What Factors Will Make the Rate Higher With Lower FICO Scores?

Lenders will often charge you a higher interest rate or deny you credit for a loan or credit card based mainly on a low FICO score. When you apply for larger, longer-term loans such as a mortgage, other credit reporting factors may affect your interest rate and loan approval.

About FICO Scores

The three major credit bureaus in the U.S., Experian, TransUnion and Equifax use credit-scoring methods developed by the Fair Isaac Corporation or FICO. These methods may vary slightly from one credit bureau to the next. This often causes your credit score to differ slightly. The credit factors that affect the majority of your FICO credit score are payment history---35 percent, amount of outstanding debt---30 percent and age of credit accounts---15 percent.

Public Records

If a creditor sues you for an unpaid balance and the judge finds in favor of the creditor, this information appears on your credit report in the public records section. Other information that appears in this section includes federal and state tax liens, foreclosures and bankruptcy filings. Anything reporting in the public records of your credit report lowers your FICO score. Credit reporting agencies do not reveal exactly how much it lowers your score, only that the damage is significant. If the judgment has a zero balance, it may not completely prevent you from getting a loan, but it will increase the interest rate you pay.

No Credit History

If you have no credit history, you are in a situation where you may have a low score, but not because of bad credit. Lenders assess credit risk based on credit history. This assessment is how lenders decide whether to approve you for a loan and what interest rate to charge. Lenders having nothing on which to base their credit risk assessment when you don't have a credit history. As a result, they typically charge a higher interest rate.

Improving Your Score

The only way to get the best interest rate on any line of credit is to improve your FICO credit score. To do so, work to pay down your current outstanding balances on your credit cards and loans and try to make all your payments on time. If you have collections accounts that still have outstanding balances, you may want to contact the creditor to make payment arrangements to pay those balances off. Once your FICO score improves, lenders will charge you a lower interest rate on new lines of credit.

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Will It Affect Me if My Spouse Stops Paying a Credit Card?

If your spouse stops making minimum payments on his credit card, his credit score will suffer as the account becomes further delinquent and is eventually charged off by the bank that issued the credit card. If you are not listed on the credit card, the lack of payment should not have an impact on your credit score. However, you could be affected if the bank attempts to collect on the debt by placing liens against property you and your spouse hold together.

Credit Impacts for Spouse's Nonpayment

When two people marry, they hold separate credit histories, based on their past behavior. Credit scores are affected by a person's history of paying on time (or paying late), the amount of credit and number of accounts currently outstanding. Each person will continue to have a separate credit score, but if a couple co-signs on a loan (anything from a credit card to a car loan to a mortgage), all activity on the co-signed loans will affect the credit score of both people.

Joint Account

If this credit card holds the name of both you and your spouse, it will have a significant impact on your own credit history and credit score. The nonpayments by your spouse will affect you because your name is listed on the loan. Because of this impact, nonpayment should be avoided if at all possible.

Separate Account

If the credit card account does not carry your name, there may not be an immediate impact on your credit score. However, the damage done to your spouse's score could affect you in the future. Whenever a couple attempts to get a joint loan, the credit scores and histories of both people are considered. The lowered credit score of your spouse could lead to a higher interest rate on the loan or alter the amount you are able to borrow.

Account Closure

After your spouse misses a payment on the credit card's loan balance, the account will generally become delinquent when payment is more than 30 days overdue, although each bank has its own specific time line. If failures to make payment continue, the bank will eventually "write off" the debt, assuming no further payments will come. The account will also be closed and your spouse will no longer be able to use the credit card.

Liens for Credit Card Debt

Before a credit card lender can place liens or make other attempts to collect debt, the company must file a lawsuit against your spouse in court. Your spouse will generally have 30 days to answer the suit and admit or deny certain information. No liens can be placed against your spouse's property or any joint property until the company has received a judgment. It is important to respond to any lawsuit, since failure to do so could result in a default judgment, which could lead to your spouse's paycheck being garnished or liens being placed on his property or property you own jointly.

Liens

A lien is a legal claim by a creditor, in this case the bank issuing the credit card. The claim can be placed with a debtor's agreement or through a court judgment. The lien is intended to help the creditor recoup the initial loan.

Community Property States

According to the IRS, several U.S. states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Income earned by one spouse while living in these states is considered the property of both spouses. Property owned or purchased by one spouse in the marriage while living in these states is the property of both spouses. This means a lender or creditor may be able to seek liens on your paycheck, even if the debts from an unpaid credit card were accumulated by your spouse.

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How Much Does Satisfying a Judgment Improve Your Credit Score?

Your credit score takes many financial activities into account. All your credit-related accounts, such as major credit cards, gasoline and retail accounts, mortgages and other loans, appear in detail, including the balances and payment histories. This data figures into your credit score, as does any related court actions.

