Questions about my credit

Factual Questions
1

I received a quarterly credit report and had some questions about my credit score (which I will withold at the moment because I’m not sure its safe to even mention the actual number).

I know that 850 is the highest score you can get, and that the credit reporting agencies use some mystical economic voodoo to calculate my number. However, even getting a pamphlet explaining what determines my credit score still raises some questions:

1.) Is it possible to know EXACTLY how these places determine credit rating? I would assume they keep some aspects of it under wraps, otherwise couldn’t people manipulate their credit scores? Would that be considered fraud or is it a legitimate way of raising your credit if you knew the exact numbers?

2.) I know my current credit score, but unfortunately I don’t see the utility in the number itself. I’ve never seen a store/lender that had some easy-to-decipher chart showing intrest rates offered at various credit scores (like this:)
Credit
Rating/APR
500/12.5%
600/10.8%
700/8.2%
800/5.3%

…in fact places like dealerships seem kind of mum on the topic unless you are actually buying something. They just say ‘This APR with approved credit’. I’m kind of curious about this, because I’d think these days (what with identity theft and all) people are more familiar/educated about their credit scores. Why not just say, “This offer with a credit rating of 700+” ?

3.) I’ve heard paying bills raises credit scores. I pay health insurance, credit card, and cell phone bills, and never missed a payment. (The other bills I write a check to the landlord) I would figure my credit would have gone up because of it, but instead it has stayed the same. I know that debt you owe affects it, and I’d figure paying down my credit card would boost my credit.

4.) Have any economists ever projected the potential savings from having a credit score of ‘N’? The higher your credit, the easier you life is (theoretically) because you borrow at lower interest rates, get better deals on financing (like being able to finance stuff interest-free for set spans of time) and have to pay fewer deposits/if any on things like cell phones.

2

[QUOTE=Incubus]
I received a quarterly credit report and had some questions about my credit score (which I will withold at the moment because I’m not sure its safe to even mention the actual number).
[/QUOTE]

There’s no harm in mentioning the number because it’s not unique to you. Everyone’s credit score is a 3-digit number between 350 and 850.

[QUOTE=Incubus]
1.) Is it possible to know EXACTLY how these places determine credit rating? I would assume they keep some aspects of it under wraps, otherwise couldn’t people manipulate their credit scores? Would that be considered fraud or is it a legitimate way of raising your credit if you knew the exact numbers?
[/QUOTE]

No. Each of the credit bureaus has their own propriety formula for calculating a score, and that doesn’t even begin to factor in individual scoring methods among insurance companies, mortgage brokers, car dealers, etc. The risks that each of those parties choose to assume are going to be different, and thus be weighed differently.

[QUOTE=Incubus]
2.) I know my current credit score, but unfortunately I don’t see the utility in the number itself. I’ve never seen a store/lender that had some easy-to-decipher chart showing intrest rates offered at various credit scores (like this:)
Credit
Rating/APR
500/12.5%
600/10.8%
700/8.2%
800/5.3%

…in fact places like dealerships seem kind of mum on the topic unless you are actually buying something. They just say ‘This APR with approved credit’. I’m kind of curious about this, because I’d think these days (what with identity theft and all) people are more familiar/educated about their credit scores. Why not just say, “This offer with a credit rating of 700+” ?
[/QUOTE]

You will never see such a chart. Again, different lenders assume different risks, and assign interest rates accordingly. The advertised interest rates are generally for those people with excellent credit, i.e., scores above 700 or 725, but there are always those other factors that come into play for any given person.

[QUOTE=Incubus]
3.) I’ve heard paying bills raises credit scores. I pay health insurance, credit card, and cell phone bills, and never missed a payment. (The other bills I write a check to the landlord) I would figure my credit would have gone up because of it, but instead it has stayed the same. I know that debt you owe affects it, and I’d figure paying down my credit card would boost my credit.
[/QUOTE]

Paying regular utility and insurance bills on time does diddly squat for your score. Being late on them, or on an increasingly wide array of other bills (e.g., parking tickets, library fines) can cause your score to tank. Think of it as your unpaid creditor taking revenge upon your deadbeat nature. :wink:

The only bills that make a difference are your credit cards/lines of credit, mortgages, and other installment loans (cars, furniture, personal, etc.). Even then, there are other factors that come into play - how long since you were reported late on a payment; your utilization (percentage of credit used, both per credit line and as a function of your total credit); the number of credit lines you have active; the length of your credit history; debt to income ratio… Bottom line is, there is no direct link between making a payment on time this month and seeing your credit score go up.

