negative elements diminish over time. Types of accounts that do not usually appear on credit reports, such as utility bills and parking fines, can hurt your score if the creditor sends the account to a collection agency when you are severely delinquent. Paying your bills on time helps your credit score, which also considers how many accounts you have that are currently paid as agreed.

Account Balances

Thirty percent of your credit score is based on how much you owe on each of your accounts. Part of your score is based on how many accounts you have with balances and what those balances on each type of account are. Your score also reflects the share of your available credit that you are using. With revolving credit accounts, such as credit cards, the scoring formula penalizes you for using a high percentage of your overall available credit and for using a high percentage of your credit limit on an individual account. Therefore, you do better to have small balances on a few different cards than to have a large balance on one card and no balances on the rest. In addition, closing an empty credit line can hurt your score if you carry balances on other cards because it lowers your total amount of available credit.

Account Age

The longer you have been managing credit, the better. Your score increases as the time since your accounts were opened increases. Because the credit scoring formula considers your average account age, avoid opening new accounts all at once, because that could significantly lower the average age of accounts. In addition, try to keep your oldest accounts open and active so they stay on your credit report and continue to affect your score.

Mix of Credit

Lenders like to see borrowers who have been responsible in using many different kinds of credit. The two major categories are installment loans that have equal monthly payments over a fixed period, such as auto loans and mortgages, and revolving credit accounts that let you borrow from and repay money on a line of credit, like on a credit card.

Recent Account Openings

Someone who has been applying for and obtaining a lot of new credit poses a risk to lenders. This is because the individual could be having cash flow problems and is trying to borrow money to help solve them. The credit scoring formula penalizes you for credit inquiries, which result from a lender checking your credit report after you apply for credit. It also penalizes you for having new credit accounts on your report.

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Does Good Payment History Show Up on a Cosigner Credit Auto Loan?

Co-signers are often needed for certain borrows to qualify for a loan. The types of loan can be anything from an automobile loan to a mortgage. Co-signers take risks when agreeing to co-sign on any loan; however, when a co-signing agreement is handled well the co-signer can benefit from the process.

What is a Co-Signer?

A co-signor is someone who is willing to use his credit information to help another person qualify for a loan such as an automobile loan. People who have yet to establish credit and those with poor credit often need a co-signer. The co-signer not only allows the lender to use his credit to qualify for the loan but the lender will hold the co-signer responsible for the loan if the applicant defaults on the loan. The decision to co-sign for another person should only be taken after careful consideration and requires a great deal of trust in the applicant. You must feel secure in the fact that the applicant can not only afford to make the payments but will make the payments.

Positive Credit Reporting

When you co-sign for an auto loan, the applicant should take responsibility for paying the bill and at each payment the positive credit will be reported to not only his credit report but to yours as well. Co-signing for a responsible person can actually help your credit without requiring you to pay for the debt. The positive credit will be reported to the credit bureau the which the lender reports.

The Flip Side

While positive credit is reported to your credit report, the reverse also holds true. Anytime the applicant fails to make a payment, the negative information is also reported on your credit report. A borrower that mishandles the account can cause catastrophic damage to your credit report, especially if the loan is a large one such as a mortgage. An automobile loan may not be as high as a mortgage loan but can put a co-signer in a very difficult position if he has to make the monthly payment on the car. Not only can the applicant be sued for non-payment, but you can be sued as well. Creditors will pursue the co-signer as aggressively as the applicant.

Minimize Issues

Never take the applicant's word that payments are being made on time. Check the account monthly to make sure the payment has been made. A late payment cannot be reported to the credit bureau until it is 30-days late. By checking the payment monthly, you can see if the applicant has not made the payment, and you will have time to contact him and push him to make the payment before your credit is affected. Always be prepared to step in and make the auto payment if need be. Before agreeing to be a co-signor you should evaluate your financial situation and determine if you can afford to make the auto loan payments should the applicant default on the agreement.