Definition

A judgment hurts your credit score because it results from long-term unpaid bills. The Bankrate financial information website explains that credit card issuers, finance companies and other lenders initially try to collect their money through telephone, email and mail demands. These creditors may sue you if you are not responsive, or they may sell the debt to a collection company. The collector can make its own collection attempts and sue you later or file a lawsuit immediately. All of this activity is added to your credit bureau records with TransUnion, Equifax and Experian and is reflected in your credit score. A judgment means the creditor or collection has sued and gotten a court order against you. The judgment is a public record and also becomes part of your credit reports.

Impact

Lenders who review your credit reports before approving applications may turn you down because of the judgment and the delinquency leading up to it. Judgments result from refusal to pay a debt, which makes you look like a risky borrower. The MyFICO website warns that these court actions also pull down your score, which is based on your credit report data. The exact amount of the drop depends on your previous records and the status of your other accounts, but Motley Fool money management website writer Dayana Yochim explains that judgments are equivalent in impact to 90-day late payments or repossessions.

Pay-Offs

Satisfying a judgment with a pay-off does not help you unless you negotiate a change in status on your credit reports. A paid judgment stays in TransUnion, Equifax and Experian files for seven years, so creditors still know that you had a defaulted bill, and it continues to hurt your score. The credit report entry must be removed to stop its score-reducing effects. Carreon and Associates, a credit repair website, recommends offering a settlement to the creditor in exchange for dismissing the judgment. Get the deal in writing before making your payment. The judgment should disappear from your credit reports, and your credit score should go up within 30 to 45 days of the time the creditor files dismissal paperwork. Actual score improvement varies, depending on your overall credit records. It may be significant if you have no other negative data on your reports, or the improvement may be minor if you still have many delinquent accounts.

Considerations

Your creditor automatically gets a default judgment if you do not show up in court. The Carreon and Associations site recommends being present and disputing the judgment's validity if there are any grounds to do so. Otherwise, you may be able to settle before the case is heard.

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Is a Credit Report an Asset?

A credit report is not an asset in the traditional sense, like a house, but you can leverage it like you would an asset. Creditors make most of their decisions using a mathematical formula called the FICO formula. If your credit report contains only positive information, this could make you a great customer to lenders.

Identification

Going by the traditional definition, a credit report is not an asset. Assets hold some intrinsic value and can be liquidated or sold for cash. Some common assets are cars, equipment, stock and cash. Credit reports contain information about your loans and have no direct monetary value to you, the consumer.

Leveraging Good Credit

Most lenders do not make informal judgments about your creditworthiness. The information in your credit report tells the lender how risky you are in the FICO scoring system. When the FICO formula rates you a low risk, you can leverage this into a loan or asset, such as a mortgage. Lenders fight for borrowers who always pay on time, because the chance of not getting repaid in the future is extremely low. When you score gets into the high 700s, you almost always receive the best rate.

Other Benefits

A strong personal credit report might be enough to obtain a small-business loan at a low rate, because handling personal finances usually translates to similar performance in managing a business. You will also have an easier time obtaining an apartment and utilities without paying a large security deposits. Insurance companies may even lower your premium for a positive report -- or raise it for a bad one.

Tip

Start building a credit history immediately if you do not have anything in your report with the major credit bureaus. A limited credit history or a report that has bad information is not an asset to building wealth and may even detract from it. The first step is to acquire a loan from a creditor that reports to Equifax, Experian and TransUnion. Meet your debt obligations every month and eventually your report becomes a valuable asset.

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Three Easy Ways to Rebuild Your Credit

A person's credit score is a numerical indicator of his past credit history. It is a number used by lenders to determine a potential borrower's ability and willingness to repay a new debt. The higher the credit score, the easier it is for a borrower to get a loan with excellent terms. Once a credit score is lowered by negative credit history, a few steps can be taken to help raise the score, or rebuild credit.

Check Your Credit Report

AnnualCreditReport.com is the only federally mandated website that allows individuals in the United States to check their credit report once per year for free. Use this site to check your credit report and look for errors. Each line item on the credit report lists the reporting credit agency or bureau. If there are any errors, contact the specific credit bureau (Experian, Equifax, or TransUnion) that lists the error to have that error removed. You may be required to provide documentation to remove the error. Please note that while your credit report will be free from this site, your credit score is not. A fee will be charged in order for you to view your credit score.

Pay Off Outstanding Negative Items

Look to see if there are any negative items listed on your report, such as judgments, liens or collections. Pay those items in full. Once they are marked as "paid in full" their impact will be less on your score. Also note if there are any loans or lines of credit that are currently overdue and listed on your report. Pay those up-to-date to lessen the impact of late payments on your score as well. There is no set formula for determining how much your credit score will rise based upon paying off outstanding negative items. The amount your score rises will be based upon your current credit, the mix of credit types you have, and the amount of time that your account has been marked "paid in full." The rise in credit score could vary from person to person and the credit bureaus keep the exact formulas for score calculation as proprietary information.