[QUOTE=Incubus]
4.) Have any economists ever projected the potential savings from having a credit score of ‘N’? The higher your credit, the easier you life is (theoretically) because you borrow at lower interest rates, get better deals on financing (like being able to finance stuff interest-free for set spans of time) and have to pay fewer deposits/if any on things like cell phones.
[/QUOTE]

The higher your credit score, the easier it is to get more credit, and at better rates. That’s generally true, and not theoretical. I don’t know if any economists have done specific studies on this, offhand.

If you want to learn more about the credit game, I’d recommend going over to the forums at CreditBoards and, as they say, “read read read till your eyes bleed.” The amount of info is a little overwhelming and confusing at first, but you can learn an awful lot over there. I know I did.

By the way, you mentioned getting a quarterly credit score. Unless you are getting that score from Equifax, or from myfico.com (for TransUnion and Experian), you are not getting a real FICO score - you’re getting some proprietary company score that may be drastically different from your FICO score, which is the score that credit card companies, say, will be looking at when you apply for a new credit line. Quarterly credit reports are good for tracking changes to your credit history, as a measure against ID theft, but not much else.

3

I’ve also heard that they have “ranges” of scores they use when extending you credit and rates and that a perfect score of 850 will not get you anything better than someone with a score of 750. Both are good. One is better. Lenders don’t care that one is better, they’re both accepatable for their “good” rates.

They even said that once your score is in the “good” range you should just focus on keeping it there. Trying to improve it from that point is just a waste of time.

4

Incubus is right on all that. Credit scores above 720 are mainly a curiosity. They don’t do anything for you because no one has any criteria set higher than that. Only certain types of bills count towards your credit score and utilities and other similar things are not among them. Credit scores generally reflect credit accounts and bills aren’t credit. However, any bill could go to a collection agency after a long period of non-payment and that could hurt your credit score. One thing a lot of people don’t realize is that no late payment can hurt your credit until it is 30 or more days late. You can pay all your bills 15 days late every month and it will never hurt your credit although there may be late charges and other negative things imposed by the lender.

5

[QUOTE=Shagnasty]
Incubus is right on all that. Credit scores above 720 are mainly a curiosity. They don’t do anything for you because no one has any criteria set higher than that. Only certain types of bills count towards your credit score and utilities and other similar things are not among them. Credit scores generally reflect credit accounts and bills aren’t credit. However, any bill could go to a collection agency after a long period of non-payment and that could hurt your credit score. One thing a lot of people don’t realize is that no late payment can hurt your credit until it is 30 or more days late. You can pay all your bills 15 days late every month and it will never hurt your credit although there may be late charges and other negative things imposed by the lender.
[/QUOTE]

Wow, thanks for the info Shagnasty! I didn’t know about the late-payment thing, it is good to know.

Experian/TransUnion says my score is 733. Equifax says its 741. I knew the closer to 850 the better, I was just curious how good 733 was.

6

The only real score is the FICO score, and that is critical for Mortgages. You probably don’t really know what your credit score is.

"Fair Isaac Corporation and refers to the best-known credit score model in the United States. The FICO score is calculated by applying statistical methods, developed by Fair Isaac, to information in one’s credit file. The FICO score is primarily used in the consumer banking and credit industry. Banks and other institutions that use scores as a factor in their lending decisions may deny credit, charge higher interest rates, or require more extensive income and asset verification if the applicant’s credit score is low.

Credit scores are designed to indicate the likelihood that a borrower will default. No public information is available to determine what the scores mean in terms of statistics. A separate score, BNI, is used to indicate likelihood of bankruptcy.

