It may be because your credit score was not high enough. The unfortunate reality is that far too many people don’t know their credit score and the factors that come into play in determining it.

This article will cover in depth one of the most important aspects which goes into determining your credit score: your credit utilization ratio. The basic idea of the credit utilization ratio is how much of your available credit are you actually using on a regular basis?

A low credit utilization ratio means that you have a lot of available credit, but you are using a little of it.

Having a high credit utilization ratio means that you are using a large portion of the credit you have available.  The ideal credit utilization ratio is approximately 33%, depending on which financial advisor you ask.

That means you should try to be using only a third of the available credit you have.

Credit cards, loans, or any other credit lines also factor into this ratio. You want to have a lot of available credit, but only use a little of it.

For example, say you have four credit cards with the credit limits below.

XYZ has a $40,000 limit
ABC has a $20,000 limit
NYC has a $75,000 limit
HJI has a $30,000 limit

Each of these cards’ credit limit is report as your “high credit limit” on your credit report.

Lets say you use each of these cards regularly and they have the outstanding balances listed below:

XYZ has a balance of $13,500
ABC has a balances of $18,000
NYC has a balance of $47,000
HJI has a balance of $17,000

If this were the case you’d have $95,500 in utilized credit out of a possible $165,000 available. This would you you have a total credit utilization of 58%, which is higher then the recommended amount. (Remember the highest we suggest is 30%

According to FICO, the average utilization ratio for the nation is a bit above the recommended 33%

On the other hand, say you have those same four credit cards.

But this time, the spent balance on XYZ is $6000, ABC is $5000, NYC is $7000, and HJI is $2,000.

If this were the case, you’d be utilizing $20,000 of your available $165,000 or a 12% utilization rate.

What happens when your utilization ratio goes out of whack?

It is possible that if your balance is too high on too many of your credit cards, you end up with a high credit utilization ratio. This will cause your credit score to fluctuate negatively.

You may be wondering what is considered a high utilization ratio by credit card companies and by financial advisors.

A high utilization ratio is pretty much any ratio over 1/3, or 33%. A low credit utilization ratio is ideal in terms of contributing to a high credit score. A low credit utilization ratio is considered anywhere under 1/3 for example, 20%, 15%, or 10%, which are all considered low and healthy credit utilization ratios.

A high credit utilization ratio can lower your credit score significantly over time, which is not desirable. If you have a high credit utilization ratio over a long period of time, it signifies to lenders that you may not be reliable in paying back the money that you borrowed a timely manner. Or that you do not practice responsible spending habits in general.

However, if you have a high credit utilization ratio in the short-term, it probably have a bad affect on your credit score. This is especially true if you pay off the full balance of your credit card before the end of the monthly billing cycle.

If you put a lot of money on a credit card all at once, and then pay it off before the billing cycle changes over, it should not have an effect on your credit utilization ratio at all.

The only time it can affect your credit score is if you are carrying over a balance month to month, therefore it is appearing on your monthly statements which are seen by credit reporting agencies.

Long Term affects on your credit score with a high credit utilization ratio

In general, having a high credit utilization ratio will have the biggest impact on your credit score over a longer period of time.

A high credit utilization ratio will lower your credit score consistently over time, and these impacts can add up in the long run.

Here are 11 things your credit utilization ratio can be impacted by:

