Month: August 2015

Types Of Credit Inquiries And How They Affect Your Score

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For the past few weeks we have been talking about credit, the ins and outs of it all. This is our last installment in the credit series. I hope that it has been informative and has given you a basic but thorough understanding of how credit works and how you can be diligent in maintaining your optimal score.

I know that you have heard about creditors checking your credit and how it can possibly lower your score. There are two different types of credit inquiries, soft inquiries and hard inquiries. I will explain both in just a moment. An inquiry is posted to your credit report every time an individual or a business reviews or obtains a copy of your credit report, but a potential lender only sees the hard inquiries. As we learned in the early part of this series, 10% of your credit score considers the numbers of inquiries made to your credit report. So it just makes sense to limit the number of times that your credit report is pulled.

The Fair Credit Reporting Act (FCRA) requires businesses to have a legitimate reason for accessing your credit report. Acceptable reasons include: to grant credit, collect a debt, underwrite insurance, employment, license issuing by some government agencies and legitimate business transactions. If a company obtains your credit report under false pretenses or uses it improperly this is considered a violation of federal law.

Not all inquiries that appear on your credit report affect your credit score. Inquiries that are made because of an application you made for credit are the ones that affect your score. These are the ones that are called the hard inquiries. A soft inquiry is when a company pulls your credit to send you a promotional offer. We all receive offers in the mail telling us that we have been pre-approved for a car, credit card or furniture. Those are soft inquiries and lenders do not see them when they pull your credit; only you are privy to those pulls. Soft inquiries are also the inquiries made by employers, businesses you already do business with and you yourself.

Inquiries on your credit report can indicate your risk as a borrower. Too many inquiries might mean that you are taking on too much debt or that you’re in some kind of financial trouble and are looking for credit to help you out. Several inquiries can reduce your score. Depending on how much information you have on your credit report, an additional inquiry may not affect your score. On the other hand, if you have a short credit history without a lot of accounts, an additional inquiry could cause your score to drop by a few points.

Credit report inquiries will remain on your credit report for 2 years, but only those made in the last year are included in your credit score calculation. The most recent inquiries have the most effect on your score.

When you are shopping around for mortgage and auto loans, it is understandable that you want to obtain the best rate and you should. Don’t worry that having your credit checked by several lenders could hurt your score, because most credit scoring calculations treat all mortgage and auto inquiries as a single inquiry, as long as the inquiries are made within a 45 day period.

If you have any further questions pertaining to credit, feel free to comment below or contact me personally. Thanks for reading!



Alternative Credit– What It Is And How It Is Used

Today we’re going to continue with our special serious on credit. Now that we have covered your credit report and credit scores, I am going to tell you about a form of credit that you may not have heard of. It’s called alternative credit and it is actually what I used to purchase my first home. I admit I had never heard of it until my mortgage broker brought it up. I was a couple of years out of bankruptcy and had made remarkable improvement to my credit score, but the lenders wanted to see more from me. I can honestly say had it not been for alternative credit I would not have been able to purchase a house.

Alternative credit is an option available to borrowers with little to no credit history. Alternative credit is usually in the form of a letter from the credit company that holds the account that does not normally report to the credit bureau. Examples of alternative credit are cellphone accounts, cable television accounts, automobile insurance and even cancelled rent checks, however, they all need to be paid on time in the last 12-24 months. I know what you are thinking: Don’t these accounts already report to the major credit bureaus? Yes they do, in the form of collection accounts when you owe them money. They rarely report when you pay on time and they are not obligated to do so. Reporting credit and payment information is totally a voluntary option, however, just because it is not reported does not mean it is not valuable or useful.

Alternative credit is an excellent way for someone with very little established good credit to prove their creditworthiness to lenders. It’s all about building a case for yourself to the lender. This form of credit is also good for foreign nationals as they may have not been in the United States long enough to establish a credit history.

Banks make a distinction between loan applicants with no credit history and those with bad credit history. Non-prime lenders are usually the only source of mortgage financing for borrowers with bad credit profiles, whereas homebuyers with little or no consumer credit history can often obtain home loans with alternative credit features from banks.

