Credit

Before you begin the process of repairing your credit, you need to understand how your score is determined by the “Big 3″ credit bureaus (Experian, Equifax, and TransUnion).

So just what exactly is your credit score? Your credit score is an number calculated using a specific formula that lenders will use to rank the risk you run them as a borrower.

It is the most important factor they consider when deciding whether or not they want to loan you money.

Lenders make money off interest rates. They make money off people like you taking out loans and paying them back over a long period of time. So it makes sense for lenders to determine whether or not you will be able to keep your balance up over this period of time because if you can’t, you are no longer an investment. You become a liability, and they want nothing to do with you at that point.

Most people don’t know this, but your credit score is actually broken down into five categories, each with a different weight or importance in your overall score. The five categories are:

•    Payment History – 35%
•    Total Amounts Owed – 30%
•    Length of Credit History – 15%
•    New Credit – 10%
•    Type of Credit in Use – 10%

So as you can see, the majority of your credit score comes from your payment history and the total amount of money you owe in debt. In these two categories, it is late payments and high balances that are going to get you in the most amount of trouble.

Obviously this means that timely payments are VERY important.  All payments that are over 30 days late show up on your credit report at the three big credit bureaus and lenders will see this and make note of it. This could manifest itself in the form of you not being able to get credit when you need it most.

And if you think that these marks will note just go away on their own.  If you do have late payments (negative entries) then they will not come off unless they have already been on your report for 7 years (in some cases longer), or if you have successfully disputed them off your reports.

Since Total Amount Owed is also a huge factor in your score, if you can pay down your debts somehow, then you can quickly increase your score with that alone.

However, most people in this situation would not be in this situation if they had the money to pay off their debts to begin with.

Now that you know how your score is determined, you can begin laying out the framework for repairing your credit — fixing your credit so that you can get loans, credit cards, etc.

We’ll begin discussing this “framework” or gameplan next time.

Till then,

Amanda Layne

Have you ever applied for a charge account, personal loan, insurance or job?

Chances are you have. If you have, they have a file on you. This file includes a bunch of personal and financial information about you. It includes where you live, work, how you pay your bills, whether you’ve been sued, arrested or ever gone bankrupt. And just who are “they”?

They are the Consumer Reporting Agencies (CRAs), small companies across the map that get this information about you and sell it to other companies for a profit.

The CRAs sell this information about you to Credit Reporting Bureaus (CRBs). There are three Credit Reporting Bureaus: Equifax, Experian and Trans Union. What they sell is basically what is called a consumer credit report. You already know that a consumer credit report is used to evaluate how worthy you are financially to receive a loan of any sort.

What’s staggering about all this is how wrong most of these reports that the CRAs sell are. Over 75% of all credit reports contain some sort of error that will affect your ability to get the loan, mortgage or lease or a car you need.

Surveys show that almost all consumers have at some point or another in their lives have a problem with inaccuracies on their credit report. 25% of all credit reports contain an error so great that it will prevent a consumer from getting credit easily.

There are certain rights that all consumers have that very few people know about. It’s my intention to inform you of them now becuase regardless of what anyone tells you, you CAN repair your own credit!

In fact, anyone who has a credit report has a right to dispute anything that appears on your report. Once an item is disputed, the credit bureau must prove that it is true, or they must remove it.

More often than not, what happens is that credit bureaus can’t prove the information they have, and they are forced to remove the information.

The first step is always to get your report so you can see what information the bureaus have on you. As I said previously, there are three of them. It’s more than likely that more than one of the bureaus has information about you, so you should contact all three and get each report.

You can get all 3 reports for free at Free Credit Report.

I’ll share some steps to begin removing negative entries off your credit report in my next post.

To your good credit!

Amanda Layne