Credit report and FICO Score

A credit report is a statement which generally shows your credit activities during the past seven to ten years. It lists all types of credit issues like any loans you have opted for, credit card dues, the balances in your credit cards, and your payment history i.e., how conscious you are in repaying these loans. The listings in your credit report is generally categorized under four heads – Identifying information, credit information, public record information and inquiries. Your identifying information includes your name, social security number, birth date, and information about your spouse. Credit information includes your loans with banks, credit card companies, utility companies and even mortgage loans. Public record may include court records on bankruptcy, tax liens, and judgments and finally hard inquiry information includes the name of the creditor who got access to your credit report in the last two years. Based on this information, your FICO score is calculated which forms the basis of your loan eligibility. There are three credit reporting agencies or credit bureaus who prepare your credit score. They are Experian, Transunion and the Equifax.

Developed by Fair Isaac and Company, FICO score is a type of credit score which is widely used by the creditors to determine your potentiality as a debtor. It is a credit scoring model developed in the late 1950s which has been accepted by almost all types of lenders to determine your eligibility as a borrower. Credit score is a numerical three digit score, which normally ranges from 350 to 850 points and is based on the listings on your credit report. The more is your score, lesser interest rate you need to pay on your loans and hence a better deal. FICO score is generally measured in terms of five parameters with maximum weight on your credit history. The five parameters on which your credit score or your FICO score depend are as follow:

• Payment History – It contribution is about 35% in you credit score and so it is always advisable to maintain a good credit history. For this it is always advisable to make timely debt payments and not to miss any payments.
  

• Amounts Owed – Amounts owed contributes about 30% in your credit score. Because of its importance as a factor in determining your credit score, one should not exhaust the entire credit card limit in purchasing through the card. This lowers credit score. Instead, one should focus spending only 30% of the credit limit. Pay back the debt and then reuse it.

• Length of the credit history – Length of the credit history constitutes about 15% in your credit score. So in order to make the payment history long, advisors always suggest not closing any old credit card accounts. Rather, one may close any new account if he is not able to continue with the annual card fees.

• New Credit – Applying for a new credit constitutes about 10% in your credit score. Whenever you apply for a new credit, creditors make an inquiry on your credit report through the credit bureaus. This is known as hard inquiry and it remains in your credit report for two years. Too many hard inquiries suggest that you are “credit hungry” which gives negative impact on your credit report and hence lowers your credit score. And finally

• Types of credit used – This factor contributes 10% in your credit score. This includes the number of credit card, loan and mortgage accounts etc you hold. Too many loan accounts may lower the score because it may suggest that if you take any further loan, you may be delinquent.

It may be noted that FICO takes into account all the five factors in determining your credit score – not just one or two of the factors.

Charge off and its impact on your credit score

“Charge off” is generally a negative term associated with your credit report to describe a bad debt. It is usually an account in which you owe some debt. An account is labeled as charged off, if you have not paid for 180 days form the date you made the first missed payment. Charge off does not necessarily mean that your creditor has closed your account and you are no longer required to pay back your debt or in other words you are no longer liable for the debt. In fact you are totally liable for the debt and your creditor has the option to sue you to the court and if needed get a judgment to garnish your wages to get back the debt till the time the SOL in your state has expired. This means that even though your debt has been written off, you are still responsible to pay off the debt.

Charge off can be labeled in any type of account, be it a credit card account or a loan account. Whenever a lender charge off your account, he reports it to the three credit bureaus or the credit reporting agencies (CRAs) who in turn will list it in your credit report. A charge of listing in your credit report may be damaging to and is considered one of the worst among the listings in the credit report. A charge off listing in your credit report may cause your credit score to fall by as much as 100 points if not more. A charge off listing remains in your credit report for seven years from the date of the first missed payment and adversely affects your credit score.

So it is always advisable to prevent yourself from being charged off. Whenever you find that you are not in a position to cope with your debt repayments and there is a risk of being charged off, immediately contact your creditor directly for a negotiation. Try to come to a repayment plan with your creditor for the repayment of the loan and agree for one which you find suitable for you. You may also consult a credit counselor and he may be able to help you find out a way to get out of the situation.

However, if you have an account already charged off and this charge off gets reflected in the credit report, it is always better to pay off the charge off if you can afford to do so. Once you pay off the charge off, the credit report will read “paid charge off” which is certainly better than if it is listed as “charge off”. Moreover, you can also ask your creditor to change the status of the charge off listing as “paid-as-agreed” which will place your account in good condition. However, it should be kept in mind that even if you pay off the charge off in full, this negative mark will stay in your account for seven years.

