Should you consolidate because you have multiple debts?

Not necessarily. Definitely, a necessary condition for debt consolidation is the existence of multiple debts. However, you don’t have to consolidate your loans just because you have a lot of loans. If you’re not finding it hard to cope with your loans, then you may go on as you are doing though, of course, you may think of restructuring your loans and paying some off just so you can get the best rates and terms possible.

Should you consolidate when you are receiving credit collection calls?

Yes, you should begin looking at debt consolidation options when you are already receiving collection calls. Credit collection agents are some of the most persistent personnel in the world. After all, most of them get paid through commission. Thus, they’re deeply committed to making you pay. Unscrupulous debt collectors would even begin harassing you just so you’d be bugged enough to make a payment.

If you’re at this advanced stage, the best way would be to approach a reputable debt consolidation agency. There are debt consolidating agents who will let you consult for free, and they can certainly help you sort through your financial problems. However, going to a professional debt consolidation agency will give you more options such as in-house debt financing. If they don’t offer in-house loans, they can still find you a good debt consolidation loan and even negotiate your current loans with your creditors.

However, do take note that this type of debt consolidation has repercussions on your credit record. However, this professionally guided debt consolidation option is best if you truly need help with your financial problems.

When’s the perfect time for debt consolidation?

It is when you are finding it hard to cope with your loans that you should consolidate. Ask yourself the following questions:

• Do you have more than two loans?

• Do you get confused about your various loans’ monthly due dates?

• Do you have to keep calling customer service to ascertain interest rates?

• Have you missed one or more due dates because of a payment mistake (i.e. you sent payment for one loan to the wrong creditor)?

• Have you defaulted on one or more of your loans?

• Are you paying mostly interest and not making headway on your principal?

• Are you finding it difficult to meet minimum dues?

• Are you sending out at least one check every week?

If you answered YES to all or almost all of the questions above, then you may have a problem brewing on your hands. This is the perfect time for debt consolidation; when the problem is at its early stages. At this point, you can obtain a secured loan (say home equity loan) and use the proceeds to pay of every single loan you have. This will not have an adverse impact on your credit record. In fact, it may even enhance it.

In conclusion, the right time for debt consolidation would be when you are having problems coping with multiple debts but are still in control of your finances.

Then suddenly, you see a credit card offer in the mail which gives interest-free loans on the first year of subscription. You decide that you cannot miss this opportunity, who has heard of an interest-free loan anyway? Pretty soon though, you noticed that you have half a dozen cards, each of which has an outstanding balance from all the items you bought. You discover that you are in financial trouble already because of all these debts and you have not yet paid the mortgage for your house. You need to get out of this uncontrolled condition fast. One solution you can consider is debt consolidation.

The concept behind debt consolidation is basically consolidating all your debts into one so that it will have a much lesser interest rate and be easier to manage. You need to develop a workable budget in debt consolidation because it will enable you to get out of your financial situation. There are many advantages you can take advantage of in debt consolidation including:

• Lower interest rate

The nature of debt consolidation is that you will only have one creditor instead of a dozen creditors. So for example, if you fail to pay several credit card payments, the finance charge will be compounded many times over. But if you only have one creditor, the interest would be significantly being less than that.

• Term extension

Taking advantage of debt consolidation will also allow you to have the option of paying off all your debts in a longer time frame. This will enable you to reduce the monthly payment to suit your budget.

• Convenience

Since you also have to pay a single creditor when you take advantage of loan consolidation, you will enjoy the convenience of not worrying about different due dates. You will also lessen the risk of accruing penalties if one due payment is even one day late.

However, before you do sign a debt consolidation contract because of its advantages, you also need to know about possible disadvantages you may encounter. One of the major disadvantages of joining a debt consolidation program is that people may have the concept that you are irresponsible so you got into debt in the first place. Meanwhile, other debtors see debt consolidation as the quick fix to their problems so they may get into the same kind of trouble in the future. The debt consolidation may ruin your fico score in order to settle your debt. Therefore, it is important to choose a good debt consolidation agency that has a good reputation and member of CCCS (Consumer Credit Counseling Services).

Suze Orman gave some tips on How to Deal With Your Growing Card Debt in the following video:

After all, taking advantage of debt consolidation can be a wise move if you have a lot of debts. But remember that the best solution to debt is not having an unmanageable amount of debt at all.

