Escaping the Poor Credit Score
A free ebook produced by GoldAllianceGroup.com
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Table of Contents
Credit scores and how they are used
The line between good and bad credit
Determining your credit score
Resources to help you escape poor credit
Why it’s important to track credit
Actions that improve credit
Credit scores and how they are used If you have previously applied for any type of loan or credit card or pay regular bills (such as a gas or electric bill), you have a credit history. A credit score is used to numerically describe your credit history. Credit scores can range from 300 (poorest) to 850 (best). A company called Fair Isaac maintains standards for calculating the FICO credit score.
Consumer credit reporting agencies (Equifax, TransUnion and Experian) maintain a history of your repayments through the “consumer credit report”. Lenders and others can request your credit score when you apply for a loan or financial transaction, and can make a determination of your credit worthiness based on this information.
Your credit score directly or indirectly impacts almost every area of your life. Lenders use your score to determine what rate you will pay on business or personal loans and mortgages. Credit card companies can deny you credit if you have a poor score. Some insurers use your score in determining premium payments. Many landlords will check your score before approving your application for renting an apartment. Some employers can grant or deny you job opportunities based on your score. These are just a few examples of how credit ratings affect your life.
The line between good and bad credit What exactly is “good credit”? This depends on what it is you are applying for, and which entity is reviewing your credit. According to Experian, the US average credit score, as of 2008, is 692. In general, though, a score of 650 or higher will get you reasonable rates, and can save you thousands in repayments over the course of a large loan such as a, student loan, auto loan or mortgage.
Scores under 600 will typically “red flag” a lender or other reviewer. A poor credit score implies that you have a history of repeatedly paying bills late (or not paying at all). It could also mean that you repeatedly misuse your credit (by overextending credit limits, for example). A poor score may not completely shut you out of obtaining credit, but it means that you will have to pay much more for the credit that you do get.
Here is an example that illustrates how important it is to escape a poor credit score:
Trina lives in Florida, and applies for a $300,000, 30-yr fixed rate loan. Her credit score is 590. She is approved for the loan at an annual percentage rate (APR) of 12.452%. Her monthly payments are $3,191.
Linda also lives in Florida, and applies for a $300,000, 30-yr fixed rate loan. Her credit score is 660. She is approved for the loan at an APR of 8.093%. Her monthly payments are $2,221.
Linda’s good credit score has saved her $970 in monthly payments on the same loan amount, but the real point is how much she saves over the course of the entire loan. Over thirty years, Linda will save more than $340,000 in payments! That is money that Linda can put towards increasing her own wealth (rather than making the lender richer).
This example is a conservative one, using scores that are just below and above the magic number of 650, so you can imagine the extremes between loan repayment terms for applicants with scores of 500 and 800.
Determining your credit score US Federal law mandates that each US citizen is entitled to review a free credit report once per year. The three reporting agencies have come together to offer one web site where you can order a copy of your report: http://www.annualcreditreport.com . Note that this web site will help you out with credit reports (i.e., your repayment history), not credit scores.
Unfortunately, credit scores do not come free. In our opinion, the best resource for reviewing both your credit report and score is via the Equifax 3-in-1 Credit Report with Score Power. This report will allow you to compare credit reports from Equifax, TransUnion and Experian side by side to check for errors and inconsistencies, and also gives you your FICO credit score.
Once you determine your score and credit history, you can take steps to either use the full power of a good score, or take steps to escape poor credit.
Resources to help you escape poor credit If you find out you have poor credit, you will need to actively manage this situation. Probably the worst thing you can do is to bury your head in the sand. You will especially need to take every measure possible to avoid bankruptcy or tax liens as these can remain on your credit history for 10 years or more.
Here is the short list to escaping poor credit:
If you notice errors on your credit report, be sure to notify the reporting agency and lender in writing.
IMPORTANT: Familiarize yourself with the statute of limitations on debts (see http://credit.about.com/od/debtcollection/a/soflimitations.htm ). On past due accounts that are well within the statue of limitations, contact creditors and negotiate new payment terms. You can also get late fees waived if you show an honest effort to pay your bills down. The idea is to have every account on your credit report to read “current” or “paid”, and make at least the minimum payments for those accounts on a timely basis. Most creditors prefer to get a payment rather than having to charge off an account or pay a debt collector.
If debt collectors are calling you, familiarize yourself with the rules they must follow. Check out http://credit.about.com/od/debtcollection/a/collectionlaw.htm .
Avoid credit repair scams – Check out http://www.ovationlaw.com/ftc.html to educate yourself.
If you are having trouble securing an essential loan, consult with your family. Someone may be willing to co-sign until you can repair your credit situation.
Increase income and decrease current expenses. The more “extra” you have, the faster you can pay off old debt and repair your credit. So if you must take that second job and shut off the cable, do it.
Why it’s important to track your credit It is very important to track your credit report and score on a regular basis. The more familiar you are with your own repayment history, the easier it is to recognize errors on your report.
Checking at least once annually is recommended, but you may also want to research a credit monitoring service. This can be a useful tool in alerting you to any changes in your credit rating which may be the result of a simple error or the warning signs of something more serious, such as Identity Theft. Either way, the earlier you know about changes, the faster and more effectively you can deal with them and avoid any lasting repercussions to your credit rating. We suggest using Fair Isaac’s Score Watch program to monitor your credit.
Actions that improve your credit score To be in control of your credit rating in the future, you need to know how your actions affect your credit score, and especially those actions that will improve the score. Ideally, you should use no more that 50% of the credit available to you at any one time. Having a history of paying down various types of debt is also key, so if you have had credit cards, a mortgage, auto loan and student loan, and diligently pay each off, this will also add points to your score. The length of time that you retain credit accounts in good standing also affects your score. In general, any show of stability will improve your score, so you should avoid frequent changes in credit card accounts, bank accounts, employment and home addresses.
Conclusion The road to escaping poor credit can be a long one, but taking the time to educate yourself on what actions improve credit and what resources are available to help your situation is a step in the right direction.
If this e-book has been helpful to you, we hope you will pass a copy along to others that can benefit from it.