Simple guide to improve your credit score and live a more solid financial life with help and tips on improving your personal credit profile and financial spending and decisions look forwards to the future!

1. -Credit$ <Credit> £Scoring+
Creditscores play an incrediblyimportant role in our livesyet fewof us truly understand where theycome from
and how they’re calculated.
Creditscores are providedby three primary creditrepositories:Experian,Equifax and Trans Union.These are
basicallyhuge databases that house creditinformationon almosteverybodyin the country. And how do they get
all this informationabout us? Well,creditors(like creditcard, automobile and mortgage companies) are always
lookingfor informationabout potential clients;people like youand me. They getthat informationfrom these
repositoriesbutin exchange,theyagree to provide data about all their customersback into the same databases.
Almost all of your credit providersreport your payment history into these databases and everytime you obtain a
new creditaccount, that account isreported underyour Social Security Number.
Credit reporting in its current form is still relatively new and a lot of people, particularly in the older
generations, are still unaware of all this information being held about them and their credit histories. My
own parents, for example, were shocked when I told them such databases exist and the extent of
information available. And it’s amazing the number of things in our lives that are affected by our credit
scores, so an understanding of the things they look for when calculating ourscores can be incredibly
beneficial for those who want to optimize their scores.
Let’s start with a definition. What is a credit score actually trying toreflect? Well, the exact thing a credit
score intends to predict is the probability you’ll have a 90-day late on a trade account within the next 24
months. That’s what they’re actually trying to predict. And as you can imagine, there are a number of
things that increase the probability you’ll have such a late payment and those are the variables that
make up your credit score. Now, the formulas and algorithms being used these days are incredibly
complicated and they change periodically as well, so it’s impossible to lay out the exact components and
their respective weights. But the basic structure is well documented and that’s what we’ll focus on here.
First, you should know that the median credit score in this country is right around 720. That means half
the population has a higher credit score and other half has a lower score. It’s actually just a bit higher
than 720 – about 722 is the latest I’ve heard. Pretty high, huh? It’s true. So the average person in this
country has pretty darn good credit. In fact, only about 1% of the population has a score below 500. That
means at least half the population should be in A-paper mortgage programs. It’s true that income and
assets also play a major role in mortgage underwriting but at least from a credit perspective, most
people should be in A-paper mortgage programs. Sadly, that’s not the case.
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2. Many MortgageBrokers gentlynudge their clientsDOWN the ladder ofloanprograms becauseit makes their lives
easier. The guidelinesare looser inwhat’s called“Subprime” programssoyou don’thave to get asmuch
documentationandit’seasier to get an approval.Infact, what youwant is someone who’ll instinctivelypushyou
UP the ladder andtry to get you intothe best possibleprogramyouqualifyfor,even ifit’s a bit more tedious.And
with a 720 credit score, you’reoff to a great start.
We shouldalsomentionthat there are actually10 differentscore cardsthat calculate credit scores. They’re each
designedto evaluate a differentset ofcircumstances.Are you youngwithonly very recent credit history?If so,
that’s one ofthe score cards andit focuseson different metrics thanthe score card for someonewho’s hada 30-
year credit history.Do you owna houseand have mortgagedebt? That’s reflected in differentscore cards as well.
Have you ever declared bankruptcy?That’san entirely separate score card also – and the strictest one of the
bunch,by the way. There’s noquestionthat you shouldavoidbankruptcyhowever possible,becauseit’ll put you
on the bankruptcyscore card for seven to ten years – andthat’s not a goodplace to be. Bankruptcy shouldbe the
absolutelast option.
And lastly,before we lookat howthe scores are calculated,we need to discussthe fact that each ofthe three
credit repositorieshas its ownscore. We’re all familiarwiththe FICOscore – everybody refers to the credit score as
the FICO score, but that’sonlyExperian’sversion of the credit score. Equifaxhas the Beacon score and Trans Union
has the Classicscore. Althoughthey’re all quite similar,they’reeach calculatedslightlydifferently.It’salso
importantto understandthat our creditors don’tnecessarilygive our credit informationtoall three repositories so
they may each have slightlydifferentinformation,resultingindifferentscores.In the mortgagebusiness,we
alwayshave to use the middlescore – not the highest,notthe lowest,but the middlecredit score.
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Okay. So for your creditscore, the single biggestcomponentisyour PaymentHistory. It accounts for a full 35% of
your total score. That’s more than a third. It’s a huge componentso making your paymentson time isthe best
thing you can do to keepyour credit score healthy. WithinPaymentHistory, the repositorieslookat (1) recency,
(2) frequencyand (3) severity.Ifyou’ve had two 30-day latesin the past six months,that’s a lot worse than two
30-day latesa year or two ago. In fact, they considerthe most recentsix monthsthe most, followedbythe past
two years and thenanything after that. The more recent,the biggerthe effectonyour score.Obviously,a 60-day
late isworse than a 30. And if you’ve had a 90-day late, that’s the worst there is. Rememberthat THAT is exactly
what they’re trying to predict.So if you’ve had a 90-day late in the past six months,you can rest assuredyour
credit score took a beating as a result.
