Category Archives: Credit Scores

Questions About Your Credit Score

Do Cell Phone Payments Effect Credit Scores?

Strictly speaking it does. As a general rule, not by much. But there are exceptions. Below are a few scenarios that should prove useful.

Does My Cell Phone provider Report My Defaults?

Here is the thing, technically speaking, creditors can report any default to the credit bureaus. But this is not always the case. A credit bureau can choose to include the information or not. Even if the information is not found on your credit score, it does not mean that the same is not considered. Remember, you may know the broad strokes of how credit bureaus make their computations, as well as the 5 main categories for consideration. But in large part, you have no idea about the details. Bottom line is, better not take the chance.

Questions About Your Credit ScoreScenario 1: One Time Default

A one-time default may not cause so much irritation that your cellular phone provider will report the same. This is especially true if the amount is negligible. The problem is, if the amount is substantial. In this case it would be better to contact your cell phone provider and reach an accommodation regarding payment.

Scenario 2: Credit Card

If your cell phone payment is tied up with your credit card, and you fail to pay the credit card company on time, then you can be sure that the default will be reported. Remember, a credit card is convenient, provided you are paying on time and in full. The problem starts when you default on payment and/or pay the minimum.

Scenario 3: Repeat Defaults

Repeated defaults on your part will may force your account to be reported to the credit bureaus. To put things in perspective, it does not mean that the same will be considered. Even if it does, there isn’t going to be much weight placed on a few cell phone defaults, especially if they are isolated cases. The problem occurs when your credit card default is on top of other defaults.

How to Check?

Aside from defaulting and looking at your report, which is a bad idea, you can try to contact your lender. Ask if they report the defaults or what circumstances warrants the default information being reported.

How to Avoid?

The simple answer is to pay your bills on time and in full. Below are a few suggestions that can be helpful:

  • Auto Debit: Most bank accounts allow the consumer to auto debit the payments monthly. Of course you want to check regularly to see that your payments are not becoming too steep.
  • Pay a few days in advance. You will be surprised at just how many times a consumer defaults because he/she forgot! You can prevent this by having a payment calendar.
  • Get a prepaid account. If you continually default on your cell phone bills, you might consider converting to a prepaid account. This way even if you default, the same does not get reported. You do however lose the ability to make calls, sms, tweets, etc, until you reload.
Getting Your Credit Score

Who Calculates My Credit Score?

Credit bureaus otherwise known as credit reporting agencies, calculate credit scores. But what exactly are they? How exactly are the scores calculated? Below are a few important facts and FAQ’s about the same.

What are credit bureaus?

These are private entities operated for profit. Their business is to collect consumer credit related information, collate the same in a report, and make the same available to the public in general. These entities also provide a computation of information based on their reports. This is called the credit score.

Are they part of the government?

No they are not. Credit bureaus are strictly privately owned. They do not exercise any governmental or quasi governmental functions.

How many credit bureaus are there?

It is almost impossible to know. Needless to say, there are many credit bureaus out there, each with their own report and score. The smaller reporting agencies are called micro bureaus, and are usually tied up to a specific lender.

What are the top credit bureaus?

There are three that come to mind. These are Equifax, Experian, TransUnion. Bear in mind that the word “top” is only indicative of their wide range, popularity, and ease of access. It does not mean that they are more accurate than other bureaus.

Who makes my credit score?

The popular misconception is that the credit bureaus make the credit score of a consumer. In reality it is actually the consumer that makes his/her score. It is only up to the credit bureaus to collect the information and calculate the same.

What is a FICO Score?

FICO stands for Fair Isaac Corporation. The same is regarded as the most accepted scoring model. This serves as the basis for most credit bureaus. The operative word is “basis”. This is because each credit bureau usually modifies the same. The modification of the model as well as the exact computation is based on the target market or audience of a specific credit bureau.

How do they calculate the scores?

The exact formula is unknown. This is because each credit bureau keeps it a secret. However it is accepted by most that there are 5 main categories for determining a credit score. These are:Getting Your Credit Score

  • Amount of debt: The total amount of debt vis a vis the total net salary determines the positive or negative points that is assigned to a consumer.
  • Credit utilization: Each consumer has a credit utilization limit. The common example of the same is the credit card limit. The nearer the consumer is on that limit, the lower the score. A good rule of thumb is not to exceed 30% of the credit utilization ratio.
  • Types of credit: Creditors like to see different types of credit facility. This means that there are a lot of entities that like to deal with the consumer.
  • Credit applied for: This is sometimes called credit inquiries. The more hard inquiries the lower the score.
Credit Score Questions

Who Uses Auto Insurance Score?