Re-Aging your credit account:

The term Re-Aging is generally used to clean up your credit history after you had a bit problem with your credit and you are back in control. Whenever an account is re-aged, it is labeled as current and is no more considered as a past due. As for example if you are a few months late with your credit card repayments, you may persuade your creditor to re-age your account. If your creditor agrees to your request, then you will not only gain by exemption of the late fees, but also you will no longer be considered as delinquent. To take it the other way, your missed payment are just ignored. Re-aging your account is thus good for your credit score as the “late” stain comes out of your credit report and you account is considered as current.

However, it is not so easy to make your creditor agree to re-age you account. It may not come free of cost. To make your creditor agree to re-aging, you may need to offer some form of payment immediately coupled with a schedule of more than minimum payments.

There are also government rules and guidelines relating to re-aging. These rules and guidelines have been set up by the Federal Financial Institutions Examination Council, which is a Government body authorized to make recommendations to promote uniformity in the supervision of financial institutions.

As per the policy resolution taken in the year 1999, the revised standard requires the borrower to express his eagerness and ability to repay the loan, for both open and closed ended credits. Moreover the credit account should have existed for at least nine months and the debtor should have made at least three uninterrupted monthly payments or an equivalent lump sum payment. In addition to this, the loan can only be re-aged once in every twelve months.

One thing should always be kept in mind while you are opting for re-aging. You must have all communications with your creditor in writing and under certified mail, since if re-aging does not take place you will have proofs to claim re-aging.

Impact of credit score on your insurance premiums

Your credit history and hence your credit score can significantly affect your insurance premiums. The cost of your insurance may increase with decreasing credit score – be it personal insurance or an auto insurance. Hence a low credit score would imply a higher insurance premium and a high score would give you the best deal in insurance premiums.

The reason behind this is simple. The insurance companies are of the view that people who have a bad credit history are more likely to file personal insurance claims and hence to minimize the risk, they charge high insurance premiums form these people. Similar is the case with car or auto insurance policies. In addition to your credit score, auto insurance premiums also depend on a few other factors like the type of the car you drive (for example, racing cars are more prone to accident and hence has a high insurance premium), the security system in your car, and the driver’s driving history (more than three speeding fines and two accidents with cost you with more premiums).

Most insurance companies depend on the credit based insurance scores (a numerical ranking which is based on the individual’s credit history or in other words how an individual handles his daily financial matters) to determine the risk involved in offering an insurance policy. These scores help insurers predict the future performance of an individual and hence minimize the risk. The insurance companies use the insurance scores prepared by Fair Isaac which are referred to as Inscore by Equifax, Fair Isaac Insurance Risk Score by Transunion and Fair Isaac Insurance Score at Experian.

A credit score of 700 and above implies that you have a excellent credit score and therefore you can expect the best deal in the insurance premium. However, if your score falls between 650 and 700, it is still a good score and you can expect low insurance premiums. Between 600 and 650, the score is still good, but if the score falls below 600, it is very difficult to get a insurance policy with premiums at competitive rates.

So to get insurance premiums at favorable rates it is always advisable to maintain a good credit score. For this, one should always go through the credit reports periodically and report any discrepancies to the credit bureaus immediately and remove it from the credit report. A good credit score always helps you not only to get good insurance premiums but also a favorable interest on your credit, a good job and much more.

Foreclosure: Is short sale a way out of it?

Foreclosure is a legal instrument which is resorted to by most creditors against the debtors in case the later fails to satisfy a financial obligation with the creditor. Foreclosures are generally a result of non payment of debt which may include mortgage payments, second mortgages, equity lines of credit or even non payment of property tax.

Mostly people fall in the trap of foreclosure because of missed monthly mortgage payments. Foreclosure is really an unpleasant experience in one’s life as you may land up losing your house to the lender. Not only will you lose the roof over your head, but also a judgment can be made issued by the lender against you for the amount you owe and other cost of foreclosure. In addition to this, your credit report will reflect this foreclosure and this will stay in the report for seven years adversely affecting your credit score. Foreclosure may result in lowering your credit score to as much as 260 points.

