FICO

What is my FICO Score?

July 31, 2020 by Walter Wimberly Leave a Comment

When a lender is about to loan you money, they want to know what is the chance of you paying that money back. Hence the FICO score. Now to be fair, there are different scoring systems out there, each with their own methods for calculation.

The Score

The score ranges from 300 (very bad risk) to 850 (very good risk). The lower your score, the more the system thinks you’re likely to not be able to repay the loan. Where a high score says they believe there is a high chance of you repaying the loan.

The average score varies from year to year, but right now it is estimated to be just under 700.

Typically, the younger you are, the lower your score will be, we’ll talk about why in a little bit. In your twenties you’ll see a score of about 660 and in your thirties, it will be 670 to 680 on average.

However, you can have a high score and be in your late 20s and 30s. I know, I had a 735 at 25, and ~750 at 30.

A good score doesn’t just help you with getting a good interest rate. It can also help you get a good (car) insurance rate, and some jobs will use it to determine how (financially) stable you are, especially if you are going to be working with money.

What makes up the score

Now the actual way it’s calculated is a bit of a mystery, and it is updated from time to time. However, we can give you a basis.

Payment History

Want to kill your credit score – miss paying a bill, or two. The longer it is late the worse the effect will be. Miss a couple, and you can quickly tank your score.

This is the number one contributing factor to your score. Up to 30% for most scoring companies.

Amount Owed

The amount owed, as a percentage of the amount you can borrow, is the second highest scoring factor.

The system can’t tell that you went on vacation, put everything on the card and will pay it off next month, so it drops your score. When you pay it off next month, your score will go back up.

The thought is, if you can borrow $100,000, and you are, then it will be difficult to pay that all back. It might even signal that you are getting ready to “run” instead of paying.

Run can mean physically leaving town, or something like declaring bankruptcy, etc.

Typically this only/mostly looks at unsecured loans (credit cards) not your mortgage or car loan, although it may, just to a lesser extent.

Credit Age

The longer you’ve had open accounts, the better your score will be. Bad accounts tend to get closed, and new accounts, people may not know how to use them.

Your credit age, makes up a big part of your score and is part of the reason why younger people don’t have as good of a score. Opening a card in college helps get people’s credit established, but too many abuse it.

I got a credit card for emergencies, and then didn’t even keep it on me, so I wouldn’t be tempted to use it. It let me build up some history, without it costing much money.

New Credit

Get a new card, and it looks suspicious. Add a bunch of new debt, and the system asks why. Did you lose your job and need to buy food so you got a new card, but that means you’ll have a hard time paying it back…

If you are getting a lot of new inquires, it looks “suspicious”. So your score will drop. To protect you, typically only the first check will count against you. So if you got to three car dealerships and they each run your credit, you only get hit once.

Check on mortgage options, and get three or four quotes, only the first one affects you. The basic idea is that the average person won’t be buying multiple new cars or houses at one time.

However, each credit card inquiry into your account, will negatively effect you since you could get multiple cards at once.

Credit Mix

The different types of loans you have does matter. The more revolving lines of credit (credit cards, department store cards, etc) the worse for your score. These tend to be more risky.

Changes to FICO and what that means to you.

January 25, 2020 by Walter Wimberly 1 Comment

FICO affects almost everyone, whether you know it or not. If you have had any outstanding debt in the last few years, you have a FICO score, even if you don’t know it.

That score is used by lenders (credit card companies, apartment complexes, and even insurance companies) to determine how likely you are to repay the money you borrow.

If you score over a 750, you are considered a low risk, and therefore will receive better offers and lower interest rates. Below 550, well, you may not get the loan you want, or if you do, you’ll have to pay more in interest through a higher interest rate. Currently, the average score is a 709.

FICO announced this week that they are tweaking their scoring algorithm, and its estimated that 80 Million people will see their score change by 20 or more points because of it. Another 100+ Million could have a minor change in their score. That means almost everyone will be affected.

Your score may go up

Your score may go up, if you have a low percentage of personal debt. This is usually things like credit cards. Credit cards, because they are considered unsecured debt are more likely to be defaulted on. However, if you have a low amount of debt, people assume that you are working to pay your bills, and your score will increase because of it.

Your score may go down…

Your score may go down, if you have a few late payments, and/or a high amount of credit card debt. This could cause your interest rates to change (for the worse) and/or it be harder to rent an apartment, get a car loan, etc.

What to do if your score isn’t great?

The good news is, your score is not permanent. It can, and does, change on a regular basis. I check my score approximately once a month, and can see if move a few points one way or the other just because of normal fluctuations like if I had paid my credit card bill already or not.

Even with this change, the basics of getting a good score hold true.

