Keys To Wealth Building – Knowing Your Credit Score (Part Three)
To continue in this series, I first want to thank you for reading these articles and I hope you are finding them beneficial. I will now jump to the information I am writing about.
Most Americans have three or more credit cards with balances on them. If you are an individual who is able to pay off your balance every month, then you are one of the 1% of people that has that ability. For the other 99%, this next step is crucial in your quest of wealth building.
Know your Credit Score
Credit card providers are in business to make money, plain and simple. They do not provide someone with credit to be good Samaritans; they are in this business to make money. They provide these services with disregard to if someone can afford this service, or not. To better understand where I am going with this statement, read on…
Credit card providers use your credit report to allow, or disallow credit to you. These credit bureaus, Equifax, Transunion, and Experian, all use the same algorithm to get a credit score for you. This credit score ranges from a score of 0 to over 800.
A very basic breakdown of these scores are as follows:
- Less than 619 = high risk
- 620 – 660 = Uncertain
- 661 – 720 = Average (acceptable)
- 721 – and higher = Very good
- Over 750 = Excellent
How we rank
The recent credit scores among the USA population approximately rank are as follows:
- Up to 499: 1%
- 500 – 599: 12%
- 600 – 699: 27%
- 700 – 749: 20%
- 750 – 799: 29%
- Over 800: 11%
So 40% of us fall into the “excellent” category. 13% of us fall under 600, which is very high risk. With this score of 600 to 749, those 47% are the bread and butter of the industry.
The credit card industry makes its living and high profit margins on the 47% of the people who are allowed to have credit. That is why it is so important to get your credit score above 750. This number, the powerful credit score, determines what kind of interest rate the banks, the credit card companies, and the mortgage companies will give you.
How to get your credit score above 750 be accomplished? Let me give you some insight into how this can be solved. Each credit reporting agency has a report on you, and each tallies their own score. Not all creditors report into all three credit report agencies. They only have to talk to one on you, according to law.
Maybe your MasterCard account reports to Experian; your Sears card may report to Equifax; and your American Express reports to Transunion. They each calculate your credit score based on what information they have on your credit report, so each credit score may be slightly different. That is the norm and no big deal. Right?
The Secret Formula
If Coca-Cola wanted us to know their secret formula on how to make coke, it would not be locked up in a vault somewhere. Same goes for the baked beans and their secret family recipe. The complex mathematical algorithm formula that is used to computing credit scores is not out there, floating around on the Internet. If Grandma Hazel wanted you to know the secret ingredient in her mashed potatoes, she would have told you.
The software that is used to determine your FICO score was developed by Fair Isaac Corporation. Fair Isaac, a Minneapolis-based financial services company, does not house a database with all kinds of information on you. Their software is used by all three of the credit reporting agencies. The credit score is computed using a proprietary mathematical formula. This means that we, as individuals, are not allowed to know the formula.
The credit bureaus and the financial lending institutions think that keeping the formula a secret will keep you in the palm of their hands. They figure that we do not need to know how electricity works just to turn on the lights. So in turn we don’t need to understand any algorithms to fix our credit scores.
This credit score is more important than we sometimes realize. Your insurance company looks at your credit score to determine what kind of policy to give you. Your employer can even look at your credit report and credit score to decide on promoting you or even hiring you. This credit score permeates into many corners of our lives.
The Credit Score is comprised of five basic elements, according to About.com:
- Payment History – 35%
- Amounts you owe – 30%
- Length of your credit history – 15%
- Types of credit used – 10%
- New Credit – 10%
Get your credit report! Check for any inaccuracies. 90% of all credit reports have something wrong with them! The first step in creating wealth is getting your credit report!
Once you get your report, it is critical, crucial, mega-important that you review it. Your credit report number is the magic number that dictates your interest rates, your fees, your financial everything, and this score is the direct result of whatever is on that credit report. To contact the big-three credit agencies, below is their contact information:
- Equifax – PO Box 740241
Atlanta, GA 30374
- TransUnion – PO Box 2000
Chester, PA 19022-2000
- Experian – PO Box 2104
Allen, TX 75013
You are entitled to one free credit report per year. Get yours today, whether you order it online, by mail, or request it over the phone. You can also go to either http://ftc.gov/credit“, or to www.annualcreditreport.com, or by mail at Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.
The latter website is a one-stop shopping website where you can get all three credit reports from one place. Just a simple form to complete online to get your free copy from all three credit reporting agencies. Once you get your copies, read, read and read it some more. Remember, 90% of all credit reports have mistakes. This is your golden opportunity to fix what is wrong with your report.
Take the time to read it through. Most items are obvious; others need explanation.
- The creditors name
- The creditors address
- The creditors phone number
- Your account number with this creditor
- The date this account was opened
- The type of account (auto, mortgage, credit cards = “revolving”)
- The credit Limit/original amount
- Reported since (date account started being reported)
- Terms (Length of the mortgage; if credit card, NA for Not Applicable)
- Monthly payment (credit cards may show $0)
- High balance (highest balance to date or original loan amount)
- Recent balance
- Status/remark (open/current; paid/closed; never late etc. open/current = good standing)
- Date of status (date that the Status section was last updated)
- Last reported (date creditor last reported any information)
- Responsibility (joint or individual account; spouse’s name may be listed)
- Recent payment (last payment received)
- Account history (sometimes the balance history just lists a lot of zeros)
If you have a lot of financial activity this report may be very lengthy. Check the easy stuff first, your personal information. Check that your name, middle initial, etc all correspond to you. This is where you may discover Identity fraud. If there are mistakes, contact the reporting agency directly. You would be amazed how often someone else’s information turns up on your credit report, simply by having the same name as you.
According to a 2003 survey by the Consumer Federation of America, only 2% of Americans said they knew their credit score. Only 3% could name all three of the main credit bureaus. Just remember that lending institutions just see you as a number, so you want this number to be the best number possible. Think of it as your golden ticket that gets you into the candy factory, or should I say, the money factory.
Martin Luther King, Jr. once said, “The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.” Certainly facing a mountain of debt is a time of challenge. To get your house into order, you first must get your credit score into higher ground, to reap the harvest of building wealth.
In my next article I will explain some of the options available that can be applied to raise your credit report number, as well how you can manipulate your payments to decrease your debt quicker, and begin building wealth. I hope you found this information helpful. I am striving for your success and any breakthrough with your debt elimination process. May the force be with you….