Insurance companies today use a new numerical point system called auto insurance score to determine if they will issue insurance coverage on your car. It also determines what premium rate they will charge you if they decide to undertake the risk. Don’t blink now but under this new scoring system, you may end up paying higher premiums for your auto insurance even if you have an unblemished driving record. Here’s why.

In the past, your car would be automatically slapped a higher premium if you have previously figured in a car accident where you are at fault, or if you have incurred speeding tickets or other traffic violations the previous year. On the other hand, a pristine driving record meant lower insurance premiums then. This is no longer the case with the new system.

The Evolution of Auto Insurance Score

In the past, your auto insurance premium was calculated based on age, driving history, your vehicle type, where you live, and the car’s safety rating with your driving history having a profound effect on the final premium. But since various studies have shown a Draconian relationship between the credit report information and the insurer’s risk of loss or profitability. Soon enough, insurance companies adopted a credit-based scoring system which is not only based on the previously mentioned factors but also on information appearing on your credit reports.

By 1990, the new credit-based scoring system started to be used throughout the auto insurance industry to develop a more accurately predictive picture of a client’s risk profile. Insurers found it especially useful in determining rates on policies where there are no records of any insurance claims or where the owner has a pristine driving record. Industry wide, it was widely used as the basis for determining whether an auto insurance policy should be issued or not and in many instances in setting the insurance premium rate.

Auto insurance Scores are different from Credit Scores

Credit Score QuestionsDo not confuse a credit score for the auto insurance score. They are totally different from each other despite the auto insurance scoring system taking into account certain information from an individual’s credit score. Credit score is meant to gauge the credit worthiness of an individual and is used mainly by banks and other lenders in deciding the fate of credit applications. The scoring system for auto insurance measures the profitability or probability of loss on every risk undertaking relative to each individual auto insurance application.

Auto insurance scoring models differ from company to company since each insurer has its own proprietary formula or algorithm. The details of are kept away from the consumers and are considered as well-guarded corporate secrets. That is why there is very little that is known about the auto insurance scoring system except the fact that it now includes certain credit report factors in combination with insurance claim statistics and profitability data to determine the likelihood of an applicant figuring in a car accident or making an insurance claim in the future..

Who uses Auto Insurance Score

A study conducted by the Federal Trade Commission released on July 24, 2007 acknowledged the fact that credit-based auto insurance scoring system can indeed accurately predict the total cost as well as the total number of claims consumers file. While this may be of help to insurance companies, the benefit it provides consumers is highly controversial and the subject of a continuing raging debate. In Hawaii, the use of credit based auto insurance scoring system has been banned. Other states have attempted to follow suit but have failed.

But whether or not its use can produce a better match between the insurance cost consumers pay and the entailing risk of loss insures have to undertake, the new auto insurance scoring system continues to be the standard based on which insurance policies are issued or denied.

The Auto Insurance Score is currently being used by all insurance companies, the credit bureaus, the Insurance Information Institute, and the American Academy of Actuaries.

Will Getting a Credit Report Lower My Credit Score

Why is My Vantage Score and Trans Risk Score Different?

Trans Risk Score is the proprietary scoring model supplied by Trans Union, one of the three major credit bureaus in the country. It is based on the traditional credit scoring methodology which gives weight to conventional credit factors in calculating the scores such as length of credit history, debts, payment history, number of recent credit inquiries, and credit usage.

On the other hand, Vantage Score is what has been dubbed by its creators as the next generation credit scoring model. Vantage score was created by the three major credit bureaus namely Equifax, Experian, and Trans Union in collaboration with each other in an attempt to come up with a consistent scoring model as well as to veer away from the use of old credit scoring models which gives more weight to credit history.

It is also an attempt by the 3 credit bureaus to develop an alternative method to the FICO scoring system which is widely used by banks and other lending institutions to assess the credit worthiness of consumers. FICO scoring was introduced in 1986 and immediately became the industry standard for objective credit scoring. The 3 CRBs have to pay a license to be able to use the FICO model. Unfortunately, the adoption of the FICO scoring system by the three credit bureaus resulted in 3 slightly different credit scores from the 3 major credit bureaus. This created widespread confusion among consumers and the 3 CRBs wanted to address the problem by offering Vantage Score.

The Big Difference between Trans Risk Score and Vantage Score

Will Getting a Credit Report Lower My Credit ScoreThe main difference between Trans Risk Score and Vantage Score is on which credit element each of them gives more weight to. Trans Risk is a traditional scoring model which gives more weight to the length of the credit history of the consumer while Vantage Score gives more weight on his most recent credit transactions than the length of the credit.

This alone creates a big disparity between the two scoring systems your credit score falls in different national percentiles with the two scoring models. Vantage Score is able to efficiently score more consumers than Trans Risk to include the upstarts with short credit histories.