Whether it’s the debt you’re carrying or the credit you want, everything comes down to managing your money. We’ve got 101 ways in our “Credit Repair and Debt Reduction Tips” ebook to help you get out of debt and put your credit back on track. It sounds harder than it is. The most important point is you have to know where your money’s going and take control.

If you just follow the simple tips in this ebook you are already on the right road. Debt control leads directly into rebuilding credit, and together they will improve your overall financial health. Remember, the real trick is to make your financial decisions on purpose, not by accident.

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Credit Repair and Debt Reduction Tips

“101 Way to Reduce Your Debt and Improve Your Credit”

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This is the scenario that is sweeping across America!

The banks made it way too easy over the last few years to get more money out of our homes. Property values kept rising, the real estate market was booming and every homeowner was sitting on a gold mine. This was sure to lead to disaster and it has.

Now with the market declining and home values taking a dramatic plunge, most homeowners are sitting on over inflated mortgages and under valued homes.

The unfortunate part is that a lot of people can no longer afford their mortgage. They are facing the possibility of foreclosure and losing their homes is a very real threat.

The good news is that the banks are realizing this and are now giving homeowners options. Otherwise, the banks will be sitting on all of these homes after foreclosure and will be stuck paying the property taxes and insurances until they sell. Factor in the foreclosure costs, attorney costs, and marketing this is not in their best interest.

One option that is being offered is called a short sale.

This is where the bank allows you to sell your home at or below the current market value in order to get a quick sale, regardless of what you owe. Let’s say that your mortgage is $180,000, but similar homes in your area are selling for $150,000. You can ask for $150,000 and can even possibly take lower bids.

The bank in turn will take a loss on the home, since the sale will not cover the full mortgage, but they will not be stuck with the home. As far as the homeowner, they just walk away after the sale, free and clear.

It is suggested that you hire a real estate agent that is knowledgeable on short sales and preferably has had some experience and success with them. This is in your best interest, since they know the ins and outs and the paperwork involved. Not to mention, since you are already walking away with no money and this option will not cost you anything, it really is a no-brainer.

That’s right, not only does the bank take a loss on the home, but they also negotiate and pay the real estate agent fees.

Now there are disadvantages, and it is not as wonderful as it sounds. Your credit will suffer, just not as much as a foreclosure. It is estimated that your credit can drop 80-100 points with a short sale. However, it will drop over 200 points with a foreclosure.

You will not be able to buy a new home for up to 3 years with a short sale. However, if your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. With foreclosure, if the house is your primary residence, you may be eligible to buy a new home in 5 years (with restrictions) to 7 years (without restrictions).

Obviously, with this in mind the best solution would be to catch up your mortgage and then to make on time payments. Since this option is not viable for many people, I would seriously look into a short sale before it is to late.

Just remember that the mortgage company is not the enemy and not to be afraid of them. They are willing to help; you may just have to talk to several people until you find someone to work with. Ask if they have a loss litigation department. These are the people that are ready to and able to help you.

A loan modification (or also called a mortgage modification) allows borrowers the opportunity to re-negotiate the terms of their mortgage loans, thereby reducing the required monthly payment. This option gives people facing a financial hardship the chance to save their home from a foreclosure. Establishing a new payment plan trough a successful loan modification will help you stop home foreclosure.

Lenders and borrowers have many reasons to work through this hard situation together, and establish a suitable plan that works for all parties involved. Selling you home may not be an option, especially with today’s market conditions and the circumstances that have causes this unfortunate situation to begin with. Therefore, if your home is to be saved from foreclosure, you and your lender will have to work together.

Loan modifications are often times a reasonable solution to prevent foreclosure. By negotiating a new payment, structure lenders still get their money and the borrower is able to keep their home. However, negotiating a loan modification is not that simple. Successful loan modification will require documentation to prove your current financial position with the lender. This information is also use to verify your ability to pay the new loan if the bank is willing to work with the homeowner.

While not all banks offer this type of solution, it never hurts to talk to them and find out. Who knows, it may be just what you need to prevent losing your home to a foreclosure. Lenders are starting to work more with borrowers facing foreclosure in this difficult time, lenders do not want your home, they are in the business of lending money not property management, and with the close to two million homes in foreclosure lenders are running out of options as well. Qualifications for this type of solution, may be difficult and time consuming, but keep in mind what your goal is. Protect your most valuable asset, stop foreclosure and save your home with a loan modification.

