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Know the Basics of the Credit Score

Many people have heard about credit scoring but do not understand the basic facts about what it is and how it works. So let’s go over some of the basics.

The Fair Isaac Corporation (FICO) first developed models (or algorithms) for calculating credit scores in the 1950s. Credit scores started gaining widespread use in the late 1980s and gained even more attention in the 1990s when mortgage lenders began considering credit scores in their loan making decisions. Today credit scoring is used as a predictor of risk and decision making for loans, approving credit cards, opening bank accounts, mortgages, utility accounts, auto financing, insurance rates, and even employment background checks. Credit Scores are found on a Credit Report which supplies the information that the credit score is derived from. There are over 50 items of information on a credit report that are used in developing the credit score.

A credit score is a number that reflects your creditworthiness at a given point in time, and can change as information on the credit report changes. There are many different types of credit scoring models used today but the most used and accepted by the lending community is the FICO score. While each of the 3 major credit bureaus use the FICO model they each use a slightly different representation. There’s Equifax’s “Beacon Score”, Trans Union’s “Classic Score”, and the Experian’s “FICO Risk Model”. The scoring range is 300 – 850. Fair Isaac divides the scoring range into five risk categories:

780 – 850 – Low Risk
740 – 780 – Medium-Low Risk
690 – 740 – Medium Risk
620 – 690 – Medium High Risk
620 – Below – High Risk


It is also important to know that there are even different scoring models at the credit bureaus for the specific industries that use them. For example the credit bureaus will sell the auto industry a score calculated specifically for them, while selling a slightly different version designed to the insurance industry. This is done because risk factors for these industries may not be exactly the same. Even the credit score that is sold directly to the consumer may vary slightly from the score that is sold to specific industries. All this can make credit scoring difficult to understand to the average person.

Consumers must also appreciate that while we do have the right to free credit reports (at least one per year from each credit bureau) the same is not true or credit scores. The score’s must be made available to the consumer but the bureaus do have the right to sell the scores at reasonable rates. If a consumer chooses to buy their score directly from the credit bureau it will not negatively affect the consumer’s credit score. When a bank or auto dealer buys your score with your permission to make a lending decision this inquiry will affect your score.

The consumer should also understand that there are many credit bureaus and reseller’s out there selling credit scores. Some of these providers do not sell scores using one of the FICO models. These scores are termed FAKO scores because they can be deceiving. For example if your bank is using the FICO model to determine if you will be approved for a loan and you buy a Vantage credit scores whose model uses a scale that goes from 501 to 990 it will be very difficult to compare the two scores. We recommend that when you purchase your credit score make sure the seller is providing a FICO score to avoid confusion.

Protect your Social Security Number

The most important nine digits in your life are your Social Security number. This number is yours and yours alone, since 1936 when the government first started issuing Social Security numbers they have never had the need to duplicate a number. They were never intended to be used the way we do in today’s society; however because of its uniqueness and the fact that they stay with you your entire life many industries have found them to be the most foolproof vehicle for identification.

Not only are they used by many government agencies like the Social Security Administration (SSA), Internal Revenue Service (IRS), and Department of Motor Vehicles, but also Banks, Credit Unions, Insurance Providers, College Admissions, and too many others to mention. This is one of the reasons that Identity Theft has become one of the fastest growing crimes of our times. Just try to imagine how many databases around the world may have your Social Security number stored, and how many people may have access, whether intended or not.

For this reason you must be the first line of defense for your own Social Security number and do everything in your power to protect its integrity. The following is a list of tips to help you protect your Social Security number:

* Never carry your Social Security number or card, Passport, or Birth Certificate in your wallet or purse. You should memorize your number and leave the original documents in a secure place like a locked safe at home or in a safety deposit box.
* Do not share your Social Security number when it’s not necessary. Many businesses will ask for it during a transaction, however it is rarely needed unless you are banking, trading stock, buying property, or they require a credit inquiry to complete the transaction.
* The only persons you should share it with are your parents if you are a child and a spouse if you are a married adult.
* Do not use any part of your Social Security number as a PIN #, and make sure it is not used by your states Department of Motor Vehicles as the ID number on your Drivers License.
* Destroy all documents that contain your Social Security number or any other sensitive personal information so they do not fall into the wrong hands. This includes credit reports, credit card statements, tax forms, bank statements, utility bills, pre-approved credit card offer, etc.
* Shred all of these sensitive documents using a good quality shredder before discarding.
* Be aware of what’s on your credit reports; check them at least twice a year. This is usually the first place you will notice the activity of an identity thief. If you find any new inquires or accounts you did not initiate you may be a victim of identity theft.

