The Market Wrap for October 18: Earnings to the Rescue
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Money Management Center
Mike Deane Nov 25, 2014
When you’re trying to get a loan, you will constantly hear about a credit rating. The amount of the loan, the interest rate on it, and whether the loan is actually given at all, are all heavily dependent on the credit rating of the person seeking the loan. In addition to lending conditions, credit also affects your insurance premiums, and landlords look at it to determine whether you’ll be a rent-paying tenant.
A credit rating is a score that has been calculated to determine the probability that the borrower will pay back the loan. The credit score is based on a number of factors, but it comes down to whether the borrower has paid back bills in the past, and the borrower’s overall financial standing with creditors. Many types of credit ratings exist, but one of the staples is the FICO Score
A FICO score is a credit rating that was designed by the FICO Company. FICO is a publicly traded company that has been around since 1956, when it was founded by Bill Fair and Earl Isaacs. Originally called Fair, Isaacs and Co., and later Fair Isaacs Corporation, the company took the name and ticker FICO in 2009. FICO was one of the earliest credit rating companies, and the company also provides analytics and decision-making services. Most people know FICO primarily for its credit rating services and the almighty FICO score, which is provided by credit rating companies across the world.
Borrowers hear the FICO term all the time, but many don’t entirely understand what it means. We’ll take a look at exactly what your FICO score entails.
Your FICO score is derived from a statistical overview of your credit report data collected by the three major credit bureaus Equifax, Experian, and TransUnion. The score itself is a result of the following factors:
FICO Score Range
A FICO score can range from 300-850. The 760 and above level tends to secure a borrower the best interest rate possible for a loan. Once you drop into the 600s the interest rates offered for your loan will tend to be a lot higher. Credit scores will affect your overall financial strategy, so make sure you’ve got an effective strategy in place to deal with any credit score changes. For a better idea on what is a good FICO score, check out this infographic.
According to FICO, the consumers in the United States have credit scores in the following ranges:
|Credit Score||Percentage of Americans|
|499 and below||2%|
There are various things that will affect your credit score, including your ability to pay bills on time, as well as keeping low balances in your accounts. A sure-fire way to hurt your score is to max out a new credit card, open up a number of credit card accounts, miss payments and transfer debt from account to account.
One of the biggest fears out there is that your credit score will take a big hit if you apply for new credit in several areas – this tends to happen when you are car shopping or shopping for a mortgage with more than a couple of companies. Your credit may go down slightly, but it’s won’t fall enough to harm you in any meaningful way. If you use a company online that specializes in finding you the best deal, you should still not see much of an impact. The scoring system is aware of the process that companies employ to find the best rate (like Lending Tree, for example).
Checking Your FICO Score
A top source to use to check your FICO score is myfico.com. Landlords and employers tend to check a person’s FICO as a way to conduct a background check, and they will usually ask for your permission to do so.
The most important way to build up your FICO score is, of course, to pay back your loans and clear any credit card debt; however, if your score is already low, this is probably easier said than done. Go through your debts and credit limits and ensure that all information is correct – you want to make sure that any payments you made went through, and that the credit limits you have set up on accounts are where they’re supposed to be. Finally, do some research in the area where you live to find a trustworthy credit counselor. There are many non-profits that provide this kind of advice for people struggling with their bad credit. A credit counselor can help you with consolidating debt, talking to creditors and finding ways to make the payments on your loans as affordable as possible.
Damaging your credit can have huge negative effects that you will have to deal with throughout your life. The worst part about incurring unpaid debts and damaging your credit is that you can do the most damage before you are taking your financial responsibilities seriously—in college, for instance—and the bad moves you make at a young age can hurt your chances of owning a home, having a car or even getting a job. A growing number of consumers mistakenly believe that simply handing in their keys is the best option when it comes to debts they can’t afford, but there are many other ways to deal with debt while avoiding credit score damage. We’ll look at how people can get into this situation, and what moves they should—and shouldn’t—make if they’re unlucky enough to find themselves with overwhelming debt that they can’t afford.
The college years can be very trying and loaded with distractions, but students need to stay focused on the field ahead. When it comes to dealing with exams, late-night papers and constant studying, buying a home or getting a loan can seem like pretty far-off goals. Many college students get into trouble at this point in their life by losing track of their payment priorities.
The best thing to keep in mind is that you shouldn’t pay for what you can’t afford; it can seem like too much to pay for school, groceries, rent, etc. while going to classes and having a part-time job, but many students make it work. The worst thing to do is to start running up credit card bills and not paying for your utilities, cell phone or rent. Ignoring these payments due to the mindset that they are less important than finishing school will haunt you once you leave school. See also: The Real Cost Of Your College Degree – And How You Can Pay for It.
With a tight job market, you may want to keep an eye on your credit scores, because those could be the “little” details that help determine who gets a particular job opening.
Employers have become aware of the credit factor, and may be hesitant to push forward with someone who fails to hit the objectives of a good credit score. It’s all too easy for an employer to classify a young person with a bad credit rating as “irresponsible.” Be sure to track your credit score and definitely begin to establish yourself with credit in those college years, so as to give you a head start to building good credit and qualifying for better interest rates when you apply for a loan of any sort.
Keep in mind the objective is always to pay your bills on time, and stay disciplined in order attain the higher levels you are looking to achieve, in life, work and money. For more career advice, check out Success in Your Career: A Crash Course.