Here is more information about Loan Modification - How to Lower Your Monthly Payment And Interest Rate Fast

For example, if you take a mortgage at 8% interest for $125,000 for 30 years, you will pay over $205,000 in interest, for a total of $330,000. And your home may not appreciate by that much — your $125,000 cost you $330,000.

You can see why you need to shop wisely for your mortgage.

All mortgages are not created equal. There are so many mortgages on the market right now that they can become a little confusing. You have to do your homework to find the right mortgage type, the right bank or mortgage company and the right terms.

One of the best places to start your search is on the Internet. You can use a mortgage calculator to see how much of a mortgage you can afford and what you could qualify for. You can compare different loans and lenders, search for the lowest rates and even apply online.

You have to make decision mainly on two things:

• how much you can afford
• what type of mortgage you want

Basically, there are two types of mortgages:

Fixed Rate Mortgage
Fixed rate mortgages are traditional loans with fixed interest rates over the life of the loan. The length of repayment may be anywhere from 10 to 30 years. Your monthly payment for interest and principal will never change, but if you have your insurance and taxes in escrow, you may see a slight change over time. Downpayments usually run 20%, but you could pay as little as 5% down with certain loan programs. Fixed rate mortgages offer predictable payments and are especially nice if you take the mortgage out during a low interest rate period.

Adjustable Rate Mortgage
Adjustable rate mortgages (ARMs) start out with a low interest rate, but the rate and payments may go up or down depending on the market interest rates. Most ARMs are adjusted every year, but there are some out there that adjust more frequently. The mortgage usually is capped for how much the interest rate can be raised each time and over the life of the loan. For example, you may take out a ARM that has a 2/8 cap. This mortgage can adjust only 2 points at the maximum each year. Over the life of the loan, the mortgage can only go up by a total 8 points. If your interest starts out at 7%, the second year it could increase to 9%, and increase each year thereafter until it reaches a maximum of 15%. That is if rates continue up. The interest rate could also go down.

ARMs are great for those who want more of a house, knowing their income will go up in the next few years. But be aware that when rates go up, the payment amounts go up. You need to make sure you could make the payments if the mortgage was to reach it’s peak rate.

There are also balloon mortgage and jumbo loan available out there. Balloon mortgages are good for those who know they will be moving in a few years. Jumbo loans are a larger than average loan for those who want to borrow more than the average mortgage amount set by Fannie Mae or Freddie Mac. There are also option ARMs that allow you to pay only a minimum payment amount for a certain period of time. These loans all come with more risk and must be thought out carefully. More options of mortgage can be called as “exotic mortgage”, a term use to to describe any nontraditional mortgages that allow homeowners to be able to afford high-priced homes. These mortgages are normally risky for both the borrower and the lender. (Read more about Exotic Mortgage Loan Options)

You can find many articles and educational tools online or even a financial advisor that will help you determine the best mortgage for your financial situation. In general, you want to take out as small a mortgage as necessary, find the lowest rate possible and consider how your future could affect your ability to repay a mortgage.

The followings are the latest and most exotic mortgages.

The 40-Year Mortgage

This is similar to a 30-year fixed rate mortgage, except the payment is being stretched over an extra 10 years. The lender will charge a slightly higher interest rate, as much as half a percentage point.

A 40-year mortgage gives you lower monthly payments than a 30-year loan, while allowing you to lock in today’s interest rate. But by extending the length of the mortgage, you are increasing the amount of interest paid on the loan.

These mortgages are best suited for first-time home owners who don’t plan to live in the home for more than a few years. If they can’t afford the higher payment of a 30-year mortgage, the 40-year may give a good start to home ownership.

The Portable Mortgage

This mortgage program allows a home buyer to lock in a low interest rate and then take the rate with them to their next home in a few years. A second mortgage can be used if the buyer needs to borrow more money for the new home.

When interest rates are low - and looking to rise - locking in a rate for the next 30 years is attractive. But interest rates for portable and second mortgages are higher than for standard loans. You may be looking at paying ½ to ¾ a percentage point more than on a typical 30-year fixed-rate mortgage.

This product is good for those who know they will move in a few years, but still want to lock in a low rate.

The Interest-Only Mortgage

With an interest-only mortgage, the lender allows the borrower to pay only the interest for the first so many years of a mortgage. After the grace period, the loan essentially becomes a new mortgage with the interest and principal being stretched only the remaining years. For example, you may pay no principal for the first ten years, and then pay the principal and interest for 20 years.