Although Fair Isaac’s Web site offers to sell consumers their “FICO score,” the company actually uses slightly different scoring methods to rate a consumer’s suitability for three different types of credit—mortgages, auto loans, and consumer credit—reflecting the differing risks of these various types of lending. It is not unusual for these scores to differ by fifty points or more for the same borrower. (The number offered to consumers is the consumer credit score.)

In the US, three major credit reporting agencies (often inaccurately called “credit bureaus”), Equifax, Experian and TransUnion, also calculate their own credit scores. Scores, many with trademarked names, differ by what they are meant to predict, statistical methods used to determine a score, as well as what information is used and how it is weighted. For example, Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores are available only from Equifax; Empirica, Empirica Auto 95, Precision Score, and Precision 03 at TransUnion; and Fair Isaac Risk Score at Experian. While these versions are developed for the agencies by Fair Isaac, they differ and are periodically updated to reflect current consumer repayment behavior. The NextGen Score is a scoring model designed for consumers. Other consumer scores are published by MyFICO.com and by Community Empower (the CE Score).

In 2006, in an attempt to make scoring more consistent, the three major credit reporting agencies introduced VantageScore. VantageScore uses a different range from FICO (from 501 to 990) and also assigns letter grades from A to F to specific ranges of scores. A consumer’s VantageScore may still differ from agency to agency, but the discrepancies would be entirely due to differences in the information reported to the various agencies, not due to differences in scoring models. Since FICO is still widely used by lenders, the agencies continue to offer FICO scores (or their closest equivalent) as well…Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following components and the approximate weighted contribution of each:

* 35%, punctuality of payment in the past (only includes payments later than 30 days past due)
* 30%, the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
* 15%, length of credit history
* 10%, types of credit used (installment, revolving, consumer finance)
* 10%, recent search for credit and/or amount of credit obtained recently

The above percentages provide very limited guidance in understanding a credit score. For example, the 10% of the score allocated to “types of credit used” is undefined, leaving consumers unaware what type of credit mix to pursue. “Length of credit history” is also a murky concept; it consists of multiple factors - two being the oldest account open and the average length of time an account has been open. Although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35%. Bankruptcies, foreclosures, and judgments affect scores substantially, but are not included in the somewhat simplistic pie chart provided by Fair Isaac."

7

[QUOTE=Shagnasty]
One thing a lot of people don’t realize is that no late payment can hurt your credit until it is 30 or more days late.
[/QUOTE]

Not necessarily. While the universal default clause usually triggers after 30 days of not paying a bill, it can occur earlier, especially if the late payment date for any account is less than 30 days.

8

Also, I believe I’ve read somewhere recently that the median FICO score in the US is ~670. Can’t recall where I saw that, though. And cursory search yields a bewildering array of sites.

9

[QUOTE=Duckster]
Not necessarily. While the universal default clause usually triggers after 30 days of not paying a bill, it can occur earlier, especially if the late payment date for any account is less than 30 days.
[/QUOTE]

That is for the credit card companies themselves. The earliest late bucket on credit reports starts at 30 days and that is where the score gets calculated from.

10

[QUOTE=Incubus]
Wow, thanks for the info Shagnasty! I didn’t know about the late-payment thing, it is good to know.

Experian/TransUnion says my score is 733. Equifax says its 741. I knew the closer to 850 the better, I was just curious how good 733 was.
[/QUOTE]

It means you would get better rates than I would (score of around 660) but the same as my boyfriend (score of around 780). So yes, you’re in good shape.

11

How far back to mortgage companies look in your history? Mine looks pretty good until you start looking back past 5 years ago, then there are quite a few +30’s and a few +60’s. I still have late payments showing up from the early 90’s on accounts that have been closed more than ten years.

12

Some of the lending institutions (auto loans) that my company has a relationship with do offer different rates for credit scores of, for example, 760+ – so it’s not necessarily true that once you hit 720 you’ve maxed out.

