December 2011
790? 680? How Do They Come Up With This Number? (… And Why Should I Care?)
Now that you are armed with you and your spouse’s credit score (assuming you emailed me after last month’s newsletter, got the internet code to get your free credit score, and saved $40) let’s talk about what it means. Haven’t done it yet? Email me at [email protected] and I will let you know how - it is a free service available on base (if you know to ask!)
FICO scores range between 300 and 850. Higher scores are better. Bottom line, a better score means that you save money. A quick example; you are applying for a mortgage. The difference of a 620 vs. 780 on a 30 year $250,000 mortgage means paying $84,424 more in interest over the 30 years. It doesn’t matter who you are, that is a lot of money to be wasted on interest. High FICO scores pose less risk of missing payments or defaulting on a loan and are charged less to borrow money.
Factors that Affect your Credit Score and their Weighting in the Calculation
- Payment History (35%) - Paying bills on time is generally the single most important contributor to a good credit score
- Amount Owed (30%) - What is your balance compared to your limit? Too many cards with balances can lower your score
- Length of Credit History (15%) - The longer the history, the better. Those with highest scores opened accounts on average 19 years ago and average age of all accounts is 8 years
- New Credit (10%) - Opening several accounts in a short period represents higher risk
-Types of Credit (10%) - It seems counterintuitive, but you need several lines of credit to have a good credit score. If you demonstrate responsible use of different types of credit, you are considered to be less risky. The ideal mix is 2 installment loans (mortgage, car) , 3 revolving accounts (credit cards) and no delinquencies. Debit cards have no effect.
Things you may not know…
- You can increase your score by increasing your credit limit. If you typically have $3,000 balance and a $10,000 limit, see if you can increase your limit to $15,000. Voila, your balance is now a lower percentage of your limit
- In sickness and in health, in credit history and debt - if you hold a joint account with your spouse, their payment behaviors are now yours. Make sure you know ALL the accounts that you are listed on as joint or authorized user
- Co-sign on a loan? Be careful. Their late payments and balances due are 100% yours
-Want to give your children the gift of a good credit score? Add them as authorized user on your account (and don’t give them a card and you don’t even have to tell them). They will benefit from your good credit history
-A FICO score is a snapshot. It is a score as of that day, that time. Say you just PSC’d and have $15,000 of expenses on your $20,000 limit. You just got back from overseas and need to buy a new car. You apply for a loan and your score is lowered because of your high balance. Consider waiting until the balance is paid off before applying for the loan
- Your credit score does take into account open and closed accounts. You can’t get rid of a bad history by closing the card
-Closing credit cards will negatively affect your score. FICO likes to see long, boring credit histories. If you have lots of cards and need to close some, close those with the shortest payment history first
What this means for you…
-Applying for a job? Your employer checks your credit score and may think twice if you are financially irresponsible
-Buying insurance on your home? They will check your credit score as a factor in determining your premiums
-You can’t “marry into” a good credit score. Joint accounts matter but you need your own credit history, too.
FICO scores range between 300 and 850. Higher scores are better. Bottom line, a better score means that you save money. A quick example; you are applying for a mortgage. The difference of a 620 vs. 780 on a 30 year $250,000 mortgage means paying $84,424 more in interest over the 30 years. It doesn’t matter who you are, that is a lot of money to be wasted on interest. High FICO scores pose less risk of missing payments or defaulting on a loan and are charged less to borrow money.
Factors that Affect your Credit Score and their Weighting in the Calculation
- Payment History (35%) - Paying bills on time is generally the single most important contributor to a good credit score
- Amount Owed (30%) - What is your balance compared to your limit? Too many cards with balances can lower your score
- Length of Credit History (15%) - The longer the history, the better. Those with highest scores opened accounts on average 19 years ago and average age of all accounts is 8 years
- New Credit (10%) - Opening several accounts in a short period represents higher risk
-Types of Credit (10%) - It seems counterintuitive, but you need several lines of credit to have a good credit score. If you demonstrate responsible use of different types of credit, you are considered to be less risky. The ideal mix is 2 installment loans (mortgage, car) , 3 revolving accounts (credit cards) and no delinquencies. Debit cards have no effect.