This gives you a smaller monthly payment during the interest-only repayment period, and during this time, all the money being paid is tax deductible. But if home prices don’t rise, your equity won’t build during the interest-only years. When your principal-payment period begins, the monthly payments will jump significantly. Most of these loans feature variable interest rate, which puts you at risk for even higher monthly obligations.

This type of mortgage is great if you know for sure that your income will rise significantly in the next few years. Interest-only loans are also a good fit for professionals who receive large bonuses as part of their pay. They can pay interest during most of the year and then put the bonus towards the principal.

The Negative Amortization Mortgage

This interest-only type of mortgage allows a buyer to pay less than the full amount of interest. The difference between the full interest payment and the amount actually paid is added to the balance of the loan. Please refer above for more information.

This gives you the option of a much smaller monthly payment during the first years of a loan. But, this is probably the most risky mortgage available. If the value of your home falls, you will easily be upside down in your load. You would owe more money on the house than it is worth.

These loans are great for those with large cash reserves who need to make lower payments during certain parts of the year, but can pay off the difference in large chunks at other times.

The Piggy Back Mortgage

This is actually two mortgages, one on top of the other. The first mortgage covers 80% of the property’s value. The second covers the remaining balance at a slightly higher interest rate.

In most cases, borrowers choose a piggy-back mortgage because it allows them to put less than 20% down and still avoid paying private mortgage insurance. The money that would be used towards private mortgage insurance is now tax deductible as interest paid.

Homeowners should expect to pay a higher interest rate on a second mortgage. The rates you pay vary greatly depending on your credit score. Since the borrower has very little equity in the home, there is the fear of the home losing value and the borrower owing more than they can sell it for.

Piggy-back mortgages are a good fit for young professionals with reasonably high salaries, but no savings.

103s and 107s

You may not need to save for a down payment at all. You could borrow 3% or 7% more than your home is even worth. These loans give you the option of borrowing money needed for closing costs and moving costs. You can include it all in the mortgage. The interest rates for these mortgages are high. You run the risk of negative equity if your home loses value.

If you have large cash reserves that work better for you in the stock market than in investing in your home, you may want to look at this type of mortgage.

Home Equity Line of Credit

These aren’t just for those who own a home. They are commonly known as HELOCs, and they can finance an original home purchase using a credit line instead of a traditional mortgage. HELOCs are variable-rate mortgages tied to the prime rate. If you use this mortgage as your first mortgage, all of the interest is tax deductible. You simply make a down payment, and the HELOC pays the remainder. You can usually use one for up to 90% of the home’s appraisal value. For a higher interest rate, you may qualify for 100%.

HELOCs can offer more attractive interest rates. You can also use the equity you build in your home at any time. HELOCs are usually structured for 10 to 20 years, instead of 30. The interest rate is variable, which means that your payment can rise at any time.

If you want to pay off your home quickly, but need the ability to access your equity at any time, you might consider a HELOC as your primary mortgage.

The Flex-ARM Mortgage

This is a cross between a hybrid ARM, which offers a low fixed interest rate for the first five to seven years and then adjusts annually, and a negative amortization loan. Each month you receive a coupon that gives you four possible payment options:

• negative amortization,
• interest-only payment,
• 30-year fixed, and
• 20-year fixed.

The homeowner decides how much he wants to pay. The bank handles all of the calculations for you. But if not used wisely, you could owe more on your mortgage than your home is worth.

A Flex-ARM is good for those who prefer to have options. The borrower should have large cash reserves for when the mortgage payments enter the later part of the loan. Like interest-only loans, they are great for those who receive bonuses during the year.

Short-Term Hybrids

These mortgages are much like traditional hybrid ARMs with fixed-rate periods and then interest rate that floats. But the fixed portion on a short-term hybrid is for a very limited time, for example, six months to a year. Lenders offer very competitive rates on these mortgages.

The interest rates are very low for the fixed portion of the loan, making the initial monthly payments relatively small. But six months or a year is not a very long period of time, but rates can change dramatically in just that amount of time.

People who plan to flip a house or move in a very short period of time are good candidates for a short-term hybrid ARM.

Loan Modification Mortgage

This mortgage allows you to change your terms whenever you want, all you have to pay is a $1,000 closing cost for every million dollars borrowed. No paperwork is necessary; all you have to do is make a phone call. You can expect to pay about 3/8th of a percentage point higher interest rate.