• As discussed above, your credit card balance is the biggest influencing factor which goes into determining the credit utilization ratio.
• Car Loan- A car loan impacts your credit utilization ratio by increasing both the available credit and the credit being used. As you pay off the loan, you have more available credit and less being utilized, so it improves your utilization ratio. Pretty much the same concept goes for paying off any loan: it will improve your credit score.
• A mortgage is also something which can impact your credit utilization ratio. If you have a mortgage, it means that you were taking out a loan for a portion of your home. The amount of the mortgage contributes towards your available credit. As you pay it off each month, that means there’s less of the available credit being utilized. However, the available credit is still the same, thus decreasing your utilization ratio, similarly to paying off a car loan.
• You might think that student loans are a major detriment to your credit score, but so long as you’re paying off the required balance each month, paying your student loans can actually improve your credit history. Because most student loans are in such huge quantities, that vastly increases your available credit amount. That means if you’re putting a lot of money on a credit card, it has proportionally less impact than it would have if you did not have student loans.
• Business credit cards also influence credit utilization ratio. Even if the card is for business purposes, so long as it is in your name, it will be counted towards your utilization ratio.
• Credit cards with very high credit limits are usually a great influence on your credit utilization ratio. As long as you’re not using a lot of the balance on it, a high credit limit means that you have a lot of available credit. So long as you do not use a lot of it, it will help keep your credit utilization ratio very low.
• Personal loans, similar to mortgage or car loans, can have a significant and strong influence on your credit utilization ratio. If you take out a large personal loan, you’re increasing both your available credit and your credit being utilized. That means that it could sway your credit utilization ratio either way, either making it lower or higher.
• HELOCS (home equity lines) will either impact your utilization ratio positively or negatively.
• Increasing or decreasing the number of authorized users on an account or opening a joint account will also impact your utilization ratio. This is because it will increase or decrease your amount of available credit, thus changing the ratio.
• The total number of accounts with outstanding debt also has an impact.
• The total amount of debt still owed to lenders is a major portion of the ratio, similarly to your credit card balance.

All of the above factors do not have an equal impact.

Revolving credit has proportionally an 85% impact on the ratio, while installment loans proportionally only have a 15% impact.

The reason behind this is simple:

FICO doesn’t treat all different types of accounts equally. For example, a student loan and a credit card are considered very different types of debt and come into play with different impacts. Credit cards are revolving debt, and they tend to have a lot of variation in their balances.

These are the most crucial type of debt in determining the utilization ratio. In other words, keep your credit card balance low to keep your ratio low.

Having a huge student loan or mortgage doesn’t matter so much, unless you aren’t making the required regular monthly payments. It takes longer to see the benefits of making regular payments on installment loans.

In the category of amounts owed, credit card debt is much more important. It has the biggest impact on your utilization ratio.

But, it can also do the most damage to your credit score if the ratio is high, or if you don’t make timely payments.

Closing unused or unwanted credit cards can improve your credit score, even though it can increase your utilization ratio. However, be careful not to get rid of your available credit too quickly.  Luckily, the ratio is not all that determines your credit score.

Here’s how credit score is determined outside of Utilization Ratio

1. Payment History
2. New Credit
3. Length of Credit History
4. Type of Credit

This concludes part 1 of 5 on how credit score is determined and why it’s so important for you, an American financial consumer, to understand this.

Click here to go to part 2

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Can Renting Build Credit History

 
Historically building an impressive credit history and higher score was done by paying mortgage, student, and auto loans as well as credit cards on time. The tracking of other reoccurring payments such as rent, cable, utility and mobile phone payments wasn’t taken into account. Even if someone never missed a payment they would still end up with no credit to speak of.
 
Two of the major credit bureaus: TransUnion and Experian are now incorporating rental data in the credit profiles. So paying rent on time can now be an opportunity to increase your credit score.
 
These two bureaus are gathering information through RentTrac. So renters that use RentTrac to make payments are providing information to Equifax and TransUnion.
 
A study done by RentBureau found that after Experian started gathering this information 97% of the study group built a credit score based on their payment history.
 
This also benefitted people already with credit scores also by increasing them 29 points on average.

More Changes?

While bureaus don’t currently count payments on utility, cable, mobile phones, doctors and hospitals, there is a support growing for including some of these into credit history as well.
 
The reasons for this support is because currently paying your phone bills on time doesn’t do anything for your score. However if you fall behind and it goes to collections, that will have a negative impact on your credit score.
 

Credit history, scores may improve with bureau changes by csmonitor.com

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Jack’s situation was that he had paid off several bills with a bonus check from work about 10 days ago.  He had called the three credit card companies involved and verified he had indeed posted the payoffs which totaled almost $6000.  He then had his mortgage broker pull a new credit report thinking he would have the increase in credit score that he thought the payoffs would give.  He only needed about 17 points to qualify for this loan but was told that his scores had actually gone down 2 points from a month prior.