Another example of a borrower who may need to use alternative credit would be someone who has filed a bankruptcy and never re-established any credit accounts. Sometimes after a bankruptcy people feel it is better to pay cash for everything and not get any more credit accounts. I know that is exactly how I felt. This is not true because it is important to re-establish your credit after the bankruptcy.

Some examples of Alternative credit are:

Housing: Rent, lease or mortgage

  1. Utilities: Electric, gas, water, phone (mobile or land), cable, internet service.
  2. Revolving accounts: Bank secured credit cards, unsecured payday loans
  3. Installment Accounts: Vehicles purchased from a buy here pay here lot, all insurance types with the exception of payroll deduction, leased furniture, appliances or durable goods, layaway payments made monthly, condominium/homeowner association dues, timeshare maintenance, gym and physical therapy payment plans, child and daycare with regularly scheduled payments, parking with regularly schedule payments, self-storage, subscriptions and memberships with regularly scheduled payments.

So you see you can build your alternative credit profile with a wide variety of payments.

Given today’s economic climate, there is increasing support for the use of alternative credit. There are many Americans who don’t have enough traditional credit history with three major credit bureaus to obtain a credit score. This group includes young adults, such as my 22-year-old son with little to no access to traditional credit. I have built a profile for him using his cellphone bill, his rental history as he just obtained his first apartment this year, and his gym membership. He is well on his way to establishing his credit. Other individuals that you may know who could benefit from this are recently divorced or widowed individuals with little to no credit in their own names, newly arrived immigrants, individuals with previous bankruptcies, and individuals who consciously shun the traditional banking system.

The system that I used to build my son’s account is PRBC. You must become a member and it is free to do so. All you have to do is register at least 3 monthly-billed accounts and be sure to pay them on time. This is not a sponsored post but feel free to go to their website for more information.

Thank you for hanging in there with me for this credit series. There is one more installment to come. Please feel free to share this information with anyone you know that it will benefit.




Your Credit Score And How It’s Calculated Part II

Photo Credit Property Guiding Flickr Commons
Photo Credit Property Guiding Flickr Commons

Welcome back to our series on credit. Last week we talked about what your credit is and I gave you some basic, but important, definitions about credit. This week we will delve a tad bit deeper and discuss how your credit score is calculated.

Your credit score, or FICO score, is a computer generated summary calculated at the time of the request and is based on information a credit bureau or lender has on file for you, and is based on data about your credit history and payment patterns. Your score is calculated by both the positive and negative information on your credit report. The data is grouped into five different categories: amounts owed = 30%, payment history = 35%, new credit=10%, length of credit history=15% and types of credit in use=10%.  These percentages are based on the importance of the five categories for the general population.

Late payments will lower your score, but establishing or re-establishing a good track record of making timely payments will raise your score. Let’s breakdown these percentages a little more so you will understand why it is important to stay on top of your credit.

PAYMENT HISTORY 35%: The first thing any lender wants to know is whether you have paid past creditors on time. Now you see why it is the largest percent of your credit. A few late payments are not an automatic score killer. An overall good credit history can outweigh one or two instances of late payments. On the reverse end of this, having no late payments does not mean that you will have a perfect score. Remember, your payment history is just one piece of information used to calculate your credit score. Had I have known this years ago, I would have made more of a concerted effort not to overextend my credit and to pay my bills in a timely manner.

AMOUNTS OWED 30%:  Having credit accounts and owing money on them does not necessarily mean you are a high risk borrower with a low score. However, when a high percentage of your available credit has been used, this can indicate that you are overextended, and are more likely to make late or miss payments. This was exactly what happened to me. I was overextended and my payments were late and some weren’t made at all.

LENGTH OF CREDIT HISTORY 15%: In general, a longer credit history will increase your credit score. However, even if you haven’t been using credit that long, you may have a high credit score depending on how the rest of your credit report looks. Your credit score takes into account: how long your credit accounts have been established, including the age of your oldest and newest account and an average age of all your accounts; how long specific credit accounts have been established; and how long it has been since you used certain accounts. Today I can say that my credit history from the low point in my life has not repeated itself, thank God!