The secondbiggestcomponentof your creditscore is RevolvingBalances; that’s the outstanding balanceson your
tradelines– your credit cards. YourRevolvingBalances account for 30% ofyour total score. So, betweenyour
Payment History and your RevolvingBalances, we’ve alreadycovered 65% of your total score.These are the pillars
of your score – by far, the most important.
Obviously,the higher your balances,the loweryour score. It makes sense ifyou think about it.If your balancesare
reallyhigh, there’sa higherprobability you’ll have a 90-day late in the next24 months. And the repositories
calculate your balanceson both individual accountsas well as aggregated across all your accounts. So while there
may be some small benefitspreadingyour balancesaround on differentcreditcards, it won’tmake a big
difference overall.The bestthing you can do is pay your balancesdown.
Its worthwhile notingyour creditscore has absolutelyNO memory. So ifyou’ve got a high balance today and you
pay if offtomorrow, your creditscore could be substantiallyhighertomorrow. It’s also worth noting your
creditors do NOT report your balances everyday or eveneveryweek.Most report once each month and the day
they pick may OR may NOT coincide with your statementdate. So the balance reflectedonyour credit report may
NOT match the balance reflectedonyour most recentstatement.Anyway, your score is calculatedat the time it’s
requestedsoit’ll reflectthe informationin the database at that momentin time.If your balances are high,your
score will be lower. If your balancesare low, your score will be higher.

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The nextbiggestcomponent isyour CreditHistory. It accounts for 15% of your score.So betweenyourPayment
History, RevolvingBalances and your CreditHistory, we’ve now accounted for a full 80% ofyour score.Your Credit
History looks at the age of your oldestaccount and the numberof newaccounts openedrecently.Again,the logic
makes sense.Ifsomeone’sopeninga ton of newaccounts, there’sno history to see how he or she will deal with
all these newaccounts. So withthese new unknowns,the risk level goesup and the creditscore goesdown. It’s
nevera good ideato open a bunch of new accounts. From the perspective ofyour creditscore, it’s good to have
betweenfive andsevenaccounts but ifyou don’t have that now,don’t try openingthemall up at once.
Nexton the listis the Type ofCredit. It accounts for 10% of your credit score. Type ofCredit looksat both open
AND closedaccounts. It looksat the type of credit you use and how many accounts of each you have, or have had.
The three major types of creditare (1) revolving,(2) installmentand (3) mortgages.But there is one subcategory
under the label of revolvingthat hits your score harder than the rest, and that’s the finance company installment
accounts. These accounts are the “nopayments for 12 months” type of accounts. You know the ones. Buy now,
pay later. The credit repositoriesknowwhat they are as well,andthey know the risk of a 90-day late increases
whensomeone goesout and buys all kinds of furniture and flat-screenTVs withouthaving to pay anything for it.
Avoid these typesof promotionswhenever possible.
The last componentof your credit score is the Numberof Inquiries.Inquiriesaccount for the final 10% of your
credit score.Now, there are two typesof inquiries.We all get tons ofcredit card offersin the mail. Well,eachof
these companiescheckedour credit before sendingus theiroffers.But don’t worry; they’re not consideredinour
credit score.They’re calledSoft Inquiriesbecause we didn’trequestthe credit.Many people worrywhen theyget
these offersthat all these inquiriesare reducingtheircredit scores but that is NOT true.
The secondkind of inquiryis a Hard Inquiry. That’s where you signedsomethingauthorizinga company to check
your credit because you’re applying for a new creditaccount. So everytime you applyfor a new creditcard or try
to buy a car or a house,those are all Hard Inquiries.Onlythese inquiriesare consideredin your creditscore.
Generallyspeaking,youshouldlimitthe numberof inquiriesto 5 to 7 peryear. Yeah, that’s PER YEAR. 5 to 7 per
year. Your credit score will look at the most recent12 months and each individual inquirycan affectyour score by
5 to 15 points, dependingonthe type of creditappliedfor.
Now, whenwe’re shoppingfor a car or a mortgage,we frequentlyconsultwith multiple placesbefore we make
our final decision.We mightvisitthree or four differentcar dealerships.We mightspeakwith two or three
differentMortgage Bankers before submittingour loan application.The credit bureausknow thisand they’ve
adjustedtheir algorithmsaccordingly. For auto inquiries,youcan have an infinite numberof inquirieswithina 14-
day window and they will all count as a single inquiry.For mortgage inquiries,youcan have an infinite numberof
inquirieswithina 45-day windowand they’ll all count as a single inquiry.So don’t worry about speakingwith
multiple people.That,in itself,will notreduce your creditscore.
The science ofcredit scoring already extremelycomplicatedandit continuesto evolve.Evennow, your credit
score is an amazingly accurate assessmentof your character. That’s one ofthe reasons income and asset
documentationhas become lessimportant. Bottom line;ifyou have a goodcredit score, lendersknowthere’s
little risk you’ll letthem down
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