Another difference between the two scoring models which often leads to confusion among consumers is the numerical ranges of their scores. And because they use different formula, even if applied to the same set of data, they will spew out two credit scores which are totally distinct from each other.

Trans Risk Score ranges from 300 to 850  with the 300 to 600 low range considered as high risk; 600 to 700 medium range as credible; 700 to 850 high range as highly credible.

Meanwhile, Vantage Score ranges from 501 to 990 and is divided into 5 divisions. The 501 to 600 low range is considered high risk and assigned the letter F; 601 to 700 is considered non-prime and assigned the letter D; 701 to 800 is considered prime and given the letter C; 801 to 900 is considered prime plus and assigned the letter A; finally 801 to 990 is considered super prime and assigned the letter A.

FAKO versus FICO

With so many credit scoring models available today, experts in this field have conveniently segregated them into two namely (1) the FICO or the credit scoring models that subscribes to and adheres to the FICO credit scoring models and (2) FAKO or the credit scoring models that uses a system other than FICO.

FICO remains to be the standard for credit scoring since most banks and lending institutions use them up to today. The FICO score is what matters most to consumers since it what the lenders refer to when they apply for a loan or a mortgage. In short, FAKO credit scoring models which include both the Trans Risk Score and Vantage score are at best misleading and unreliable for now.

Getting Different Credit Scores

What is and Who Uses Vantage Score?

With a market so overwhelmingly dominated by FICO, consumers are apt to ask who uses Vantage Score. According to the company, 90% of the largest lenders in the U.S. use the FICO credit scoring model before making lending decisions. 75% of residential mortgage applications are also decided with the help of FICO according to the same sources. The company’s long list of clients (built up from 1986 when FICO was first introduced) even includes 25 of the largest issuers of credit cards and auto loan providers in the country. So where does all these put Vantage Score?

What is Vantage Score and where is it in the industry relative to FICO?

Getting Different Credit ScoresVantage Score is one of the dozens of other non-FICO credit scoring systems. It was created by the three Credit Reporting Bureaus (Equifax, Experian, and Trans Union) and introduced to the market only in 2006. The three Credit Reporting Bureaus collaborated with each other to develop a more predictive alternative credit scoring model that can reach more consumers than FICO.

Vantage Score is considered by its creators as the next generation credit scoring model. In contrast to FICO, it gives more weight to payment history than the length of the credit. Vantage veers away from the traditional credit scoring method which weighs on credit history a lot, leaving the “thin file” consumers, those who never availed of credit, and those just starting their credit relationships without credit scores and effectively squeezing them out from availing of loan opportunities.

According to Tower Group, a financial research firm, 10% of U.S. Lenders now use Vantage Score.  And if we are to believe the company’s figures, their list of current clients include 4 of the top five financial institutions in the country; five of the country’s top credit card issuers; 2 out of the top 5 auto loan providers; one of the 5 highest ranking mortgage loan providers. So far Chase Bank has been the only one so far to have acknowledged its use of Vantage Score.

Verified or not these claims may be, there is still no denying that Vantage has started to make inroads into major industry. After being in the market for barely six years and considering the fact that the well entrenched FICO has been in the market uncontested for almost three decades, you can consider this a great achievement with still brighter prospects for the future.

Who then may find Good Use for Vantage Score?

Because of its unique credit scoring methodology, Vantage Score can reach more consumers including the 35 to 50 million strong ‘thin file’ consumers representing 18% to 25% of the country’s adult population. This includes the young adults about to embark on their new careers; recently arrived immigrants, divorced or widowed personalities with no credit histories of their own, people digging out of bankruptcies, and people who hardly availed of credit in the past.

This market is by all accounts huge but has been traditionally left out by design from availing of credit by 90% lenders using the FICO model. Vantage can now effectively score them thus, giving lenders an opportunity to assess their credit worthiness and provide credit despite them not having a long credit history.

Entities and institutions who may find good use for Vantage Score include companies in highly competitive industries who’d want to discover new niches to market their products. This will include companies like auto lenders, credit card providers, and home mortgage loan providers.

Vantage’s growth may be slow but it definitely is a sure way to make an inroad into a market long dominated by a single provider and where the cost of a changeover to a new credit scoring model can be prohibitive for now.

Getting Different Credit Scores

What Is the National Average Credit Score?

The national average credit score depends on several factors. It also depends on the entity you asked. Below are the basic parameters for the same. It is worth noting that the national average changes on a regular basis. If there is a range that is provided, use the higher value. If there is no range, add a few points.

FICO Score

This is arguably the most acceptable scoring model in the United States, and most other countries. FICO stands for Fair Isaac Corporation. This scoring system ranges from 300 to 850 (lowest to highest). As of the third quarter of 2013 (March), the average credit score for Unites States fluctuates at around 630 to 640. To put things in perspective, as of the last quarter of 2012 the national average was 634 (FICO).