Well this is what prompted Jack’s call.  He was confused and upset that he had read something I wrote previously about how FICO computes credit scores.  He thought that by freeing up his credit lines and paying down the debt would help his credit scores.   Was he right?

Upon review of Jacks credit report it did look like he would benefit from a score increase by paying down the $6000 of the $9000 worth of credit lines to cut his outstanding credit line usage from 67% overall to 0%.  so why didn’t he get any boost in his credit score?

Well. the answer to this in one of the myths regarding credit reporting.  Credit Scores are computed only on a snapshot of a credit report at the exact time the report is requested.

The problem is that most creditors only report to the credit bureaus one time per month.  Credit Bureaus are NOT real time so if you make a payment or payoff an account as in Jack’s case it might be days or weeks before the creditor reports it to the credit bureau and thus any FICO credit score change taken into account.

After Jack realized what was happening he was relieved that the bump he hoped for in credit score was most likely just a couple weeks away.  But Jack did ask a very good question…This process seems screwed up, most everything else we deal with is in real time, why aren’t the credit bureaus?

It is 2011 almost, right?

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Now all three of the credit reporting agencies are in the business of pushing the FAKE credit scores to the unknowing consumer who thinks they are buying their FICO scores.

Shame…Shame…Shame is all I can say.

I mean really what is the purpose in selling you a credit score that not one single lender cares about?   There is no mortgage company, auto loan company or even a mattress lender out there that says “OH, YOU HAVE FAKO SCORES? SURE WE”LL BE HAPPY TO LEND YOU MONEY!”

It’s not going to happen!

This product has been created to simply dupe the unknowing consumer out of their hard earned cash! Greed has taken over the last of the big three and now all selling millions of hard working people this dope, errr I mean hope and belief that their credit scores are higher than they really are.

The credit reporting agencies are doing this because they know that probably less than 5% of the population will know the difference between a FAKE-O and a FICO credit score!

The FTC last year came out with this video to try and get the word out that these FAKE-O and useless products.  You can check it out here…

http://www.youtube.com/watch?v=krG2d7OK8MM

It’s a cutesy look but the truth of the matter is the Federal Trade Commission just doesn’t have the marketing dollars to get the word out that these fake scores are absolutely useless to you.

How can you protect yourself you ask?

• Well, if your credit is being pulled by a mortgage broker or other lender then you are most likely safe.
• If you go on the internet to pull your credit score make sure it says it is a FICO score because any other name or slick sales pitch calling it anything else is a FAKE-O score.
• Real FICO scores will cost you a few bucks.  Anything giving you free credit scores are FAKE-O for sure!
• Credit scores will not be included on your free credit reports at www.annualcreditreport.com but can be obtained for a few dollars.

• The only scores that you should concern yourself with are FICO scores provided by the Fair Issac Corporation and can be obtained from www.myfico.com

If you have a credit report that you’re unsure of or would like some help getting real FICO scores pulled and an overall review of how to improve your credit and scores just CLICK HERE

As in all things in life…Caveat Emptor..Let the buyer beware!

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On occasion, I am asked are things better or worse?

People are trying to be as responsible as possible to increase their credit scores because the reality is going down the road good credit is going to be necessary for any type of credit purchase from home ownership to low interest rate credit cards.  My hat is off to those working hard to maintain good credit or get out of the credit prison that low scores can bring.

There are many things as consumers we need to be aware of when it come to credit. Keeping an eye on what the “Bankers” say can be a forewarning of things to come. On the credit front according to Fitch Ratings credit card defaults fell to a 15 month low.  Michael Dean, a managing director at Fitch, tempered this welcome news by saying: “The trends are encouraging, but card defaults are still elevated historically and are expected to remain so.

FICO just released a report “US consumer Credit Risk” their trends and expectations for the 3rd qtr 2010. This report is a compilation of numerous banks and creditors both large and small.  Basically the survey covers 1) short term forecast for credit card delinquencies.  2) short term predictions for demand for consumer credit and the lending environment. 3) short term outlooks specifically for the existing customer credit balances and the level of charge offs from credit portfolios.