So one must always try and avoid foreclosure at all cost. To avoid this situation, whenever you are in a financial crisis, contact your lender immediately. Since foreclosure is costly to both your and your lender, most lenders agree to foreclosure. However, it should be noted that if you show a good effort to repay back your missed payment to the lender, you can avoid foreclosure. If you ever miss a payment, ask your lender to give you some time to repay the missed payment plus the late fees on a monthly basis. Pay the dues with the monthly installments slowly.

Another alternative to foreclosure is short sale. Depending upon the area you live in and the market price of your house, you can sell the house to get the full or part of the amount needed to repay the entire mortgage payment. However, for short sale, it is essential for your lender to allow you to sell your house and forgive any shortage between the sell price and the balance due. Both short sale and foreclosure have negative impact on your credit report. Short sale lowers your credit score only by 200 points and you can overcome the impact of short sale faster than foreclosure. However, you have to pay the tax on the amount of the loan forgiven.

Missed mortgage payments and its impact on credit score

If you think that maintaining a good credit score is an essential part of your life, it is advisable not to miss any mortgage payments. Timely mortgage payments every month help you to improve your credit score. It is always recommended to make mortgage payment your first priority among the bills you pay every month since it not only protects your house from foreclosure, but also help you to maintain a good credit score. This is because of the fact that if you have a missed mortgage payment, it technically implies that you are in breach of your agreement with the creditor. Even if your creditor does not initiate foreclosure, late charges and other fees will add to your expense if you miss one payment and will make it even more difficult for you to make up the missed payment at a later date.

A missed mortgage payment no doubt gives a negative impact on your credit report and lowers your credit score. So a missed payment can be very costly. A missed mortgage payment for more than 30 days can even lower your credit score to about 100 points or even more and this decrease in credit score will remain for as around 12 months from the date the account becomes current. Thus in order to keep up your financial health, make sure that you make the payment on time each month.

Ways to ensure that your mortgage payment is made on time.

• If you ever miss your mortgage payment, notify your lender of your financial position immediately, since it may prevent your home from becoming foreclosed. Since foreclosure is costly for both parties, the lenders mostly agree to help the borrowers to keep their houses. But this is the case only when you are one or a couple of payments behind. They can plan you a repayment plan for the missed mortgage payment which you can pay slowly with your current payments.

• Try and cut unnecessary expenditures. Although it is very difficult to cut down expenses, yet it is necessary to do so to make timely mortgage payments. Keep the money you save in a different account and use it to pay your mortgage bills.

• If you are hesitant to talk to your creditor for some reason or the other, call a counselor who is approved by the US Department of Housing and Urban Development, who can assess your financial situation and help you negotiate with your lender.

• Finally always ensure that you reply to the letters send by your lender if you miss a mortgage payment. Else, the lender may take legal action against you which may result in foreclosure.

Pay day loans

The concept of pay day loans arises out of the fact that most Americans undergo financial crisis during the end of the each month and they are severely in need money during this period. Payday loans usually help people to meet such unforeseen expenses till the time you receive the next pay check, when you can afford to pay back the debt.


Payday loans usually come with a very high interest rates and can be availed by anyone with a checking account. For availing a payday loan all you need to have is a permanent source of income. However, the pay day loans are mostly used by people who do not have a credit card account and so mostly people with a very bad credit score or people having no credit history at all take recourse to such type of loans.


The basic advantage of pay day loans is that it is very easy of access mostly during emergencies. These loans are mostly taken to pay emergency medical bills, car repair bills, and other unanticipated expenses. But the most important fact is that it is not free from disadvantages. If you are not able to repay the loan within the end of the term, you may land up paying high additional fees. Moreover, these loans come up with high annual percentage rates which may range from 300% to 1000%. As compared to credit cards which charges mostly 12% interest rates, the rates on pay day loans are astronomically high. So it is always advisable to repay a pay day loans as early as possible.


Some substitutes to pay day loans:

It is of course true that pay day loans are helpful for meeting one time emergency expenses. But one should always consider other options too before going for a pay day loan. You may try the following alternatives before applying for a pay day loan:

• If you have a credit card, then charge the amount you need from your credit card.
• You may take some advance from your employer and repay back on getting the next pay check.
• You may get some loan from your relatives and friends and finally
• The most important alternative to pay day loans is to prepare yourself to meet your emergencies. For this, always try to cut down unnecessary monthly expenses and keep the amount in your savings account. Although it is very difficult to curtail monthly expenses, try and save at least the minimum amount possible.