Credit & Savings Tip

Pay off Your Credit Card

Did you know that carrying a credit card balance is costing you money each month, and may be hurting you credit score as well.

Save Money Each Month - On average, consumers who carry a balance owe $2,200, on which they pay 15.2 percent in annual interest charges. Eliminate that and you can save $28 per month on your household budget. Some 15 percent of consumers carry balances of $10,000 or more, according to Fair Isaac, the credit-scoring company; these folks can save at least $125 per month by paying off their debt. Not to mention you will raise your credit scores by having lower revolving debt!

How to Do It - Paying off your balance is easier said than done. The trick is to stop charging. Then pay more than the minimum required each month until it's paid off. Dig up cash for this from your U.S. Treasury stimulus check, garage sales, IRS refund, or extra work part-time.

Rusty and CP (Credit Puppet) want to hear from you.

Please let us know any questions or subject matter you would like us to cover on our blog-site or in our upcoming video's. We want to help you understand credit and how it affects your everyday life. Please visit www.youtube.com/creditpuppet for current video.

The man behind the Puppet !

We wouldn't really expect you to take credit advice from a Puppet. Like the old saying goes, behind every puppet is a good person. Well I guess that's not an old saying.

Let me introduce myself; my name is Rusty Cullen and I am an independent Certified Credit Counselor with many experiences helping people get out of credit related jams and showing them the way to rebuilding a solid credit profile. That is what this blog-space is dedicated to, helping our visitors and bloggers get helpful knowledge. It is also a forum to ask pertinent questions you may be having about credit issues from CP (Credit Puppet), myself, or other bloggers that you may need answers for.

Why the Puppet? Well there are many places on the internet to get credit information, believe me I've been to too many to mention. They all have one thing in common. BORING!
I wanted to create a helpful credit forum that wasn't just a bunch of redundant credit information, but a place with very pertinent data that is disseminated in a fun way. So we are going to take a usually dry subject matter and try to inject some fun into it.

So join in the fun, add a post, ask a question, take our poll, and we will have fun learning and improving our credit together.

Thanks,
Rusty Cullen

A good reason for getting your credit right !

Bailouts, market crash, layoffs, bank failures, credit crunch, foreclosures………………

If you turn on the news today it seems like this is all you hear, gloom and doom about the financial future for all of us. And while we are certainly in the midst of some hard economic times there is some good news on the horizon. Every recession in our countries history has had a recovery that eventually led us back to prosperity. The question is will you be prepared?

Whether its incentives in the Presidents stimulus package, the corrections in the housing market, or the retooling of the automobile industry the next few years should be ripe with examples of opportunities for those who have set themselves up to take advantage.

If you are planning on using the new tax breaks for buying your first home, upgrading your present home to energy efficiency, or getting a new vehicle, the stage has been set. Maybe you’ve been thinking of refinancing your current mortgage to the lower interest rates available or taking advantage of the glut of affordable homes that are available due to the mortgage crisis for investment purposes. Yes in most segments of the emerging economy it’s going to be a buyers market!

To reap the benefits of these great opportunities there is going to be one common denominator; an excellent credit rating. Even as I write this article there are many exceptional deals available in the auto and housing markets for those who are employed, have low debt ratios, and outstanding credit scores.

If you do not fall into these three categories now is the time to fortify your position. Get a copy of your credit report and start working on cleaning it up and raising your credit scores. Pay down your debt as much as possible now, this will help raise your credit score as well as give you the availability to take on these new opportunities in the future. Proper planning today will create a financial situation that will let you participate in the next economic recovery and not leave you sitting on the sidelines.