This FICO survey show a pretty grisly outlook coming for the next couple of quarters.  As a summary 53% of the respondents expect a rise in mortgage delinquency and only 14 % expect a decrease.  42% expect a rise in credit card delinquency, 49% an increase with student loans and 47% increase with small business loan delinquency.

With the vast majority of bankers expecting delinquency rates to increase or at best stay the same what does this mean to us Mr Joe Average consumer? Less access to credit and a tougher time getting it!  Yep, you can “bank” on it!!

This survey reports that 99% of the “Bankers” expect an increase or at minimum same scrutiny overall on risk management.  This simply put means they are going to watch their credit portfolios like a hawk!  It’s reported that 36% expect less credit to be granted and 39% expect the same credit as last qtr to be granted.   Overall 46% of all creditors expect approval criteria to get much tougher and 65% expect that when credit is granted a lower limit will be approved than in the past.

It’s just the way things are right now.  Like it or not credit scores are at the forefront of what we can do or not do.  If you’d like to get more information on how to increase your credit score just let us know.

Be Bold!

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FICO.com has just reported that 25.5% of the US population that use credit now have a credit score of 599 or less. That’s a whopping 43.4 million people in this category.  In the past about 15% or 25.5 million have been in this category which means that over the last 2 years there are been an increase of 17.9 million people fall under a 599 credit score which is a whopping 70% increase!

Overall 35% of the population are at a 649 credit score or less. What does this mean?  Basically, look at the person to the right and look to the left and the dirty truth is that one of the three of you cannot buy a house nor car and are considered unworthy of credit by many lenders and are in need of help with credit repair.

Now certainly some folks need to tighten their boot straps and become more diligent in their handling of debt but the majority have been simple pawns in this economy over the last couple of years.  The reality is there are several forces causing this credit eligibility problem.  Unemployment at 10% as well as the numbers of unemployed no longer even counted.  The downward spiral of real estate values which is forcing people to accept short sales or forced into foreclosure is commonplace.  Credit lenders cutting credit lines on home equity lines to credit cards no matter your credit score has eliminated well over a trillion dollars of credit availability.

Right now this economy needs jump started and one of the ways this happens is that people are buying goods and services.  However this increase of folks with falling credit scores puts a damper on this at best.  The ability to clean up your credit and fight to restore your credit score back to a level that allows you buy a new home or car is your right.  If you’d like to know how we can help you with credit repair get a credit consultation at no cost to see if our assistance makes sense for you.

Be Bold!

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Your FICO scores are determined by a number of things but most importantly how timely your credit is paid and the overall amount of credit used as compared to your credit lines available.  Of course other factors come into play but these two play the most significant in determining your credit score.

Your credit score for many lenders is the biggest factor if your loan will be approved at all and at what interest rate. To give you an example I was speaking to one of our members and he was telling me he had a credit score of 552 and over the last few months had increased his scores to 632.  At first you might say not to shabby, an 80 point increase.  I agree,  an 80 point credit score increase is nothing to sneeze at and certainly looks like some solid credit repair has been under way!

This member and I’ll call him Mr G for today’s discussion.  Well Mr G was extremely happy he was able to buy a newer truck and was happy with the new financing.  The interest rate he agreed to was 10.75% interest. Certainly the upside is that he got the financing as it’s questionable if he would have been able to get financing at all just 4 months ago!  But the bottom line if he had 720-740+ credit scores his rate very well could have been around 5% or better.

When I explained to Mr G that the $20,000 loan amount over the 6 year term he agreed to at 5% vs the 10.75% would be $56.03 every month for the 72 months he had the loan.  That’s a whopping $4034.16!!  Money given to the bank simply because of a credit score.   I asked Mr G what would he do if he had an extra 4 grand socked away?  I had to laugh when he responded with a deep throated “uurrgghhh”

While things were on the right path there was much to do with getting Mr G’s credit repair in overdrive.  His mortgage loan was at 7.75% and he owed roughly $160,000.  His loan had been opened almost 5 years ago and had been paid right on time every month.   He had tried to refinance about a year ago but had been denied so he had put this task to the back of his mind.