Pay Down Credit Card Debt

The lower your credit card balance in comparison to your credit limit, the less the impact on your score. Keep your credit card balance to less than 30 percent of its limit, even if you pay it in full each month, to lessen its impact on your score. Credit cards that are "maxed out" where the balance is close to the limit have a very negative impact on your credit score.

Set Up Automatic Payments

To avoid late payments in the future, and to avoid judgments, liens or collections, set up all loan payments on automatic drafts or payments each month through your checking account. This ensures that the bill is paid on time. However, make sure your checking account (or the account that the payment is drafted from) has enough funds to cover the transaction to avoid overdraft fees.

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How to Compare TransUnion Credit Scores

The three national credit bureaus---Experian, Equifax and TransUnion---each use slightly different versions of the FICO scoring method. If you have recently applied for a home or car loan, you may have noticed differences in your credit scores from each of the credit reporting bureaus. Your scores can vary due to different calculation formulas, and not all creditors report your activity to all three bureaus, so each of your credit reports may contain different information. For instance, when you compare TransUnion credit scores with your scores from the other two agencies, you may find a discrepancy of 30 or more points.

Instructions

1

Obtain a copy of your credit report from each of the credit bureaus. You are entitled to a free copy from each agency annually, and you can order your reports by providing your name, address, date of birth and Social Security number. The three agencies have established a central website at AnnualCreditReport.com where you can order your free reports, either separately or all at once.

2

Check the personal information section of your TransUnion credit report, as well as your other reports. The personal information sections should include your name, current and previous addresses with dates of occupancy, Social Security number and date of birth. Check for accuracy on all three reports.

3

Read the information in the employment history section. A TransUnion credit report will list your current employer with your date of hire, position and income, as well as any relevant previous employers and your reasons for leaving those occupations. Do the same for the other two reports and highlight any errors you find.

4

Examine the area of your TransUnion report that details your active credit accounts. Paid-off and past-due accounts will be included in this section, as well as your credit score. Compare your TransUnion report to the reports received from the other agencies, taking note of any differences in the reporting creditors, which can account for credit score differences.

5

Verify the remaining information. Look for items such as reported bankruptcies or judgments, any collections activity, current or past creditors, repossessions or charge-offs, your payment history over the past two years, all credit inquiries by lenders and any warning messages that may be attached to your credit history. Credit scores are calculated based on percentages, according to the importance attached to a particular category; for example, your payment history may account for 35 percent of your credit score.

6

Compare your TransUnion credit scores, which should be somewhere between 300 and 850, to the scores received by the other two agencies, and immediately inform the agencies of any errors found in your reports. Unfortunately, there will be no score given on a free report, but you can order a report that gives your credit score, directly from each credit bureau. Equifax charges $15.95 for your credit report and Experian charges $14.95. TransUnion now offers your credit score free through TrueCredit.com and Zendough.com.

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When Do Credit Card Companies Report to Credit Agencies?

When you open a credit card account, the card issuer reports this information to one or more credit bureaus. When you make or miss a payment, the issuer reports this as well. Different credit card companies use different credit bureaus and report at different times. In most cases, you should see a new account appear on your credit report within a month. In some cases, it takes longer.

Credit Bureaus

There are three main credit bureaus in the U.S.: Experian, Equifax and TransUnion. Some creditors use all three, others just one or two. Your credit report varies slightly depending on which bureau issues it. The bureaus also use different formulas to calculate credit scores. When analyzing your credit score, you should consider all three credit scores, not just one. Before applying for a credit card, consider finding out which bureaus the issuer uses. It can mean a difference between an approval or a rejection.

Credit Reports

Your credit report contains personal information, such as your name, date of birth, Social Security number, address, driver's license number and, possibly, the name of your employer. It also has a list of your credit accounts, credit limits, the amount you owe and whether the account is in good standing. If you've filed for bankruptcy within the past 10 years, it will be on the report, as will any liens and debt-related court judgments.

Credit Reporting

Credit card issuers report to credit bureaus every 30 to 60 days on average. If you've taken out a new credit card, it should show up on your credit report at the start of the following month. In other words, if you added a credit card in October, it will be on the report by the first week of November. Credit card companies should report both your balance and credit limit, though some (notably CapitalOne) do not. Without knowing your credit limit, the bureau uses your maximum balance to calculate your debt-to-credit ratio. This can make it appear you've used all your available credit--maxed out your credit line--when you have not.

Fixing Mistakes

You should check your credit reports on a regular basis, in case there are errors. Even a small mistake can cost you points on your credit score. You can obtain a copy of your credit reports free of charge at annualcreditreport.com once a year. If you notice an error, file a claim directly with the credit bureau. The bureau will investigate, and, if your claim is valid, it will correct the information within 30 days.

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