>What’s Behind the Credit Score?

>By Natasha L. Foreman, MBA

I just read an insightful article How Your Credit Score is Calculated written by Simon Zhen that explains how your credit score impacts your life, how it is calculated, and the benefits of earning and keeping a good credit score. As many of you may know your creditworthiness is based on a Fair Isaac Company (FICO) credit score with a range of 300 to 850. The FICO score is calculated based on certain measurements:

1. Payment History (35%): the most impactful on your credit score
2. Amounts You Owe and Credit Limits (30%): this measurement looks at your debt utilization ratio which is the total amount you owe divided by total amount you borrowed (and/or can borrow)
3. Length of Credit History (15%): the longer you have had credit the more experienced you are as a debt manager- and most likely the higher your credit score
4. Types of Credit (10%): revolving credit (credit cards) and insallment credit (mortgages)
5. New Credit Inquiries (10%): every time you apply for credit it is recorded on your credit report whether you receive the new line of credit or not.

This article gives you a breakdown of these five measurements and even provides a link to a MyBankTracker article, How to Make Yourself Creditworthy: The 7 Don’ts of Credit that is very informative and helpful.

To read the Zhen article for yourself visit MyBankTracker

Let 2011 be the year you reclaim your credit and your life!

Copyright 2011. Natasha L. Foreman. Some Rights Reserved.

>Credit: The debt game


The January 2010 issue of Essence Magazine (p. 85) has an eight-page Money and Career Guide that is rather interesting. As I flipped through the guide I took notice of The Credit Quiz that asks you five questions to help you assess whether you should seek assistance from a debt management company or handle your issues personally with your creditors. The five questions that you are to answer either yes or no to ask:
        Does your debt include credit and department store cards, credit lines or unsecured loans?
        Can you make consistent monthly payments?
        Is there a good possibility you won’t take on additional debt in the near future?
        Can you negotiate well and commit to following up with your creditors?
        Are you okay with having a significant ding on your credit report?
If you answered “yes” to three or more of the questions then they suggest you check with the Federal Trade Commission (FTC) to begin screen debt management companies to assist you. If however, you answered “no” to three or more questions then you should use the extra money you have left over after covering your recurring costs in order to pay off one debt at a time. For those who could not select yes or no to one or more questions, because you simply could not decide which answer was most fitting to your current situation, the article suggested going to http://ftc.gov/credit  to read more about the process and making an informed decision after that point.
What I believe this article failed to do was educate consumers on the risks and rewards of using debt management companies versus tackling creditors alone. The last question uses the word “significant” in relation to how impactful one’s credit report could be affected by either handling the situation one way or another. What do they consider “significant”? What does this “significant” ding mean to the person and their credit? How long does this “ding” stay on their credit?
I’m not a credit card person. I remember getting one at the age of 18, like so many other college students who were pounced on at college campuses. Mine was with a well-known bank seen all over the country. I did as many other financially illiterate people do and allowed my credit card to be used for frivolous purchases that weren’t being paid off in full each month. I looked out for loved ones who claimed to need this or that, when it was only a case of instant gratification gone wild. Of my $800 limit I at most spent $100 on myself. Sad but true. I was making payments on the card, paying what I could and hoping that the other people who were there when it was time to make purchases, would also step forward with money in hand to pay off the debt. It was like saying “hello” at the Grand Canyon…the only person you hear is yourself.
Eventually because no one helped me pay back the charges and associated fees that accrued, I found myself in a pickle after losing my job. I was then sent to an outside collection agency that made a deal with me…“Pay us $600 right now on the phone and we will wipe out the balance owed…” I ran and got my checkbook and rattled off my account number over the phone. Months later I moved and guess what I received in the mail? A demand letter from the bank requesting more than $900 to be paid immediately; they claimed to have no knowledge of my earlier payment and although I said the agency’s name they refused to accept that I had made an agreement to eliminate the amount initially in question for a reduced fee. They wanted me to pay the money in full and began their fear tactics on me in hopes that I would break down and be naïve enough to give them the money. I refused. I felt as though someone had taken advantage of me and until it became clear who the culprit was, and that what I said was factual, no one was getting a lint ball from my pocket.
For years I battled with this bank. There was no way I was going to pay a combined total of $1,300 for an $800 credit limit. I had learned my lesson…matter of fact I learned several of them. I quickly paid off my card from a clothing store in 1997 and closed the account (also not aware of how that would affect me until I saw my credit report several months to a year later). I was 20 years old and free of credit cards!
Although I had sworn off credit cards my mother several years later thought it was important to have a secured credit card for “emergencies” and decided to add my name without my knowledge to her account so in case something happened to her I could immediately have access to the funds. What my mother did not understand was that the minimum monthly payment MUST be paid on time each month even if you don’t use the card. This wasn’t how her American Express card used to work! Long story short…guess who pulled their credit report and noticed “dings” for late payments?
Yep…me! Talking about being livid; I almost dislocated my jaw I was whooping and hollering so much. I had gotten out of the credit card rat race and found myself right back in its claws without ever having received one perk from the card’s use.
I’m not saying credit cards are bad or evil. Not at all….what I am saying is this, educate yourself on the associated costs, fees (both plainly seen and hidden), and penalties for both using the card and for cancelling the card. Know why you are applying for a credit card and what purchases you think you should make using it instead of cash. I understand that a credit card comes in handy, especially when renting cars (and you don’t want them freezing the funds in your account until you return the car), or securing hotel rooms, etc. Here’s the thing you should always consider however…If you can’t afford to pay the bill in full each month then you should opt to use cash for the purchase or defer it altogether until you can afford one lump-sum payment, or layaway. Just think about it!
Copyright © 2010 by Natasha L. Foreman. All rights reserved

