Credit Basics : CRedit

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I feel like there are a few questions popping up on this forum every day. I hope this information can help. You can correct any information that you think is incorrect.

Vantage vs. FICO scores

VantageScore 3.0 or 4.0 is a scoring model provided as a monthly free credit score by many of the free credit score apps (CreditKarma, CreditSesame, NerdWallet, etc.) and credit card companies. FICO scores are the credit scores that are used by the vast majority of lenders for credit cards, mortgages, and auto loans. Because these models assign different weights to different factors in your credit profile, they can vary by up to 100 points. VantageScores can be particularly volatile and tend to fluctuate due to small changes. Both models have different versions, with FICO having specific versions for auto, mortgage, and credit cards. The latest version of FICO is FICO 9 (FICO 10 promised soon), but most lenders use FICO 8 or earlier industry-specific FICO scores for a total of 30 different FICO scores. You can get all of your FICO results from myFICO.com and Experian.com. Experian offers a free 7-day trial with a seemingly unlimited number of renewals / cancellations. You can get your credit reports (no score) weekly for free through annualcreditreport.com through April 2021.

Learn more about FICO vs. VantageScore models.

Experian, Equifax and TransUnion

There are three major credit bureaus: Experian, Equifax, and TransUnion. Your scores may differ between the three offices due to slightly different credit profiles (different numbers of inquiries, different numbers of accounts). Inquiries can be made by 1, 2 or all 3 offices when applying for a new loan. Some accounts do not report to all three offices. For example, if the Apple card was originally only reported to TransUnion, but now to all three offices.

FICO rating factors

Your score consists of:

  • Payment history (35%)

  • Debt Amount (30%)

  • Length of the story (15%)

  • New loan (10%)

  • Credit mix (10%)

Obviously, some of these things you can actively work on (pay on time every month, reduce takeouts, don’t apply for excessive new credit), others just take time (long history, waiting for requests to age / become unscorable).

Payment history

Pay your accounts on time every time. Set up auto payment, then check that auto payment always works. The impact of late payment penalties will decrease over time with a good payment history. Since this is a large percentage of your FICO score, it is often the limiting factor in improving your score and it is difficult to recover from negative information as you have to rely on the unlikely scenario of deletion or deletion.

Amount of debt

You will be penalized to varying degrees if you have large credit cards or owe a large amount on a loan. The draw is either $ owed / $ available for credit cards or $ owed / original loan amount. You will receive a large point bonus for an installment account with a very low percentage owed (around 6-9%). In the case of revolving accounts (credit cards), the lower your total and individual occupancy, the better your score. However, a 0% load on revolving accounts will result in a penalty as you do not appear to be using any revolving balance. Higher workloads lead to higher penalties. The most important breakpoints for the total utilization (total credit card debt / total credit availability) are:

The breakpoints for individual revolving accounts are:

  • 29%

  • 49%

  • 69%

  • 89%

  • 100% (over-limit penalty)

To optimize your score in relation to utilization, you can practice AZEO (All zero except one). This means that all of your credit cards or revolving accounts are reporting zero except one that shows a small balance of $ 20 or whatever that is preventing you from reporting 0% on that card. With this method, you are still penalized with fewer than 3 revolving accounts and maximized with 4-5 revolving accounts (this refers to a mortgage FICO rating factor in terms of the number of accounts reporting a balance). If you are an authorized user of a card, at least one of your AU cards must report a small balance or you will receive a zero penalty. AZEO is not strictly necessary unless you are applying for credit and want to maximize your score as the workload has no memory. You can get points back as soon as accounts are reported. The amount reported to the credit reporting agencies is usually your amount Date of declaration So if you want a card to be reported as $ 0, you must pay by that date. You will NOT pay any interest on the one card you reported an account balance for as long as you pay with that Due date.

Length of story

In general, if you build a history of good payments over many years, your score will improve over time. Account age can get quite complicated as the average age of the accounts, the average age of the revolving accounts, the average age of the installment accounts, the age of the oldest account, and the age of the youngest account can all affect your FICO score. There is no control over this other than not applying for excessive new credit. However, they can explain some “mysterious” changes in creditworthiness if your usage, inquiries, or other credit profile factors haven’t changed. AU cards are excluded from the credit age for some FICO models.

New loan

The effects of inquiries when applying for a loan are reduced after 6 months and are no longer assessable after 1 year, even though they appear in your credit report. Multiple requests in a short time for car or mortgage loan are grouped as one for evaluation, although they appear as separate requests. Applying for many loans in a short period of time is considered risky for lenders (some are more query sensitive than others) and can affect your approval for additional loans. You will see an increase in scores as your youngest account crosses age thresholds like 6 months, 1 year, 2 years.

Credit mix

The maximum FICO rating can be achieved with ~ 3 revolving accounts and 1 installment account. This is partly why when you repay a loan you will see a drop in your score if you don’t have another installment account (you may also lose the low loan utilization bonus). However, repaying a loan is a good thing and not something that you can avoid. The credit mix is ​​only 10% so you can earn lots of points in other assessment areas if you don’t need credit right now.

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I could go on, but it’s been a lot longer than I intended. Credit can be an overwhelming thing to learn about because there is a lot of information, but if you educate yourself, you can save tons of money in interest over the course of your life. If you want more details about the FICO 8 rating, this is a great thread to spend time reading.

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