Below you will find common credit questions with accurate answers. If you still have a question, ask our community in the Forum, in our Chat room or you can always contact us and we'll try to help you find the answer to your question.
How is the FICO score configured?
The exact formula used for coming up with a FICO score is a well kept, trade secret. There are 5 key factors which makes up a score, which is given by Fair Isaac Corporation (FICO), as well as the importance of each factor. They are:
- 1. Payment history = 35%
- 2. Amounts owed = 30%
- 3. Length of credit history = 15%
- 4. New credit = 10%
- 5. Types of credit = 10%
FICO credit score ranges between 300 and 850
Here's a breakdown of score ratings:
- Excellent ~ very low risk: Over 750
- Good ~ low risk: 750 -720
- Acceptable ~ low-medium risk: 720 - 660
- Questionable ~ medium-high risk: 660 - 620
- Bad ~ very high risk: less than 620
Payment history is most important and accounts for 35% of your score. Paying at least the minimum on time every month is key. A couple of missed payments or even a couple of late payments could really damage your fico score.
Amounts owed or utilization is the next most important factor and accounts for 30% of your fico score. Keep you balance low, especially on your credit cards. The ideal range is a balance of under 10%; carrying a high balance can have a negative impact on your score, especially once you go over the 50% balance to credit limit ratio.
Length of credit history factors in at 15% of your fico score. There's really no quick remedy for this if you have a relatively short credit history. All you can do is continue to make on time payments, keep your balance(s) low (under 10%), and as time goes by your length of credit history will improve. Do note: Every time you apply for credit (for example a credit card) and get approved/accept the agreement, your average age of credit history will decrease because of the new credit account. For example: Lets say you have a fairly short credit history, you have 1 credit card that has been open for 12 months. If you were to open a new credit card, your average age of account(s) will go from 12 months to 6 months.
New Credit & Types of Credit each account for 10% of your fico score. If you were to rack up a bunch of new credit in a short period of time, you could damage your score, plus each new account will shorten the average length of your credit history. FICO likes to see a credit mix or "types of credit used," this typically includes at least 2 open revolving accounts or credit cards, installment loans (auto or personal loan) and a mortgage. Building a mixture of credit accounts over time and in a responsible manner will have a positive impact on your fico score.
Does paying off a collection account remove it from my credit report(s)?
In short, No. Just paying off an account whether positive or negative will not make the account disappear from your credit report(s). Collection accounts generally remain on your credit report for 7 years from the date of the first delinquency. In some cases, paying off a collection account can actually lower your credit score. There are ways you can increase the chances of getting negative accounts off of your credit report. The best way and most common is offering a "pay for delete" agreement. This is when you offer to pay (either in full or settle the account for less) and in return the negative account holder will delete the negative info from all reporting agencies. You can also try offering a deal with a creditor, for example, if you had a late or missed payment. This wouldn't be a "pay for delete" deal though. Instead offer something that would include you catching up, and if you remain on time over a period of time (example 6 months) the creditor will remove the late or missed payment. As long as you don't have a habit of this, many creditors will work something out if in return it means you are paying the money that is due. This isn't always the case, but it doesn't hurt to try.
Should I pay a collection account in full or settle it for less?
If you're wondering which one is the better option, it depends on what you are trying to do... If you are trying to have the accounts closed for as cheap as possible, settling it would be the way to go. If you have limited funds and can choose to pay 1 collection in full or 2 if they settle for less, settle 2 accounts. If you are looking to find out which one will help your credit score the most, that also depends. Paying or settling a collection will not make it go away, and whether it is paid, settled or unpaid, matters, but only marginally. The fact that you have a collection on your credit report(s) will have a negative impact no matter if it's paid in full, settled, or still left unpaid. Also, timing is everything, if you pay (in full or settled the account) for example, a collection account 5 years old that hasn't had any activity in the last several years, you could actually hurt your score. New activity on an old, dying off negative account may have a negative impact on your score. However, in just a couple more years, the account will fall off your credit report, whether paid, settled or unpaid because it will be a 7 year old negative collection account. If you want to pay or settle an account, go for it, but work out a "pay for delete" deal if possible. This way, once it is paid or settled, it will be removed from all reporting agencies. If you do this, you should work on trying to settle it first and possibly save some money, but be prepared to pay in full if that's what it takes for the collection agency to agree to your pay for delete deal. Remember, if you do not get any signatures on the pay for delete agreement, you probably do not have an agreement. Always get agreements in writing and with signatures.
Once you have bad credit are you stuck with it forever?
Absolutely not! No matter how bad your credit is at the moment, there are ways to start improving it today. Whether it's bankruptcy, judgments, collections, missed payments, or late payments, all of these will not permanently doom you with bad credit. In fact, you may be surprised how quickly you can start seeing improvements. Start off with something that easily approves people with bad credit like a secured credit card, they are probably the best and easiest thing to get approved on. Secured cards are basically just like any other credit card except it's not an unsecured credit card. This means you would have to deposit money with the issuing bank; typically the amount you deposit will equal your credit limit. There are secured credit card companies that will eventually turn your secured card into an unsecured card, which means they give you back your deposit sometime in the future, and some will offer you unsecured credit limit increases (but hold your deposit). Some secured credit card companies will not even do a "hard pull" on your credit report to approve you. This is an excellent way to start building positive credit accounts, which ultimately builds a better credit score. You would still need to deal with the negative accounts that made your credit bad. Find out what negatives you have and work on repairing the bad credit accounts, but in the mean time, you will be building a solid positive credit history with your secured credit card(s).
If I have bad credit, how can I get approved for anything?