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Legal Credit Report Improvement

Improving your credit report improves your overall credit score and can help you obtain credit cards, lines of credits and financing for a home. Raising your credit scores can also increase your chances for employment and or award you lower insurance premiums. The fastest legal ways of improving your credit reports involves direct and decisive action on your part.

Payment History

Avoid late payment history whenever possible. Devise a plan to make on time monthly payments to all your creditors. Make more than the minimum monthly payments if you can. Consider making a list of all your creditors along with the minimum payments due and their due dates. If you have past due accounts, catch up the ones that are the most past due while making minimum monthly payments on the others. Consider creating one to two days a month that are dedicated to your bill paying process or consider monthly payments automatically withdrawn from your checking account before the due dates to avoid late payments.

Reduce Debt

Consider the amount of debt you have and reduce it. Ideally, try to keep your balances on your credit cards low whenever you can. Too many credit cards open at once can lower your credit score. You really only need two credit cards, ideally two different major cards if possible, with good payment history to show strong credit. If you have several credit cards, consider closing the ones with annual fees unless they are the only major credit cards you have.

In addition, close the ones issued by retail stores that only allow you to use the card at certain stores. The only exception to this is if these are the only types of cards you have, you are still in the process of building your credit. This shows a creditor that even though you much credit history, at least you are responsible with the cards you have and you've been able to maintain them consistently.

Convert Debt

If you choose to keep the credit cards you have open and have student loans, medical bills or maybe some past due accounts also on your report, consider converting some of that debt into installment loans. This means getting a consolidation loan from a bank or other financial lender that will pay off some of those cards, the past due accounts and whatever other debts you can comfortably fit into it. Then you pay the lender back with specific monthly payments over a specified amount of time. Once the payments are finished, the debt is gone.

It also looks better on a credit report to have a mixture of installment loans and credit cards when necessary, than to have all your debt wrapped up in credit cards alone. When lenders see installment loans on your credit reports, it tells them that eventually the debt will be paid off, unlike an open credit card where the customer can charge up to the limit again and potentially weaken financial stability.

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The Best Credit Card to Repair Bad Credit

When your credit goes south, perhaps due to difficulty paying your loans on time or falling behind on credit cards, you may find that it takes much longer to improve your score than it does to hurt it. A poor credit history and low FICO score may disqualify you from traditional credit sources, but you may be able to heighten your credit score and reinstate a respectable credit history by applying for and using a secured credit card.

About

When you receive approval for a secured credit card, you must provide your credit card company with a monetary deposit that acts as collateral in case you default on your account payments. The money usually sits untouched in an account while you make payments on your credit card. If you incorporate responsible spending and payment habits on a secured credit card account, you can build your credit history in the same way that you can with an unsecured credit card. On the other hand, skipping or making late payments on the account could further harm your credit score and result in a loss of your credit card deposit.

Considerations

Before deciding which secured credit card is right for you, make certain that the credit card company you choose reports your payment history to all three of the major credit bureaus instead of just one or two. Future lenders may obtain your credit history from any one of these bureaus, rather than all three. If your secured credit card only reports to one bureau, your credit score and history could vary wildly between the three bureaus. Also, do not expect to obtain low interest rates and fees on your secured credit card. Most secured accounts integrate high annual percentage rates and excessive annual fees to maintain the account. To avoid falling victim to expensive interest rates, try not to sustain a revolving balance on your credit card and instead pay off your balance each billing cycle.

Expert Opinion

Justin Harelik, a bankruptcy adviser for Bankrate.com, suggests that secured credit cards can rebuild your credit quickly following a bankruptcy or series of other negative items on your credit history. He recommends requesting the highest possible credit limit on your card, while using very little of your credit line. This creates a lower debt-to-credit ratio, a factor that contributes to 30 percent of your credit score. As indicated by Harelik, responsible usage of your secured credit card should improve your credit score significantly within one to two years.

Timeline

Destructive credit histories are not indefinite. Within seven years, negative items on your credit history are expunged, hopefully replaced with a more positive and constructive credit history. Until these items fall of your report, they will become less and less damaging as more recent information becomes available on your secured credit card account payments.

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