What’s Your Score? More than 60% of VI participants at recent financial empowerment seminars admitted they have never seen their report, but believed their score was low. Traditionally, consumers with a poor understanding of credit reports or no knowledge of what affects their credit scores generally have lower scores and higher interest rates.
A credit report includes personal details on where you live, habits for paying bills, collection accounts, tax liens, and whether you’ve been sued, arrested, or filed for bankruptcy. This information is collected by the three national credit bureaus, Equifax, Experian, and TransUnion and sold to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home. Once you obtain credit, the lenders usually report your payment information to the credit bureaus. Scores can vary, but range from 300 (poor) to 850 (excellent), and are based on a number of factors:
- 35% is based on Payment History, and includes late payments (info will be sent to the credit bureau when you’re 30 days past the due date), collections, charge offs, liens, bankruptcies, or judgments. Unpaid accounts (medical, apartment rental agreements, utility, cable, & phone) go to collections.
- 30% is based on the Amounts Owed on all credit accounts, loans and credit cards. When the percentage of your credit limit tips 30-50%, your scores tend to decrease.
- 15% is based on Length of Credit History, so the longer you maintain open accounts with creditors the better your score.
- 10% is based on New Credit that you establish. People don’t often realize that having multiple creditors pull their score can negatively impact their score.
- 10% is based on Types of Credit Used, including mortgages, installment loans (car or student loan payments), and revolving credit (credit card). When you vary your loan type, you improve your chances of having a better credit score.
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What Difference Does It Make? Most students and adults agree that they would like to purchase a vehicle and their own home, but many have little knowledge on how they can accomplish those goals. It is important to understand that in order to obtain a loan for financing a car, home, or to consolidate bills, you will need to establish a good credit history. If you do not have any credit, establish a savings goal, open a checking or savings account, and apply for a secured loan or credit card. Some local banks may allow you to get obtain a small secured loan using a savings account as collateral. Other options may include local or national credit unions or banks to obtain the loan or credit card. Once you obtain the loan or credit card, your goal is to ensure that you pay on time (within 30 days of the due date), stay under 30-50% of your credit limit, and refrain from abusing your credit line by not making unnecessary purchases.
If you already have credit, but need to boost your scores, you may want to review your credit report and identify a strategy to improve the areas that are hurting you. For instance, if you have a credit card with a credit limit of $1000, and you have spent $800, you have spent 80% of your credit limit. The optimal strategy here would be to devise a budget for paying down that balance to 30-50% of your credit limit, down to $300-$500. Also, consider establishing a spending and savings plan to prevent you from charging too many items on credit. Creating a simple budget is a quick method to managing your finances – we will cover that in a later issue of CORE.
The Fair Credit Reporting Act requires Equifax, Experian, and TransUnion to provide adults (at least 18 years old) a free copy of their credit report once every 12 months. The only authorized online source for a free credit report is www.annualcreditreport.com. You may also contact them toll-free at 877-322-8228, or by sending your written request to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Once you print and review your credit report, take the following steps to protect yourself:
- Make a list of all of the accounts that need to be corrected
- Dispute erroneous items with each credit reporting agency
- By law, the credit reporting agency must settle all disputes within 30 days. Follow up and obtain an updated report to make sure your dispute has been resolved.
- Document and keep records of all of your communication
- Keep proof of payment and a paid receipt from the creditor
Taking basic preventive measures to protect your credit can pay off over time. Generally, consumers who have a high credit score generally have lower interest rates on their vehicle loans, mortgages, and consumer credit cards. Ready to take charge of your life? Then it’s time to Get Your Financial House in Order!
About Lizette Llanos & Strategic Solutions
Lizette Llanos is a native daughter of St. Croix, V.I., who graduated with a BA from Spelman College in Atlanta, GA. She worked in the telecom industry before relocating to the D.C. Metro area to teach Middle School English. Her transition to becoming a mortgage loan officer and a financial strategist came after sitting down for a budget consultation with the founder of Strategic Solutions Network, Inc. to prepare for the purchase of her first home. Her motivation for the move from teaching English to educating students, individuals, and businesses on financial literacy was simple – she wanted share her knowledge about the power of good credit, budgeting, and home ownership to elevate personal and professional economic positions. You may contact Lizette Llanos regarding this article, or to schedule a complimentary consultation at 340.277.4149, 202.270.3966, or lizllanos@avresidential.com.
Strategic Solutions Network, Inc. (SSNI) is a 501 (c)(3) non-profit, tax exempt organization that promotes financial literacy in the U.S. Virgin Islands and the D.C. Metropolitan area by teaching students, adults, families, and businesses how to develop financially healthy habits. By advocating financial and credit management, the community will benefit as a whole from economic growth and better management of government, community and personal resources. SSNI is currently working with local high school seniors through their Youth Economical Empowerment Initiative. You may visit them at www.strategicsni.org or send an email to strategicsolutions1@yahoo.com
It's time to Get Your Financial House in Order!
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