People who like to follow interest rates can call and have their rate changed when interest rates are down. But borrower’s must take into consideration the closing fees charged each time they modify their mortgage. Many customers with this type of mortgage have financial planners who manage the mortgage.

Click here for more about Loan Modification, How to Lower Your Monthly Payment And Interest Rate Fast

The aggressive campaign sometimes makes the potential borrower think only of what are highlighted and forget, to their regret later, the so-called fine print in the loan terms. In putting the house at risk, the owner-borrowers owe it to themselves and the family members to make sure they are making a decision they can handle.

The biggest risk of a borrower is the lack of understanding of the loan terms. Here are some of the information any borrower should take time to be well versed of:

• Have a clear idea of the reason for the loan. Is it a one-time or ongoing financial need? This is needed to decide if the loan should be Fixed Rate or HELOC (Home Equity Line of Credit). Be sure to choose the appropriate loan package.
• It is a good idea if the take out would go directly to the party whom you want to pay with the loan. This would minimize the risk of spending the money for something or somebody else.
• Ask for an official list of fees and interests before going further with the loan negotiation. Some agents conveniently fail to mention some fees like the closing costs and prepayment fees.
• Closing costs and prepayment fees are important information just in case the borrower decides to make advance payments later.
• Be wary of scams. Some lenders may appear to be assisting the borrower to have a good deal by approving loans that are more than they can afford to pay but actually, the borrower is being led to the road of payment default and consequently foreclosure.
• Research before signing anything. Contact people who have taken out loans from the lender. The Better Business Bureau is a good source of information regarding good business practices.
• Don’t be misled by the low amortization. It may not even be enough to cover the monthly interest and the consequent is a surprise after years of payment that the principal of the loan is not yet paid.
• Don’t be afraid or ashamed to ask about anything that is not clearly understood. In fact, any items that seem to be subject to interpretation should be confirmed with the lender.
• The Truth in Lending Act gives the borrower the right to cancel the loan by informing the lender in writing within three days of issue.

The home equity loan is an excellent and tempting source of cash for the home owner. The lenders consider it a safe investment but the opposite applies to the home owner.

There are advantages like the tax-deductible, lower-than-the-credit card interest and the convenience since you can apply online and agents are eager to do business. However, the collateral’s value is more than what the appraiser reports. The appraiser has no idea of the true value of a home.

If ever a home owner finally decides to have that home equity loan, it should only come after a careful study of the pros and cons of the decision.

Each company or lender has its own interest rates and terms and conditions. It makes sense to take time and get all the information about the lender. If the lender is a direct lender then the chances are that he may go through your credit reports and only after he is satisfied he will grant you the auto loan. The time taken to repay the loan matters a lot. The monthly installments as repayments are inversely proportional to the total time of the repayment. Different creditors charge differently for their services. It is wise to review the terms and go for the auto loan.

There are some requirements to be fulfilled for acquiring an auto loan. Employment details and current income details are necessary and a proof of income is essential. $8.66 per hour or $1500 per month is required to qualify for the auto loan. In absence of these documents then a proof that you are employed in this organization for at least a year is necessary. Most of the direct lenders have very strict rules.

These are some of the basic criterion to acquire an auto loan, such as the followings:

• USA Federal offers 100% financing of the Manufacturers Suggested Retail Price on new vehicles. Used car auto loan is also available.

• A 60-month term offer is available on non-US specification vehicles. Vehicles that are five years old or newer can fetch an auto loan of $30,000.

• Any recreational vehicle such as sports cars, travel trailers and motor homes also can be acquired through the USA Federal financing.

Refinancing auto loan is a big business. Take the advantage of search engines online to help you find the best deal with its given terms and conditions. You usually need to pay application fee to apply for used or new car. Before you go for an auto loan, search for a competitive loan. See whether there are no prepayment penalties on the loan you take.

What is Credit Score?

A Credit Score is a number between 300 and 850 based on a statistical analysis of an individual’s credit activity. It is used to represent the credit worthiness of an individual. How likely that the individual will pay his or her debts. A credit score is based on their credit report information which is typically sourced from credit bureaus and credit reference agencies, typically from the three major credit bureaus.

What is Credit Score used for?

Lending institutions, such as banks, finance companies, mortgage lenders, and credit card companies, use an individual’s Credit Score to evaluate the potential risk posed by lending money to that individual. Lenders use Credit Scores to determine who qualifies for a loan, at what interest rate the loan is issued, and what credit limit is determined.