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>First-Time Home Ownership Woe #1: The Catch-22 of Credit Card Debt

>Someone close to me is in the market for a first-time homeowner purchase and was recently told by a mortgage rep that they needed more debt in order to qualify for a home; so they needed to get two credit cards, charge $100 each month and pay the bills in full each month for 12 months in order to establish “good” debt. Now let’s look at the background information on this person I’m referring to, they have no real assets; had a secured credit card but it was closed, and has some debt already…bad debt like student loans and charge-offs; their debt-to-income ratio is too high to afford the additional monthly recurring fees associated with the two credit cards yet they are expected to over-extend themselves in order to hopefully qualify for home ownership in no less than 12 months. Talk about a frustrating situation!

So, let me analyze this closer… you have student loans, late payments, and one or more charge-offs, and are already stressed as to how you will afford to pay off that debt, but you have to deal with your daily debt of a car loan, rent, health insurance, life insurance, car insurance, utility payments and whatever else you’re expected to pay on a regular basis; with the dark cloud of reality over your head that reminds you that you don’t make enough money to cover this debt; how in the world will you be able to assume two new high interest debt payments for not just 12 months…but until you give up and tap out?

If you notice I didn’t mention that you are swimming in credit card debt already…you don’t have credit cards because you stayed away from them after learning the hard lesson behind them such as, you can’t merely close a credit card account and not receive a “ding” to your credit report. No, you have to pay at least the minimum monthly amount in order to show a good credit history. But paying just the minimum won’t get you anywhere fast. This rat race is incredible! Where’s the consumer bailout???

We’re told that credit cards are “bad”, that the extremely high interest rates (usually 19% and higher) and added fees can cause you to eventually drown in debt; yet we’re being cajoled into getting these debt-magnets because somehow although they are bad, they are also somehow good for us. So is this another case of using the 1980s coined term, “bad” to mean “good”?

My research has shown that this process is called “re-building your credit“. You have to get help with this because there are quite a few obstacles.

Remember to:

1) not apply to too many credit card companies because that will negatively affect your credit score
2) apply to “good” credit card companies and not ones that charge high interest, processing and administrative fees
3) consider a department store, gas, or secured credit card
4) avoid pre-paid credit cards since they don’t report to credit bureaus (so they can’t help your credit)
5) build new credit habits by not doing what you did in the past to end up with “bad” credit
6) replace bad credit with good credit by charging only what you can afford, making sure to pay your bill on time each month, and making sure you pay more than the minimum each month
7) make sure to not take out too many credit cards because it can become costly as well as confusing

Now check back next week to read my analysis of these 7 points referenced above.