Financial Matters July 2013 – Stuart Burns

Financial Matters July 2013 – Stuart Burns
Hopefully everyone is staying cool in the summer heat. We have the 4th of July rapidly approaching and with it the impressive displays of fireworks. I always enjoy the ones with the different colors combined as they light up the summer sky. This also seems like a good time to think of another important part of credit which we need to be familiar: your credit bureau score, also known as your “FICO score”. Just like the different colors in some fireworks, there are multiple factors that combine to create the score which is used to evaluate your applications for credit approximately 90% of the time.
Let’s start with a quick overview of the Fair Isaac Corporation (FICO). The Fair Isaac Corporation was founded in 1956 by engineer Bill Fair and Mathematician Earl Isaac as Fair, Isaac and Company in San Rafael, California. They started selling credit scoring systems during the following 2 years and have since developed a variety of credit related products. The FICO score is the primary score used by the three largest credit bureau reporting agencies in the USA – Equifax, Experian, and TransUnion. The FICO score can range between 300 and 850. The higher the FICO score, the better.
What’s in my FICO Score?
Before we look at the factors that make up your FICO score, it’s important to note that everyone’s credit history is unique and the importance of each of these categories in the overall score will be different for each person. This is because the overall credit information provided in the credit bureau is being reviewed. Also keep in mind that while the FICO score is one factor, the lender may review other factors such as income, debt, stability (length of time at residence/current job) while evaluating your application.
Payment History: Payment history is the biggest factor and will account for 35% of your FICO score. This will be calculated based on your history of paying your Credit Cards, Retail Cards, Mortgages and Loans. This is also where Bankruptcies, Foreclosures, Liens, Judgments are reviewed. The good news is that a few late payments won’t necessarily crush your score; likewise a perfect payment history doesn’t mean a perfect score since this is only one area evaluated in the full score.
Amount Owed: The amount you owe will account for 30% of your FICO score. The amount owed factor is calculated reviewing your overall debt load as a whole and also by specific categories such as credit cards and loans. This part of the FICO score also looks at the total number of accounts with balances and if debts are increasing or decreasing.
Length of Credit: The length of your credit history will account for 15% of your FICO score. Things evaluated here will include your oldest account, newest account, how long have certain accounts been established, and the last time the accounts were used.
Types of Credit: The types of credit established accounts for 10% of the FICO score. If you have credit cards and manage them responsibly it can increase your score. FICO will also evaluate if you have different types of credit and managed the different types responsibly. One interesting note is that if you close accounts they may still be reviewed and don’t necessarily go away.
New Credit: New accounts will account for 10% of your FICO score. This basically evaluates the number of new accounts established.
Can I fix my FICO Score?
The good news is that as new information is added to your credit bureau, the score will gradually change. Here are some tips on how to start to turn your credit around:

Step 1: You should get a copy of your credit report so you can see what you need to improve. If you are declined credit, you are entitled to a free credit bureau. Another way is to request your credit bureau from one of the sites that will provide it for free such as: www.annualcreditreport.com
Step 2: This article is a starting point for you: gain more knowledge on your FICO score and how it works so that you know how to fix specific areas (i.e. debt load, payment history, etc)
Step 3: Set a plan to fix the areas identified in step 2. For example: how can you pay down balances.
Step 4: Keep monitoring your credit. You should review your credit at least once a year to make sure that you are making progress.

If you need to re-establish credit after a bankruptcy, one thing you may want to consider is opening a secured card so that you are starting to rebuild your credit and new favorable information can be provided to the bureaus.
If you have reviewed your credit bureau and have found errors, you should dispute the items so that the inaccurate information does not hurt your FICO score. You should send a letter to both the credit bureau and creditor informing them:

The item you are disputing
Why you are disputing the item (provide any information showing its not accurate)
Request it be corrected or deleted

The credit bureau will investigate your inquiry, usually in 30 days, and give you a response. Keep in mind that they are not obligated to remove valid information. So just because you may not like the information, if you originally agreed to the terms, you will not have much luck removing the item.
Medical bills can show up on your credit bureaus and are treated the same as credit card debt. Keep them paid and up to date and they can help you, or if they get behind or go to collection, they can hurt you. The same procedures listed above would have to be followed to dispute them. If they are valid, you most likely won’t be able to remove them.
How my FICO Score can help me?
You will want to pay specific attention to your FICO score because it is used in determining your risk level when lenders evaluate your credit. The better the FICO score, the lower the interest rates the lender can provide you. This can save you a lot of money when thinking especially in longer term loans like cars and houses.
A final thought on your FICO score: There are many companies out there who are stating they can “fix” your credit and improve your score. They also want to charge a fee for their services. Generally speaking there is nothing they can do for you that you couldn’t do for yourself. For example, they have no specific weight in getting items removed and would have to try writing the same dispute letters as mentioned above. You can also go to the bank and apply for a secured card to start rebuilding your credit without using such a company. So my advice is to stay away from these companies and if you need to rebuild your credit follow the steps listed above.
FICO provides more in depth information which is great for educating yourself at: HYPERLINK “http://www.myfico.com/CreditEducation/articles” http://www.myfico.com/CreditEducation/articles.
For some great financial tools and resources go to: BOA Money Management and bettermoneyhabits.com or contact Stuart Burns at 602-464-1381 or email me