VantageScore

Getting Different Credit ScoresVantageScore is another scoring method. The same is being popularized by the top three credit bureaus Equifax, Experian, and TransUnion. They utilize the same 5 categories used by FICO but with some modifications. This includes additional categories. This scoring system ranges from 501 to 990. Taking into account the different computation and the different point system, VantageScore has a different national average. As of the third quarter of 2013 the same fluctuates from 735 to 750. The Experian website has the average credit score at 736 (VantageScore).

State Average

Credit scores are also averaged per state. This may be higher, lower, or the same as the national average. Most experts believe that this is actually the score that is more relevant in the US. Other experts believe that the best way to determine the actual median score is to reference both national and state scores. You do not average this, rather you look at the higher score, and you consider that as your average. Strictly speaking the same may not be as accurate, but it is the better choice. Why? This is because the goal of the consumer is better served.

National Average by Age

Some inquiring entities also consider the national average per age bracket. Currently the most popular bracket type is:

  • 18 to 24
  • 25 to 34
  • 35 to 44
  • 45 to 54
  • 55 and above

This is relevant because it has been proven time and again that some age brackets are better equipped at handling their finances. The general rule is that the older one gets the higher the average.

National Average for Mortgages

If you are planning to take out a home loan, then you might want to refer to the national mortgage average. As of the last quarter of 2012 this was 734 (FICO). The same increased four points from the 2011 average. It is safe to assume that 734 (FICO) and above is your target score for 2013.

In Closing

If you fall below the average (national, state, age, mortgage, etc.) it does not mean you will get disapproved. It only means that the chance of disapproval is higher. The chance that you get the worst interest rate is even higher. If you are above the average, it does not mean you will get the facility of credit or loan approval. Bear in mind, the national average is not your goal, it is your starting point!

Getting Different Credit Scores

What is the Highest Credit Score?

The other term for credit score is called FICO score.  FICO stands for Fair Isaac Corporation, the general system to determine the credit score.  There are a lot of factors that affect our FICO scores.  The higher FICO score the individual has, the greater opportunities in the financial world.  There are actions to be taken to get a better score or if you may want to get the highest possible anyone can have.  The question is how we will be able to achieve the highest credit score?  What’s the range of the FICO score?

Range

The range of FICO scores can be from 300 to 850.  If we get the 850, the highest credit score which is next to impossible, well there is no harm in trying though; but once we achieve even near to that score, we will have more opportunities to get better interest rates when we apply for housing, car loan, business loan, etc.  In addition, there are several banks who will offer the best interest rates for getting new credit card accounts.  You will be receiving a huge number of marketing promotions and offers from financial institutions.  The advantage of having a high FICO score can give you the power to choose for the best credit card with no annual membership fees, lowest interest rates and excellent rewards program.

What are the determining factors to get a high credit score?

  1. Getting Different Credit ScoresThe most important factor is Payment History.  If we want to get a high score, making payments on time is a must.  We are judged as financial account holder mainly based on our previous and present payment history.  This factor contributes 35% of our credit score. 
  2. The next important factor is the severity of the amount we owe, our debts. If we have a lot of debts, it can lead to a lower score.  It is also important to know that using too much of your available credit is a no-no.

To be specific, if we have used up more than 30% of our available credit on our credit card, our credit scores will start declining.  So, monitoring our usage is a must.  This determining factor also contributes 30% of our credit score.

  1. Then, the longevity of your credit history with credit bureaus or credit reporting agencies plays a significant role in determining the credit score.  This means that closing our first and oldest credit card is a big mistake. 

When you decide to open a new account thinking you’re getting greater deals, you’re making such a huge mistake, because it is important to keep old credit card account than keeping new ones. New credit cards don’t create a big impact on credit scores.  The longevity of your credit file is 15% of your credit score.

  1. Another important thing to consider is the number of new credit card accounts you have or you keep acquiring.  The more new credit cards you have, the greater it will have a negative impact on credit score.  So, there is no need to get a new one if it’s not needed and being used. Because this factor contributes 10% of the FICO score.
  2. Collection or variety of financial accounts is also a plus when it comes to building a good credit score.  Financial accounts such as car loans, credit cards, home loans, and other type of credit accounts are greatly considered.  But if in case, you don’t need those other type of accounts, this can lower the formation of the credit score because this represents 10% of it.  This option though is advisable for account holders who are financially capable to manage all these accounts, but if not, it will not hurt to wait for the right time.  

So, there you go, we have all these determining factors to help us better understand the formation of credit scores.  It is up for us on how to put it into actions and start building our credit.  Credit rating is something that defines us.  If not totally, but this a great portion of oneself, it reflects who we are, what we do and how we stand in the society.