FICO credit scores

In the past, reading a credit bureau report was a big part of credit granting process. Even if your credit was less than stellar, there was a process through which its negative impact could be mitigated. You could try different companies, with different criteria. You could hope for an underwriter to make a mistake and not notice an occasional account that was 30 days late ( I used to work for a credit card company when in graduate school - we used to look at 80 credit reports per day - believe me - we missed a lot of things - our quality control department would give us individual status reports - even for the best of us, you could track the days when we were worried about school, or had a fight with a girlfriend, or partied out late the night before - mistakes went up - and that usually meant that someone got a better credit assesment than he/she deserved).
Today, it's a single, computer generated number.
Moreover, nobody really knows how this number is arrived at. We only have hints of what makes it go up or down. In the past, the criteria were clear -
a company would not tell you what they were, but at least internally they knew what they were doing.
Today they have no clue - they just get a number.

I was recently refinancing my house.
According to the bank, my credit score was "affected" for 2 reasons:
a) amount owed on account is too high
b) proportion of balances to credit limits is too high on revolving accounts

Geez, I carry $8000 on 2 credit cards - at a fixed rate of 3.99% - unsecured. That's a lot lower than loans secured by real estate - and that's a reason to ding my credit score?

And amount owed on account is too high? Excuse me -
none of my accounts, including equity line of credit, use up even half of the available credit lines. But a forum on FairIsaac recommends that you have balances of no more than 10% of your credit line - sounds like a strategy to induce you to open more and more credit accounts.

Bottom line: while my credit was still rated very good, I got dinged for being prudent and taking advantage of great deals. So much for Isaac being fair.

35% of the score comes from Payment History. So any lates (30 day, 60 day, etc), collections, charge offs, bankruptcies, judgments, liens or such will hurt your score. All is time based, the older the information the less it is contributing to the scores. But of course, they don't tell you how these things are weighted.

30% of your score comes from Utilization. It is best to have several accounts with low balances - myfico forum recommends utilization ( balance/credit line) to be lower than 10% per account - so either borrow very little, or have huge credit lines ( like 20,000 - 30,000 per account ).

15% of the score comes from Established History. The longer you maintain open accounts with creditors the better. But what about paid off installment loans? My car is paid off - do I get extra bump in score for that? The Fair one is silent on this subject.

10% comes from Inquiries. Avoid having many inquieries, especially in the same month - shopping for credit will hurt your score - interesting - the scoring system is designed to penalize you for shopping for a good deal. Good for the banks, not good for you.

10% comes form Mix of Credit. Again, the forum suggests to "Use different types of credit (revolving; installment; auto; mortgage...) evenly."
What does that mean - am I supposed to have as many credit cards as real estate loans? Or am I supposed to carry the same balance on the credit cards as on my house? Again, arbitrary rules are used to generate your credit score. In the past, banks had those rules as well, but at least they understood what they were. Today, they get a number, and then apply ANOTHER set of arbitrary rules to this number in order to make a decision. This means that they can always justify not giving you credit, or offering you a much higher rate than originally advertised.

These are not guaranteed to work - FairIsaac can change the rules 5 times a day if it feels like it.
But overall, these should help:

1) if you have an old chargeoff /collection -
talk to a lawyer BEFORE making any payments - because chargeoffs/collections fall off your credit report after 7 years. But when you make a payment - the account is "refreshed" - the clock resets to 0 and you have 7 more years to go.

2) if you have to declare bankruptcy,
fight as hell to be able to discharge 100% of your
debts. Banks and credit card companies paid good money to Congress to make it a lot more difficult than it used to be, but it can still be done.
Remember, on your credit report, bankruptcy is a bankruptcy - whether you are free and clear, or whether you are stuck for 10 years paying off creditors.

3) Beware of credit counseling agancies - for most of them, their goal is to get you to pay the creditors money you would otherwise have not paid.
When I worked for a credit card company, we treated
a credit counseling mark on a credit report the same as a bankruptcy.

4) do try to pay your bills on time - this does make a difference, FairIsaac or not

5) if you must carry a balance - keep it as low as possible - both for credit score reasons, and because of the interest payments

6) if you have many credit cards you never use - use them occasionally - rotate through them so that each one is used at least twice per year.
Dormant accounts lower your credit score, or so the story goes.

7) if you have very little credit, buy a Certificate of Deposit (CD) at a bank, then use it as collateral for short term personal loan. Make payments on time, be sure that bank reports the loan to the credit agencies ( ask!)
While you will lose some money on the interest rate difference between what you get on the CD and what you will pay to the bank on the loan, it will pay off in improved credit score.

8) Make so much money that you don't need the banks or FairIsaac - living well is the best revenge.

Check out this lense for more ETF info
More about ETFs.

Couple other lenses to visit - to take a break from the money game:
Fun

and more fun

Back to money stuff:

Wealthencyclopedia.com