We agreed that over the next 2 months he was going to pay his visa card down to $1000 down from the $3200 he owed on his $4000 limit so he would be at just 25% of available credit.  As well we would continue to require validation of a couple of the bad credit marks still on his credit report.  This should cause another increase in his credit scores.

The reason is that when Mr G is able to refinance his mortgage to the current rates of about 5% this will cut about $287.35 off his mortgage payment.  Over 5 years that’s $17,241 interest savings!  over 10 years $34,482 and over the life of the loan, 30 years $103,446 in total interest saved!    You should have heard his growl then!

Bad credit not only effects the interest rates of all types of loans and credit cards but can affect insurance premiums as well.  Bad credit is one of the biggest factors that keep people in credit prison.  Having good credit scores are one of the most important things to creating long term wealth!

Write me a comment back and tell me what experiences you’ve had.  To find out more… Check this out!

Be Bold!

The post Does bad credit cost me money? appeared first on National Credit Federation.

As I got back into the groove this morning I had several messages and one woman has called me wondering if she should begin the credit repair process with us by asking the question “Is credit repair really needed in my case, I mean won’t my scores go up over time?”

Now I must warn you that I am a bit biased but I do try to give a fair assessment to this question and in answering  this question it might be best to rephrase it and ask a few other questions first.

Now I have to be honest here and tell you that my first reaction at times is to reach through the phone and grab you by the scruff of the neck and shake you like a rag doll to knock some sense in you but I refrain from this immediate knee jerk reaction.

Instead after finding out all the facts, I might ask “Well your credit score is 585 and your mortgage broker told you they cannot do a thing for you with those scores, so how soon do you want to actually close on a new home?”   I’ve learned two things with this approach.  The first is I don’t have someone on the other line wanting to punch me and send me into next week (which is a good thing!).  Also, this will address real desires as I’ll most often hear “as soon as I can get approved” or “within the next few months” really almost any answer is good and allows us to continue our discussion.

Here are some hard truths. Negative inaccurate, un-validated information on your credit report can prevent you from buying that new home or a new car.  It can cause you to pay a higher insurance premium than if you had 720+ credit scores.   In addition, the credit reporting agencies (CRA) by law can keep this information on your credit report 7-10 years depending on the creditor or furnisher.

Here’s a dirty little secret that the credit bureaus don’t want you to know. You have the right to demand and have every negative item removed if there are any reporting inaccuracies or if the item cannot be validated.  The FCRA or Fair Credit Reporting Act is very specific here about your rights.  The bottom line is that the law says negative items must be removed from your credit report if the credit furnisher or CRA cannot prove it’s accurate.  They must remove the bad credit mark if they are unable or unwilling to validate it or if the item is outdated.  This is not about whether you actually went to the doctor last year and the debt ended up in collections.  The law doesn’t ask you if you went to the doctor’s office.  It simply states that if a negative item is not accurately reported, if the item cannot be validated or if it is outdated it must be removed from your credit report.

So knowing this, the real question that needs asked is this. “If you knew today that in the next 6-12 months your credit scores could be up 100 points higher, our average member sees 127 points, do you think credit repair would help you?”  Ok, if you’re into a bit of pain then the question might be “If right now today, you knew, that 6-12 months ago IF you had gotten started with credit restoration and your scores were well up over 100 points and a bunch of the negative items on your credit had been deleted, how hard would you be kicking yourself for not starting the process?”

That’s it!  These are the real questions to ask because ugly credit, even fair credit can cost thousands of dollars in additional interest or higher insurance premiums preventing you from making the purchases you want or maybe worse, now knowing that waiting almost always is a very costly decision.  Attorney assisted credit restoration can make a dramatic improvement many times in just a few short months. If you’d like to get a free consultation to find out how we might be able to help just Click Here and let us know

If you have anything to add that might help others or just want to comment please let me know your thoughts by commenting below.

Be Bold!

Herschel

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