Bankruptcy Information

Matthew Foley

Matthew Foley

Esq. & MBA

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General Credit Information

UNDERSTANDING CREDIT – PART 1

Credit scores are a great tool to help you know where you stand. There are numerous agencies that can provide you with a credit report, and knowing what your credit number is can help you understand your progress and your status as a consumer. In this series, we help you identify the different types of credit scores, how to establish new credit, and the difference between various crediting agencies. Our firm is committed to ensuring you regain a positive credit score.

What is a Credit Score?

A credit report is a lender’s tool to evaluate the creditworthiness of a potential borrower. Stated differently, a credit report estimates the likeliness a borrower is to repay a debt. That said, the higher the risk of default, the higher the interest rate.

Therefore it is paramount that individuals review their credit and take steps to improve it. This process begins with understanding the components of a credit report and then learning how to improve the areas that effect scoring, which includes confirming the accuracy of their report and disputing any typos or errors. I’ve been told by one credit expert that approximately 29% of credit reports contain inaccurate “derogatory” information and roughly 20% are missing positive information that would improve a credit score.

A high credit score translates directly to lower interest rates, more relaxed lending guidelines, and cheaper premiums, as insurance companies and other industries are now relying on credit reports to determine rates. Employment opportunities can also pivot on an individual’s credit report, particularly with jobs in the financial sector.

This Guide is designed to provide the basic framework to understanding credit, offer advice on how to improving a credit score, and to illuminate some helpful tips & interesting facts regarding credit. Also herein, are complementary templates to fix credit inaccuracies. As a disclaimer, the information herein is meant to be general in nature and is not legal advice. This information is based off of personal experience with lending guidelines, creditor representations, and general observations.

A credit score is the product of a complex mathematical equation that uses the information within a report to evaluate the creditworthiness of a consumer. The exact variables that determine a credit score are unavailable to the public. However, we do know that the information discussed above (the four sections of a credit report) provides the foundation of a credit score. The key is to understand how the score is created using this information.

A FICO® SCORE. Most credit scores are computed using software created by Fair Issac Corporation (FICO). FICO ® Scores range from 350 to 850 and are used by lenders as a numerical value to determine whether a consumer qualifies for a particular credit request. Because a credit score is a calculation based off of information that is constantly changing, a credit score does not exist until it is actually requested. Once generated, the score is weighted heavily on current behavior to predict future behavior, such as a potential default. The last two years of information seem to predominately drive the score.

This score will almost always vary among the three credit reporting agencies. Therefore, banks will typically extend credit based off of the middle FICO ® Score. This score can affect qualifying for a loan, employment opportunities, and insurance premiums. Research has shown that individuals with lower credit scores have a higher likeliness of filing insurance claims, therefore bad credit equates to higher insurance premiums (approximately 90% of insurance companies charge premiums based on credit scores).

TIP. Do not get caught up in the unknown nuances of a credit score, but rather focus on the basic concepts and you’ll be fine. Also, if you need accurate advice, speak with experienced mortgage professionals. Their occupation is driven off of understanding and improving credit.