NEW ACCOUNTS 10%: Research shows that opening several credit accounts in a short period of time represents a greater risk especially if you don’t have a long credit history. If you have been managing credit for a short period of time, don’t open a lot of accounts too rapidly. Newer accounts will lower your average account age, which will have a larger effect on your credit score if you don’t have a lot of other credit information. Now don’t think that if you have a long credit history that opening a new account can’t affect your score because it can. Even if you have used credit for a long time, opening a new credit account can still lower your score. Opening a new account will likely produce a credit inquiry on your credit report. The new inquiry may have no effect at all, or it may make your scores go down slightly, depending on the type of inquiry and the number of inquiries already present on your report. For example, applying for credit excessively can almost be expected to have a negative impact on your scores, as most inquiries tend to indicate a higher credit risk. So be careful when applying for credit. When I was going through my ordeal I had every credit card known to man. Today I have 2 cards and one store account. I maintain those accounts to keep my score high. I use them sensibly and I don’t shop around for new credit.

TYPES OF CREDIT IN USE 10%: Types of accounts such as credit cards, retail accounts, installment loans, finance accounts and mortgage loans will be considered when tabulating your credit score, however it is not mandatory that you have one of each and it’s not a good idea to open credit accounts that you have no intention of using. The open accounts that I maintain on my credit report are two credit cards, which are considered revolving accounts, and an installment account, which is a small furniture account. These are accounts that I have had over 10 years (excluding the furniture account) and maintain a good payment history. Accounts that are included on my credit report that show paid in full are three automobile loans, a mortgage loan and my student loans. This mix of accounts, their age and my payment history on them made it a cinch to obtain financing on a new property my husband and I just acquired. So as you can see being credit conscious plays a major role in aiding you to live the lifestyle you desire.

Join me next week as we explore ways that you can clean up your credit.


Your Credit Score and How It’s Calculated: Part 1

Excellent Credit Score
Excellent Credit Score


Do you know your credit score? Do you really understand what your credit score means? There was a time when I would have answered “No” to both of these questions. And today I know that many of the money mistakes I made in the past would have been avoided had I really understood credit.

I want to help you avoid those mistakes and so over the next several weeks I’ll be doing a series on credit. Today we’ll start with some basic, but important definitions:

CREDIT SCORE: Your credit score is a statistically derived numeric expression of your creditworthiness. It is used by lenders to assess the likelihood that you will repay your debts. Your credit score is based on your past credit history. It is a number between 300 and 850, the higher number the more credit worthy you are deemed to be.

Once I did learn my credit score it was 420, which, in case you were wondering, is awful! But I’m proud to say that today my score is 740!

CREDIT BUREAU: An agency that researches and collects individual credit information from banks, public records, and other sources and provides it for a fee to creditors so they can make a decision on granting loans.

Trust me the credit bureau was telling creditors to run from me as quickly as possible back then, but today I am a creditor’s dream!

CREDIT REPORT: A detailed report of your credit history, prepared by a credit bureau. Your credit report includes personal data, a credit score, a summary of credit history and detailed account information.

Once upon a time my credit report was so jacked it wasn’t even worth the paper used to print it.

CREDIT HISTORY: A record of your demonstrated responsibility in repaying debts. It consists of information such as: number and types of credit accounts, how long each account has been open, amounts owed, whether bills are paid on time and number of recent credit inquiries. It also contains information regarding whether you have any bankruptcies, liens, judgements or collections. This information is contained on your consumer credit report.

Let’s just say I am glad that I have rewritten history in terms of my credit.

CREDITWORTHY: The measure of your ability to repay debt.

My creditworthiness at one point was no ability to repay debt, but today I am debt free!

Ok, now that we have the basic definitions out of the way, join me next week for part 2 where I will explain how your credit score is tabulated. We will delve into the different data used and the five categories that make up your score. Lord knows back in the day my data was a hot mess, but today I have credit offers on a daily basis!