It’s not a crime to owe money, and debtors’ prisons were abolished in the United States in the 19th century. These days, creditors go after any assets you have, and if you have none, they write off the debt and promise themselves to check your credit record more carefully next time around. Technically, a creditor can petition a court to issue a summons for nonpayment of a bill. From there, things can get crazy if for some reason you defy the court order.
Two troubling real estate trends have become commonplace since the housing bust of 2008 – these are foreclosures and “short sales.” A foreclosure is the process where the mortgage lender takes physical possession of your home because it’s in default. A “short sale” is where the lender agrees to take less than you owe on the home and consider the loan to be paid. There are different rules when it comes to lenders and how they can try to collect debts for each state. Real estate agents have built a niche around short sales, but they are not doing you any favors when it comes to your credit score.
Foreclosures and short sales will both result in huge damage to your credit score. If foreclosure seems like the only option for you, you will end up without a house and without the means to apply for another mortgage for a long time. A short sale will leave you with your home, but with a terrible hit to your credit; so, you better hope your roof doesn’t spring a leak, because it will be pretty hard to get a loan to fix it.
There are other possible consequences that consumers face when missing payments and defaulting on various debts. Deadbeat dads and tax evaders get hit with jail time when they miss their payments. Obviously, this is a situation to avoid at all costs.
Missed vehicle and appliance loans usually result in the items being repossessed. We’ve all seen the images on television of repo men taking back items from people — and it’s never pretty. If you miss a credit or charge card payment, your credit will be damaged and you could be sued, depending on the laws in your state. Some states even allow creditors to garnish wages and place property liens on consumers who don’t repay their debts.
Should you default on your student loans, your credit will be destroyed for several years. The government can go after your wages, withhold your tax refund, sue you and even prevent you from collecting your Social Security benefits. And unlike many other loans, there’s no time limitation on suing you over student loans!
If you’re getting ready to go in for a loan or to apply for a mortgage, it’s time to find out your credit score. Not knowing your credit score can really hurt you if there are erroneous or false financial information contained in your credit history. Luckily, once you find an error on your report, you can call the credit reporting company and have them correct the information before you apply for a loan with poor credit. If your credit is not stellar in general, there are other things you can do to improve the score. Once your score is repaired and you’ve paid down your debts, you can once again start investing in your dividend stock portfolio.
As stated above, the first step in fixing your credit is to check out your credit history and make sure that all of the information is correct. This is a way to make sure that all of your payments that you made have gone through, and to make sure that there are no mistaken late payments recorded. Going over your credit history will also alert you to any false charges, which may have resulted from identity theft or some kind of fraud.
If you find any of these mistaken late payments or false charges, contact the company and provide the proof that you did pay on time, and if there are charges that you are sure you didn’t make, contact your bank or credit card company to notify them of the charges, and follow the steps necessary to combat identity theft.
Along with making sure your credit history is correct, make sure that your credit limits are correct. The reason for this is because if your credit limits are lower than you’ve agreed to, any debts you have on them appear worse, as it looks like you are closer to using your entire credit limit. This can make your credit look worse, as you may only be using your card for smaller purchases, but it will appear that you are maxing out your credit.
Of course, the best way to improve your credit is to pay down your debt. One of the ways to do this is to set up an automatic payment option so that you don’t even have to worry about remembering to pay down your debt, it just happens according to the payment plan that you have set up. Having this plan where you pay down your debt before you can use the money, makes it easier to pay down your debt. Aside from paying down debt, you should also work on building up some savings; check out Why You Need An Emergency Fund – And How To Build One.
Just like unpaid debt, unpaid bill payments really hurt your credit. If you can’t pay your bills immediately, contact the company and see what kind of repayment plan you are able to work out. Companies will be happy to accommodate a reasonable plan, as it’s better than receiving nothing and expediting the issue to creditors.
If you still have credit cards that are not maxed out, it’s good to still use them, sparingly, as long as you can repay them. Using debt and repaying it within the allotted time given by the debtor (credit card company), is a good way to start building up credit again. However, if you’re in a position where you are not being offered regular credit cards, there are other options.
Secured credit cards can be a good option if you want a credit card and are willing to make an initial deposit as collateral against the assigned credit line you will be allowed to borrow against. Once you have established a good payment history the credit card issuer will begin to extend credit so that it turns into a true credit line.
Look for cards that have no application fee, limited annual fees and the ability to switch to a regular, unsecured credit card after a period of time (1-2 years usually). You also want to make sure your use of the card is recorded and being dispersed to all of the major credit bureaus. Find out some other ways to save money while banking in 7 Sure-Fire Money-Saving Banking Moves.
If it looks like you can’t build your credit back by yourself, it’s time to contact a credit counselor. Depending on what state you’re in, you can access this service for free. A credit counselor will contact the companies/agencies that you owe money to, and will help you come up with a debt plan, where you will work out how much you can afford to pay back monthly. Dealing with someone in this position will get the creditors off your back and is a good way to start to pay back your debt and get your credit back to a respectable level. More information on finding a credit counselor, click here.
There are different ways to calculate a credit score, and FICO is the oldest and one of the most widely-used tools that creditors have at their disposal. A FICO score can help or hinder your quest for credit, and needs to be checked and managed to ensure that you get the best rates and the fairest loans.
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