Decoding Your Credit Score
By Loral Langemeier (as seen on the Dr. Phil Show and website)

Have you ever wondered why your credit score is so important? Why is it that little number determines whether we are trustworthy or even a good person? Simply put, your credit report is a track record of your financial promises and you are scored at how well you keep those promises. It's really just a promise game. You may not want to play but if you don't you will pay more in the end.

The credit game is easy. The objective is clear. Keep your promises and get high scores. I like to think of it like being on the honor role at school or being the kid going to Saturday school.

There is a lot of confusion when it comes to interpreting the scoring system. Misconceptions throw off the game so be clear on the facts and rules. If you have questions find out the answers. Here are a few I am regularly asked…

Why is my credit score so important?

Your credit report and score serve as a history of everything you buy, borrow, and acquire when you do not use cash, instead you borrow and promise to repay for your purchase. This is called a Trade Line. This line reflects the relationship between you and a lender.

Your credit report shows all your trade lines; mortgage, credit cards, car payments, etc. it tells how much you borrowed and if you pay on time or if you pay late. This is how they keep score. You have to play by their rules. It's just the game don't let it get the best of you… just do it.

Credit scores can range anywhere from 350 to 900 points, with the average being between 620 and 640. The better your credit, the higher your score.

Keeping score is a way for lenders to assess their risk. The higher the score the lower the risk. If the score is low the risk is high and you guessed it, the more you pay.

So if you're just now grasping this concept and find yourself with a low score start playing the game better and things will look up for you soon. Don't fall into the thinking "it's too late to fix this mess" that will keep you there forever. It's not too late.

What is a credit bureau?
Credit bureaus are independent agencies that verify and rate your credit. There are three major credit-reporting agencies:
  • Equifax
  • Trans Union
  • Experian
Generally most lenders review all three reports, however some are more dominant in different regions. If you're doing what you're supposed to then you are fine. If you have blemishes anywhere they will be found. Sellers want to sell and they usually will choose a lender that will provide the best financing based on your median score.

Should I check my credit? YES! Obtain copies of your credit report from all three bureaus once a year. It's an absolute must! And it's free, no excuses. Google each bureau name and request your free annual copy. Be careful of offers for free credit reports. You're better off to go directly to the bureaus it self. If you are married you need to get one individually and jointly.

Check it carefully for mistakes and suspicious activity. No one is looking out for you in this game you have to protect yourself. Knowing what is on there also prevents you from trying to obtain credit when it is obvious you will not be approved. Too many inquiries on your credit will negatively affect you, an overlooked fact among consumers seeking lenders.

I'm trying to repair my credit, should I check more often than once a year?

You have to. If you are paying off old debts that appear on your credit report send a copy along with a cover letter to the all the bureaus' the collection appears on, by Federal Trade Law you must do this in writing. Give it 45 to 60 days and check your credit. If the collection still appears contact the agency by phone, explain the letter and ask them to update your report as being paid. NICELY, now kids they don't make the rules but they can help you and generally will do so.

How long do items stay on my credit report?

That all depends on how you've been playing the credit score game, for instance if you have a credit card that was closed by the lender for non payment or what they call a "charge off" it stays for seven years. If you fell into a series of unfortunate circumstances and filed bankruptcy it will camp out on your report for at least 10 years.

Now, you've might have had bad luck with credit, if so I know you're thinking… "Uh Oh!" Don't freak out, start paying off the debt and once you have two full good years after you have satisfied your debts (see article on Gone to Collections: 4 Easy Steps to Repairing Your Credit) lenders will be more inclined to give you a second chance. 'Bad things happen to good people' there are lenders that recognize that, it's important to treat these second chances with high priority. You'll earn more points and start winning at the game again.

Do my every day bills get reported to credit bureaus?

Here's a good question. Yes and no. Utility companies will report you if they have made attempts to collect on your bill and you have not paid. They don't like that and it knocks points off your score. However if you are a person that has not yet established credit but have paid your utilities on time it won't show up, just ask and they will mail (or email) a print out of your payment history. Lenders who specialize in first time credit will consider good payment history for utilities when determining your risk factor.

So it's very important to pay your bills on time that goes for your rent too! If you have collections, on the other hand, it may be some leverage for you when you're ready to re-establish your credit.

How does the scoring work and how do they keep track?

That all depends on the scope of your borrowing habits, if you pay on time you get better points. If you are conscience of your debt to income ratio… even more bonus points! Your debt to income ratio is how much you are spending each month compared to the amount of money you actually bring in. Keep this ratio balanced and watch your credit score rise! Mortgage lenders really pay attention to this more than any other lender. This determines risk; they are asking, "With all these other bills can they afford $1200 a month?"

I am sure there are standards and formulas when it comes to how the score is really kept, does it even matter? Here's some tough love for you, pay your bills on time. If you aren't find a way to do it. If you have collections you have to settle them. Stay on top of your game for 2 years and you'll be ok. And if you have been doing what you promised, good for you but you have to keep doing it.

Is it too late to fix my credit?

This kind of thinking is what holds so many people back. They push it away, try to tune it out, and hope 7 years goes by quickly so it will all just go away. This kind of thinking just blows my mind! This kind of programming that got you in trouble to begin with. Before you even begin to fix your credit you have to start changing the way you view money and define the line of power money holds in your life. Once you have come face to face with pre-programmed money issues you will find repairing your credit becomes the natural next step.

Please read my article on credit repair entitled… 'Be your own credit repairman!'

When should I start to establish my credit?

You should only begin establishing credit if you are able and willing to keep the promises you make to lenders. If you are the type to get a bit impulsive with money do yourself a favor and wait till you have come to terms with this issue.

If you consider yourself to be a good consumer, have stable employment, and recognize the importance of establishing good credit then go for it. My advice is to start out with something small and slowly build credit as needed. Be very aware of interest rates and bad deals. If you sense a red flag, check it out. Protect yourself and your credit. Lastly pay special attention to your debt to income ratio. Keep it reasonable and keep your score high.

Ready GO!

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