First, pay down your debt. The snowball method, where you pay all of your bills at the minimum and then put everything you can into your smallest debt works well. Once the smallest is paid off, you can work on your next smallest, until they are all done.

This is a tried and true method, and works for both financial reasons as well as psychological – you feel good watching your bills disappear.

I’ve known people who’ve held garage sales, or worked a second job for a few months to get that extra money to start the process. Once the first debt or two is paid off, and you can use that money toward larger debts, you are well on your way.

Second, pay your bills on time. I know people who just forget to send in the check/pay online. They get busy with everything else going on, and forget. It has nothing to do with how much money they have.

For them, and maybe you if you are in this situation, consider auto-bill pay. Scheduling your payments, as long as you have the money to pay them, means no more late fees, and helping, not hurting your FICO score.

Finally, don’t spend more than you make. It’s easy to do, but its the most important step to get out of living paycheck to paycheck.

https://www.cnn.com/2020/01/24/success/fico-score-changes/index.html

Time to Check your Credit Report

January 3, 2017 by Walter Wimberly Leave a Comment

Your credit score direct affects your finances. In addition to determining how much you will be paying in interest on a loan for your car, home, or even a credit card; a good score may even get you lower car insurance rates. Looking for a new job? Some companies will check your credit report, especially if you work with money at all.

However, your credit score is composed of lots of information, and with all of that, there is a chance of there being an error. Luckily you can get a free credit report from the big agencies, once a year. Now if you search for “free credit report” you’ll get a lot of sites. However, https://www.annualcreditreport.com/ is the official free site as part of the Fair Credit Reporting Act.

As part of my new year routine, I like to get them in January. Even if I don’t plan on making a large purchase in the next month, I want to be ready. It’s also a good first step if one of your new years resolutions is to improve your finances. Whether it be to save for a new house, pay down a credit card, etc. (A higher credit score can get you a lower interest rate on a credit card, making paying it down easier.

Unfortunately, about every other time I check, I see an error. Hopefully you won’t, but if so, lucky for you, it isn’t too difficult to fix the errors.

So here are the steps to check and see if you have an error.

So go to annualcreditreport.com.
Enter the information needed to verify who you are. This will include your:
- Full Name
- Address (previous address if you’ve liver their less than 2 years)
- Social Security
- Date of Birth
Request the reports you want. I always select all three, but you don’t have to if you don’t want to.
Review the reports.

When you get done, you’ll see a screen like below which will take you through the different reports:

What should you check in your report?

There are a few things I always check.

First, I check for errors in the credit statements. The two most important include:

Past due notices when they were not? Sometimes things don’t get reported, its important to fix these late payments will hurt your credit score. If you were past due, there is little you can do other than work on not continuing to have these.
Any extra accounts showing up? This has happened a couple of to me, usually from someone with a similar name, or who lived at the same address that I used to. I’ve caught a credit card which had over $30,000 used on it, and a property lien. This is also important to check to see if someone has opened an account in your name, in which case you are a victim of credit fraud.
Are closed accounts showing correctly? Did you pay off a student loan? The mortgage when you sold your house? These should be shown as closed.

Don’t worry if your credit used on your card isn’t showing, or that you paid off last months credit card. That info may not have been sent in to the credit reporting company yet, they do not update in real-time.

It’s important to know that each company reports data differently. Some will use just text, others will use color coded tables. Luckily they provide a key for you:

Hopefully yours is all green. The further down the list in this key, the worse. Try to avoid getting there if possible.

The next thing I look at is credit inquiries. When a person or company contacts one of the credit reporting companies they record it. Generally someone will go to one, but rarely all three, so this will be different for each report. Some checking is normal. For example when you go to get a loan (to buy or lease a car, rent a home), apply for a job, or a few other special cases. However, you should know when this someone is requesting a look.

If you look and see companies checking your credit, and you didn’t apply for them, someone may be attempting to steal your identity. You may think you don’t have anything, so it’s not a big deal, but it can follow you around for years, and it is worth investigating with a professional if you think it might be a real problem.

Finally I review personal information. This will include things like current address, other known names, etc. Each reporting company may offer different details in different ways, but that’s OK. Reviewing, and correcting, what you need to reduces the chances of future mistakes.

What’s not in your report?

The one thing you don’t see in your report is what your credit score is. This is not required by the FCRA. You can buy this from the companies if you want, and they will attempt to sell it to you. However, you are under no obligation to get it, so don’t worry about trying to.

While you’ve seen what goes into your score, you won’t know the number unless you order it. Luckily there are ways to get your score for free if you want/need it.

Credit monitoring/protection is not included either. The report allows you to manually review your report. It does not protect you, or monitor it for you. Please keep this in mind. If you don’t see any red flags in your report, you can probably skip it. If you do see it, then you might want to look into a service which can help.