Quick somewhat related anecdote:

One lender had a Credit Tier structure (i.e., Tier 1 = 720+, Tier 2 = 700-720, etc…), and some statistical analyst discovered that Tier 3 customers defaulted more often than Tier 4 – so the next time they published rates, Tier 4 got a better APR rate than Tier 3. Odd? Yes. Does it make any sense? I suppose, but I have to assume their sample size was too small for that statistic to have any meaning…and yet they acted upon it.

And for the record, that’s far from the dumbest thing I’ve seen a lender do.

13

[QUOTE=Patty O’Furniture]
How far back to mortgage companies look in your history? Mine looks pretty good until you start looking back past 5 years ago, then there are quite a few +30’s and a few +60’s. I still have late payments showing up from the early 90’s on accounts that have been closed more than ten years.
[/QUOTE]

There appears to be a lot of folklore, and not a lot of specific knowledge on the mortgage front.

Rough guideline as to how long certain things remain on your credit report (it varies in part due to differing state regs):

Bankruptcy - 10 years from date of filing
Details of credit line info (including lates) for an active account - past 7 years
Listing of a closed account (whether closed by customer or creditor) - max. 7 years
Chargeoffs - 7 years from date of first delinquency (i.e., the last time you made a regular payment on an account before it was charged off)
Inquiries - 2 years

The general view over at CreditBoards is that lates hurt the most in the first 2 years after you incur them, after which they don’t look good, but don’t impact your score as much. Some people claim that mortgage brokers have the ability to see your credit record going back further than 7 years, and that they have the ability to see lates that may have been expunged from your credit report via disputes (a “full financial,” I think it was called). Posters over there who are in the mortgage industry say, however, that they have spent entire careers without ever seeing a full financial report pulled, so the consensus appears to be that you ought not to worry about it.

As to your lates appearing in closed accounts older than 10 years:

This is a bit of a sticky question. On the one hand, those accounts are bumping up the average age of your credit lines, which is a good thing and helps bring your score up. (It’s more of an issue when you don’t have tons of accounts on your report, say, less than 20.) On the other hand, the lates will still carry some negative factor, although not probably not too much given the age and the fact that they are only 30s and 60s. Folks will argue that having a clean report is worth the loss in average age of credit lines, and if you think this might be true for you, then you can dispute the closed accounts off your credit report entirely.

By the way, a credit reporting agency is not obliged to continue reporting any closed account if it’s been inactive for awhile. In fact, they have been known to just let those closed items “drop off”, especially if you have a lot of newer and/or active accounts. Your closed accounts probably should have dropped off a long time ago, and would eventually unless you press the issue.

14

[QUOTE=Patty O’Furniture]
How far back to mortgage companies look in your history? Mine looks pretty good until you start looking back past 5 years ago, then there are quite a few +30’s and a few +60’s. I still have late payments showing up from the early 90’s on accounts that have been closed more than ten years.
[/QUOTE]

Anything more than 7 years should not be on your report, except Bankruptcy. That’s the law.

15

Linky:

CRAs may not retain negative information for an excessive period of time. The FCRA spells out how long negative information, such as late payments, bankruptcies, tax liens or judgments may stay on a consumer’s credit report - typically 7 years from the date of the delinquency. The exceptions: bankruptcies (10 years) and tax liens (7 years from the time they are paid).

16

[QUOTE=DrDeth]
Anything more than 7 years should not be on your report, except Bankruptcy. That’s the law.
[/QUOTE]

I’m sorry, but as a blanket statement that is incorrect.

Yes, creditors are generally not supposed to report more than 7 years of history on an active account. However, apart from any requirements under the federal-level Fair Credit Reporting Act (FCRA), individual states can and do specify other time limits for certain types of reporting. (For example, NYS requires paid charge-offs to be removed from credit reports 5 years after the date of first delinquency, not 7 years.) As a result, reporting requirements can be a little hairy to figure out if you moved across state lines while experiencing or recovering from financial woes.

OTOH, if you have a closed account that was in good standing when closed, and it’s over 7 years since it was closed but the credit reporting agencies haven’t stirred themselves to remove it, you are perfectly entitled to have that closed account listed for as long as possible. It contributes to the average age of your credit lines, and may provide a depth of credit history that might not otherwise be apparent.