Having bad credit will make it hard to get approved or in some cases impossible. You could open a secured credit card or 2, these types of credit cards are as close to guaranteed approvals as one could ask for. Secured cards are just like any other credit card, except you have to deposit money to the issuing bank, which is used as collateral. Secured cards will report to the credit bureaus just like any other card. As you make your payments on time, your credit will improve. Over time you will be able to build good credit history and at that point you should have no problems getting a loan. Best of all, no one would know it's secured except you and the bank.
Why are my scores different in each of the 3 credit bureaus?
There could be many reasons for this, and most importantly, you should know each bureau is independent of the others. They are competitors, and receive information based on a source (creditor, lender, collection agency, etc...) reporting an account to them. Some creditors may report to 1 or a couple of reporting agencies but not to all of them. Some creditors report to all the major credit bureaus. Some negative accounts may be in some reports but not all of them, and the same is true with positive accounts. Creditors are not required to report to all reporting agencies, so you will find some accounts in one report but not in the other(s). Based on each bureau getting their information for themselves and not from any of the other bureaus, usually each report and score will be different. If you find a positive account not being reported to a certain bureau, you could ask your creditor to report to that bureau. They are not required to do so, but in some cases they may comply. It is also important to note, not all the bureaus use the same scoring model, so if for some chance everything is the same between 2 reports, the scoring model the 2 different bureaus use could be different. For more information about the different scores, scroll down a few more questions...
Since inquiries hurt your score, does checking my report hurt my score?
Checking your own credit report does not hurt your score. You can check your credit report and/or score as much as you want, it does not hurt your score. The only inquiries that can hurt your score is when you are trying to obtain credit. This is also known as a "hard pull." Hard pulls will remain on your report for 2 years, but only affects your score for 1 year. A single hard pull will have a minimal negative impact on your score, usually between 1-5 points. Multiple hard pulls can have a major negative impact on your score, so avoid several applications and denials. In some cases, having multiple hard pulls in a short period of time will have the same impact as only one hard pull. This is usually due to rate shopping, which is typically done for mortgage.
I have a great credit score but didn't get approved for a personal loan - why?
There could be 1 of several reasons for this or even a combination of several reasons. Without knowing the circumstances, it's fairly tough to say with any certainty what the reason is for the denial. On a side note, you are allowed to request a reason from the lender on their decision. Just to throw out a few possibilities, it could be an income issue, requesting a loan that will result in a payment the lender believes you can't afford is one possible reason. Another possible reason is the loan amount you requested was too high based on limited credit. While your credit score is good, it could be good with only two - $500 credit limit credit cards. In this case, you have shown you can handle and afford a potential $1000 of credit, but if you requested a $30,000 unsecured personal loan, that is quite a leap of faith the lender would need to take. Perhaps trying a smaller loan that is secured is the way to go. For example, if you were to apply for a car loan, the car would be used as collateral and put into consideration for approval, along with your good credit score/report. This would improve your chances for an approval, especially if the loan was not significant amount of money, perhaps around $15,000. Any unsecured loan involves greater risk than a loan that is secured and backed by something that has a tangible asset, and the lender would have something they could seek out for compensation if for some reason you were to default. Another possibility is the current credit crunch, lenders have simply tightened their belt with lending and the standards for being approved. Some have made the expression: a 750 fico score is the new 650. Which basically means what once was considered good is now considered too risky and what once was considered excellent is now considered acceptable. There are several more possibilities, but your best bet is to find out from the lender why you were denied, and whatever the reason is, work on it to improve your chances down the road.
What types of scores are there and the ranges for each?
FICO Score: ranges from 300-850Excellent - very low risk: Over 750
Good - low risk: 750 -720
Acceptable - low-medium risk: 720 - 660
Questionable - medium-high risk: 660 - 620
Bad - very high risk: less than 620
Plus Score: ranges from 330-830Fairly similar to the Fico Score grades.
Vantage Score: ranges from 501-990901 - 990: A
801 - 900: B
701 - 800: C
601 - 700: D
501 - 600: F
Several lenders may use their own internal scoring system and there's no way of knowing all of them. Lenders use a host of different scoring models to better suit their needs in evaluating an application. There is no wrong or right scoring system. The ones stated above are the common ones...
On a side note, the most common or the score most lenders use is the FICO score.
I had a negative account deleted - how much should my credit score go up?
There is no set amount per negative account. Plus, there are several things that make up your credit score and each individual has their own unique credit file. The type of account or age of the account will matter greatly on how much of an improvement you should see. Deleting a negative account that's 6 years old will improve your score but only marginally because as it ages it has less and less of a negative impact. However, if the account is only a few months old, you should see a much larger positive impact. Also, what other accounts you have in your credit report(s) will make a difference, for example, if you deleted 1 collection account out of the 10 other collection accounts in your credit report, deleting the one will help but it won't be a huge improvement. If you only have 1 collection account in your credit report(s) and you delete the only negative information in your credit report, you should see a larger increase. So if your looking for a number, it's really to complicated to give you one, but if you want our best guess, you could see anywhere from a few points to as much as 50+ points depending on the circumstances.
Authorized User Accounts & Piggybacking - What's it mean?
There was a time, not too long ago, where anyone could add anyone as an authorized user. If the person being added as an authorized user had bad credit they would receive a boost in their score for this new, positive account. In 2008 the FICO scoring system caught on to this loop hole when businesses were adding folks with bad credit as an authorized user for a fee. These people weren't given access to the credit card, just simply added to the account. This in FICO's eyes, as well as many others, was viewed as exploiting the system, even unethical. Needless to say, FICO revised the benefit of authorized users, and they came up with: A spouse, child, or family member would continue to receive a benefit as an authorized user. However, anyone not related, there would be no benefit for adding someone as an authorized user. The nick-name for this is "Piggybacking."
Got a good credit question?
Contact us - If it's a frequently asked credit question and could help several readers, we'll post it, because CreditLibrary is here to help!