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Credit 101

There are no if an or buts about it, unless you have endless amounts of cash you must use and depend on credit in some way form or fashion. At some point in time if you are going to live a normal life you will be in the credit cycle.

My simple version of the credit cycle is as follows, once you get a job, open a bank account or just fill out a application to get credit the Credit Bureaus go to work gathering this information and compiling it into what is commonly called a Credit Profile. Your credit profile is evaluated into a numerical Credit Score. Creditors/ Lendors gain access to your credit profile and credit profile from the credit bureaus to determine whether you are worth giving credit too. Creditors or Lenders that you come in contact with or gain credit from  report your Credit History back to the credit bureaus to be added to your credit profile. This cycle continues on and on with your score adjusting as needed with the new information thats added to your credit profile.

Credit bureaus or credit reporting agencies are the gate keepers when it comes to your credit profile and credit score. Their are many credit reporting agencies but the most important ones, also known as the 3 major bureaus: Equifax, Experian and Transunion. Your Beacon, Fico and Empirica score are based solely on the information in your credit profile maintained by the credit reporting agencies. Other scores may be based on a combination of credit information and other information that you supply on your credit application. 

All three credit reporting agencies  may report information on your personal credit and issue a credit score no matter where you live, but each zip code has one credit reporting agency that is the "preffered credit" bureau for that area.If you are thinking of purchasing a copy of your credit report from only one reporting agency, then choose the "preferred agency" in your zip code. Remember to check and see if your state mandates a free credit report. You may be entitled to a free credit report if you have been denied credit within the last 30 days.

Click here to see your preffered bureau and if your area mandates a free credit report.

The 5 Main Catergories of Your Credit Report

There are five main catergories of information in your credit report that is evalueated in your Fico, Beacon or Empirica score . The five categories are, in order of importance: Payment history — what is your track record? 35 % of the score Risk predictors here look at: ·   Severity – how bad are the delinquencies? ·   Recency – how recent are they? ·   Frequency – how many times did it occur?

Amounts owed — how much is too much? 30% of the score       Risk predictors here look at: ·   Large outstanding balances ·   The ratio of balances to credit limits Length of credit history — how established is yours? 15% of the score       Risk predictors here look at: ·   Age of the trade lines - (the age of the oldest account, the average age of accounts, or both). Length of credit history — how established is yours? 15% of the score       Risk predictors here look at: ·   Age of the trade lines - (the age of the oldest account, the average age of accounts, or both).

New credit — are you taking on more debt? 10% of the score Risk predictors here look at: ·   Number of inquiries and new account openings  Types of credit in use — is it a healthy mix? 10% of the score       Risk predictors here look at: ·   Number of trade lines reported for each type: bankcards, retail, department store cards, installment loans, etc. Types of credit in use — is it a healthy mix? 10% of the score       Risk predictors here look at: ·   Number of trade lines reported for each type: bankcards, retail, department store cards, installment loans, etc.

Credit score Ranges Equifax                   Beacon         300-850   Experian                 FICO             340-820   Trans Union                 Empirica       150-934

What is a good score?

Scores 500-600 Poor score.  This usually is from slow pays on loans, charge offs, student loans and medical bills.  You will most likely be charged the highest interest rate allowed by law in your state, or turned down completely.  You'll be considered "special finance.

Scores 600-650  Fair score. You will be able to obtain credit more easily than the weak credit category.

Scores 650-700  Good score.  As long as your debt to income ratio is low you will be approved, but will likely pay a higher interest rate on your loan. Scores 700+ Great score. You are considered a "prime borrower" and will have no problem getting a great interest rate on your home loan, car loan, or credit card.

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