Things you may not know…
- You can increase your score by increasing your credit limit. If you typically have $3,000 balance and a $10,000 limit, see if you can increase your limit to $15,000. Voila, your balance is now a lower percentage of your limit
- In sickness and in health, in credit history and debt - if you hold a joint account with your spouse, their payment behaviors are now yours. Make sure you know ALL the accounts that you are listed on as joint or authorized user
- Co-sign on a loan? Be careful. Their late payments and balances due are 100% yours
-Want to give your children the gift of a good credit score? Add them as authorized user on your account (and don’t give them a card and you don’t even have to tell them). They will benefit from your good credit history
-A FICO score is a snapshot. It is a score as of that day, that time. Say you just PSC’d and have $15,000 of expenses on your $20,000 limit. You just got back from overseas and need to buy a new car. You apply for a loan and your score is lowered because of your high balance. Consider waiting until the balance is paid off before applying for the loan
- Your credit score does take into account open and closed accounts. You can’t get rid of a bad history by closing the card
-Closing credit cards will negatively affect your score. FICO likes to see long, boring credit histories. If you have lots of cards and need to close some, close those with the shortest payment history first
What this means for you…
-Applying for a job? Your employer checks your credit score and may think twice if you are financially irresponsible
-Buying insurance on your home? They will check your credit score as a factor in determining your premiums
-You can’t “marry into” a good credit score. Joint accounts matter but you need your own credit history, too.
November 2011
Protecting Your Children’s Credit and Your Own
As adults, we know to protect our social security number (SSN), but are you watching your child's? Kids make attractive targets for identity thieves because they have no previous credit history. Moreover, the crime could go undetected for years because parents don't typically check to see whether their children have credit records. Most fraud is not discovered until a child applies for a job or a driver’s license and realizes their SSN has been racking up credit card debt for years.
Why does this happen? Credit issuers often do not verify the age of the applicant. The information on the application is taken at face value. Credit reporting agencies and the Social Security Administration don't “talk” or share information. An applicant's age becomes official in the eyes of the credit reporting agencies when it is reported on the first credit application.
Just because they ask, doesn’t mean you have to tell. Often your child's school, physician's office, daycare center, or sport's team may request your child's SSN. Always ask why it is needed and how it will be protected. Just because there is a line on a form that asks for it, does not mean that you have to fill it in.
Four Ways to Protect Your Child’s Credit (and a Special Military Benefit for You and Your Spouse!)
1. Don’t carry your child’s SSN card, teach your kids about passwords and PINs, guard online networking sights, change passwords regularly, and teach the importance of not filling in information on websites
2. Your child’s bank account shouldn’t have overdraft protection and it should only be a savings account
3. Watch for mail arriving at your home in your child's name. One of the first red flags is a preapproved credit card offer. This may reveal that your child has an established credit record.
4. Just like you run one on you and your spouse every year (right?), run credit reports on your children for the presence of a credit file. If a credit file is not found, that's good news. An existing credit report on a minor may indicate a problem.
§ The official site to obtain a credit report is www.annualcreditreport.com
§ You can get a credit report from the official site once every 12 months for free which pulls from all three nationwide consumer credit reporting companies - Equifax, Experian, and Transunion
§ This is for a credit report, NOT a credit score (FICO Score), which you have to buy for approximately $20 from all three of the credit reporting companies.
5. As of March 2, 2011 the FINRA Investor Education Foundation for has made FICO scores (the actual number!) available for FREE to military and spouses. This service is not available for children.
Please contact me at [email protected] if you are interested in getting yours. I just got mine and my husband’s score for free (mine was 3 points higher) and saved $40
Why does this happen? Credit issuers often do not verify the age of the applicant. The information on the application is taken at face value. Credit reporting agencies and the Social Security Administration don't “talk” or share information. An applicant's age becomes official in the eyes of the credit reporting agencies when it is reported on the first credit application.
Just because they ask, doesn’t mean you have to tell. Often your child's school, physician's office, daycare center, or sport's team may request your child's SSN. Always ask why it is needed and how it will be protected. Just because there is a line on a form that asks for it, does not mean that you have to fill it in.
Four Ways to Protect Your Child’s Credit (and a Special Military Benefit for You and Your Spouse!)
1. Don’t carry your child’s SSN card, teach your kids about passwords and PINs, guard online networking sights, change passwords regularly, and teach the importance of not filling in information on websites
2. Your child’s bank account shouldn’t have overdraft protection and it should only be a savings account
3. Watch for mail arriving at your home in your child's name. One of the first red flags is a preapproved credit card offer. This may reveal that your child has an established credit record.
4. Just like you run one on you and your spouse every year (right?), run credit reports on your children for the presence of a credit file. If a credit file is not found, that's good news. An existing credit report on a minor may indicate a problem.
§ The official site to obtain a credit report is www.annualcreditreport.com
§ You can get a credit report from the official site once every 12 months for free which pulls from all three nationwide consumer credit reporting companies - Equifax, Experian, and Transunion
§ This is for a credit report, NOT a credit score (FICO Score), which you have to buy for approximately $20 from all three of the credit reporting companies.
5. As of March 2, 2011 the FINRA Investor Education Foundation for has made FICO scores (the actual number!) available for FREE to military and spouses. This service is not available for children.
Please contact me at [email protected] if you are interested in getting yours. I just got mine and my husband’s score for free (mine was 3 points higher) and saved $40
