How Credit is Really Determined...

Most of us think that credit is determined by how we make our payments. And to a degree that's true, however, only 35% of our Credit FICO score is determined by how we make our payments. 30% of your score comes from how much debt you have, 15% from the age of your credit, 10% based on the establishment of new credit, and 10% is based on having a mix of credit with Credit Cards, Installment loans, and a Mortgage. An inquiry can lower your score by 5 points. Multiple inquiries within a 14-day period count as only 1 and inquiries within the 30 days prior to the scoring do not count at all.

Inquiries made by Credit Card companies to check your credit status do not count against you. However, if a Credit Card company checks your credit and you take the card company up on their offer, that affects your score, as you will be opening a new account.

One late payment can reduce your score by 50 to 100 points. And a Bankruptcy can lower your score by 200 points. Negative credit can stay on your account for 7 years (depending on when the account goes negative) and a Bankruptcy up to 10 years. Most mortgage lenders consider credit Counseling, as an unrecorded Bankruptcy and they won't lend to you if you are in such a program. So, if you are really not behind on your payments, don't let these programs lure you into their services so as to lower your rates or payments. This will inevitably hurt you more than help you.

Debts that originated on December 29, 1997 or later that have developed a negative payment history will fall off in 7 years from the date of the last payment. Debts that originated before that date will fall off after 7 years from the last activity date. Therefore, contacting the Creditor at this time for an update on a outstanding balance will restart the clock. Therefore, you are better off allowing these accounts to simply fall off your report at the end of their upcoming 7-year point.

Closing accounts can hurt your score if you close older accounts that shorten your credit history period. The relationship of your card balance to your credit limit is also calculated. That is why it is best to keep your card balances at 35% or lower of your limit. As such closing accounts with higher limits can hurt you because it may reduce your balances to limits ratio.

Once you discontinue making payments on a debt, the creditor will most likely write off the debt as a charge off. This is an accounting measure benefiting the Creditor. But this does not relieve you of your debt responsibility. Your account will probably then be turned over to a Collection Agency. This will show up as two separate delinquencies derived from a single incident of negative payment history. This will be calculated into your score as two negative marks.

The Collection Agency may then turn your account over to another Collection Agency, thus creating a third negative entry on your report stemming from the singular derogatory payment history. When such duplications occur, you should request that the duplications be removed from the 3 Bureaus.

Once the damage has been done, it may not benefit you in paying off old charge offs. Often times the numbers reported to the Bureaus by the Collection Agencies and the numbers reported by the original Creditor can differ. If the report shows that your Creditor is reporting your account with a Zero balance (primarily because they have turned the account over to a Collection Agency), and you pay off the delinquency at this point, it will not improve your score. If on the other hand, the account shows a balance, and you pay it off, it could improve your report. However, as a part of the process, you need to negotiate with your Creditor to have the payment reported to the Bureaus as Paid Off rather than as Settled. There is a significant difference in how the computer will calculate the difference.

If you are involved in a Divorce situation and as a part of the settlement, your debts are divided up, you are NOT relieved of financial responsibility on debts that are awarded to your ex-spouse. Even though the Judge may sign the decree dividing up the debts, his signature only states that the court does not dispute with the agreement derived between the two divorcing parties. However, no one has asked the Creditors if THEY agree to this division of the debt for which you promised to repay. The Creditor typically granted credit based upon the signature of both parties of the marriage. Therefore, both are responsible. Most Credit Card companies will require that the old joint account be closed and a new account established based upon the credit of the individual keeping the account.

More commonly though, the Creditor will require that the account be paid off in it's entirety and the account closed before a new account will be opened for the individual that wants to keep an account with that Creditor. Likewise, with Installment loans and Mortgages, the loans will have to be paid off before a new account can be established. With a Mortgage, the party keeping the house will have to Refinance the Loan before the name of the ex-spouse can be removed. Even if the Judge has a spouse Quit Claimed off the property, releasing all interest in the Property, this does not release ones responsibility to the debt.

Notably, the difference in legal documents is the Note (promising to repay the lender the mortgage amount) and the Deed of Trust (giving ownership to the property). A Quit Claim Deed, removes the ownership interest in the property from the spouse that is giving up the property. Again, signing the Quit Claim Deed and having a Divorce Decree in hand will NOT release one from their responsibility of the Note, or Mortgage loan. If you want to have your name removed from the debt, your spouse who is keeping the house will have to refinance based on their credit and income alone, thus paying off the loan your name is on and reestablishing a new loan in their name only.

If you marry into bad credit, it need not affect your credit. Your credit is YOUR credit and your spouses credit is theirs. As long as you keep your credit separate, your credit scores will not commingle. However, if you apply for a card or other loan jointly, that is when your scores start to cross over. If you marry someone with bad credit, start working on improving their credit right away.

If you are applying for a home loan and your spouse has bad credit, you can apply for the home loan in your name only. However, you will only be able to count your income for the loan. In many cases, you may need your spouse's income to qualify. But it is possible that even if your income is not sufficient enough to qualify on alone, there are loan programs available known as a Stated Income loan, where you do not have to prove your income. In this way, you can state an income sufficient enough to qualify on and not have your spouses credit report pulled to apply for the loan. You purchase the home separately. However, in some states Community Property laws prevail so your spouse would still have their interest in the home, but just not in the loan it' self. In this case, you would, in essence, be buying half the house for the entire purchase price, debt and responsibility. It is conceivable in this example, that if a divorce were to later follow, your spouse might be awarded the home and you would have full responsibility for the loan.

Most people eventually refinance their original home loan. So, attain the home loan, then work on repairing your spouses credit report and credit score. Eventually, you will be able to bring up their score enough to refinance your home and add your spouse to the home loan.

For those that do not have much in the way of credit established, FICO scoring is now starting to look at ways of evaluating these people by looking at bank black lists, those that bounce checks, Pay Day lenders, and Rent to Own accounts. It is estimated that 50 million people will fall into this category of people that either have no credit or credit that is too thin to calculate.

The importance of Credit Scores is now being evaluated, not only by Creditors, but by Insurance companies and Employers as well. Employers can review credit as an indicator of character and financial risk and Insurance Carriers are now looking at Credit scores as an indicator of those most likely to report a claim for monetary gain.

The bottom line is to Correct your errors with all 3 Credit Bureaus, Pay your Bills on Time, Pay down your Debt, and Apply for Credit Sparingly.

About The Author: Shelly Lambert is the owner of Financial Security Services. If you need help, give me a call. Call Shelly Lambert at (360) 871-1028. I have been helping people with their Home financing needs for 22 years now. As a part of that service, I can also help you with your Credit rebuilding.