Even now I have three closed accounts over 7 years old on my credit reports, and I’m perfectly content to leave them there. If those accounts had had a whole bunch of lates on them and I wanted to clean up my report, then it would be my right to request their removal as obsolete.

17

An anecdote:

When I bought my first car, my credit score was in the mid to high 700s (I don’t know exactly) but I had no “deep credit” (long-term loans, I had only credit cards), and so had to get a cosigner on my loan.

Credit score means diddly in some cases.

18

[QUOTE=tiger lily]
I’m sorry, but as a blanket statement that is incorrect.

Yes, creditors are generally not supposed to report more than 7 years of history on an active account. However, apart from any requirements under the federal-level Fair Credit Reporting Act (FCRA), individual states can and do specify other time limits for certain types of reporting. (For example, NYS requires paid charge-offs to be removed from credit reports 5 years after the date of first delinquency, not 7 years.) As a result, reporting requirements can be a little hairy to figure out if you moved across state lines while experiencing or recovering from financial woes.

.
[/QUOTE]

Although States can make their laws more restrictive, they cannot be less restrictive. So they can change it to 5 years but not to 8. So, it is correct as a blanket statment and I backed it by a cite.

I suppose if you want to you can ignore older but harmless reporting. However, Patty O’Furniture was talking about “I still have *late payments *showing up from the early 90’s on accounts that have been closed more than ten years.” Italics mine.

Those late payments more than 7 years old should not be there.

19

[QUOTE=DrDeth]
Although States can make their laws more restrictive, they cannot be less restrictive. So they can change it to 5 years but not to 8. So, it is correct as a blanket statment and I backed it by a cite.

I suppose if you want to you can ignore older but harmless reporting. However, Patty O’Furniture was talking about “I still have *late payments *showing up from the early 90’s on accounts that have been closed more than ten years.” Italics mine.

Those late payments more than 7 years old should not be there.
[/QUOTE]

You said, “Anything more than 7 years should not be on your report, except Bankruptcy. That’s the law.”

The law is supposed to prevent the reporting of negative information (apart from bankruptcy) for more than seven years. It does not say that there should be no information older than seven years apart from bankruptcy. There is a difference, and it isn’t necessarily trivial.

The age of all your accounts - closed or not - goes into determining the length of your credit history. As Film Geek pointed out, it’s a key factor that lenders consider when extending a loan in addition to your score. If you have a very thin credit file - “thin” in this case meaning less than 15-20 credit lines, with most accounts under seven years of age - there could be more benefit in letting an obsolete account with some negative info continue to sit on your report than in disputing the account off simply because it’s old.

Yes, I realize that under FCRA, the lates on Patty O’Furniture’s reports should not be there. If you read long enough on CreditBoards, though, you’d realize that the credit reporting agencies among other organizations frequently ignore the law, or play dumb, until their hand is forced by the consumer. It’s a screwed up system. The question then becomes, as a consumer, how one can make the screwed up system work to your advantage.

So to play the game, Patty O’Furniture has a number of things to think about re the obsolete lates before he takes action. Does he have a thin or thick file? Does he have a significant proportion of new accounts? What’s his debt-to-income ratio like? What is his time frame for applying for a mortgage?

If he’s in the middle of applying for a mortgage right now or plans to in the next three months, and has a thin file and/or “recent” accounts, he might want to leave it alone for now. That’s because removal of those obsolete accounts might well cause his score to drop initially, and it could be several months before his scores recover from the loss of age. If, however, he has a thick file and not many recent accounts, the impact of removing the obsolete accounts is likely to be pretty small, so he could go ahead and clean up his report without worry.

Note that I’m using the words “if”, “might” and so on pretty liberally. I have to, since we none of us are privy to the information needed to figure out exactly what would happen to Patty O’s scores if he disputes his obsolete accounts off. What I’ve written is part of what I’ve learned after about six months of steadily reading about other people’s situations, and asking my own questions, over on CreditBoards. It is a totally eye-opening experience. Creditors hate the place, because people post there not only about laws and regulations, but also their experiences with making the system work to their own advantage.

Especially when it comes to managing credit reports, YMMV.