The use of credit scoring prior to granting credit is a trusted system throughout the industry. Credit scoring is not limited to banks, however. Organizations, such as mobile phone companies and government departments employ the same techniques.

Basically, banks and other lending institutions use Credit Scores as factors in their lending decisions. Whether credit is denied or approved, what interest is charged, what income level and asset verification is required is all based on an individual’s credit score.

Major Credit Scores

The most widely known score in the United States is FICO, which is most widely used in the mortgage industry. FICO is an acronym for Fair Isaac Corporation, the company that provides the most well-known and most widely used credit scoring system in the United States. While the other credit scores are NextGen, VantageScore, the CE Score, etc.

The FICO score is calculated by applying statistical methods, developed by Fair Isaac, to information in one’s credit file and is primarily used in the consumer banking and credit industry. FICO scores show how likely it is that a borrower will default. No public information is available to determine what the scores mean in terms of statistics. A separate score, BNI, is used to indicate likelihood of bankruptcy.

The FICO score actually uses slightly different scoring methods to rate a consumer’s suitability for three different types of credit; mortgages, auto loans, and consumer credit. Each reflects the different credit risks of these various types of lending. It is not unusual for these scores to differ by as much 50 points or more for the same borrower.

Additional Credit Scoring Systems

There are three major credit reporting agencies in the United States. Although often times inaccurately referred to as “credit bureaus”, these agencies; Equifax, Experian and TransUnion, also calculate their own credit scores. These additional scores differ depending on what they are meant to predict, what statistical methods used to determine a score, and what information is used and how it is weighted.

These additional Credit Scoring Systems are numerous and are agency specific. For example, Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores are available only from Equifax. Empirica, Empirica Auto 95, Precision Score, and Precision 03 are available only from TransUnion, and, Fair Isaac Risk Score at Experian.

These various Credit Scores are developed for the different agencies by Fair Isaac, each differs and are periodically updated to reflect current consumer repayment behavior habits. The NextGen Score is a scoring model designed for consumers.

In an effort to make credit scoring more consistent across the board, in 2006 the big three credit reporting agencies introduced Vantage Score. Vantage Score uses a different number range from the FICO score. It ranges from 501 to 990 and also assigns letter grades from A to F to specific ranges of scores.

A consumer’s Vantage Score may differ from agency to agency, but the difference would be entirely due to differences in the information reported to the various agencies, not due to differences in scoring systems. Since FICO is still widely used by lenders, the agencies continue to offer FICO scores (or their closest equivalent) as well.

Most credit scores use a multiple-scorecard design. Each version may use individual scorecards, and an individual potential borrower is typically compared with other previous borrowers. In other words, a borrower with one 30-day late payment will be scored against a population with some similar delinquency. A borrower with two 30-day late payments will be scored against a population with like credit faults. The individual is then graded according to which variables indicate a risk within that group.

Nearly all large banks also build and use their own systems for credit scoring purposes, and are often times in conjunction with outside scoring formulas.

Credit Score Regulation

The systems used to generate credit scores are subject to federal regulations. The Federal Reserve Board’s Regulation B, which implements the Equal Credit Opportunity Act, expressly prohibits a credit scoring system from considering any “prohibited basis” such as race, color, religion, national origin, sex, or marital status. It also stipulates that credit scoring systems must be “empirically derived” and “statistically sound”.

In addition, if an adverse action, a denial of a credit application is taken as a result of the credit score then the specific reasons for the denial must be provided to the individual denied. The statement “credit score not high enough” is insufficient. The reasons for denial must be specific; “too many delinquencies 60 days or greater” and such.

Credit Score Formula

Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, the Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution of each:

• 35% punctuality of payment in the past (30 Days Past Due)
• 30% the amount of debt, expressed as the ratio of current revolving debt to total available revolving credit
• 15% length of credit history
• 10% types of credit used
• 10% recent search for credit and/or amount of credit obtained recently

These percentages offer a limited guidance in understanding a credit score. For example, the 10% of the score allocated to “types of credit used” is undefined, leaving consumers unaware what type of credit mix to pursue. “Length of credit history” is also a murky concept; it consists of multiple factors two being the oldest account open and the average length of time an account has been open.

Interestingly, although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35%. Bankruptcies, foreclosures, and judgments affect scores substantially, but are not included in the very vague pie chart provided by Fair Isaac.

A FICO score generally has a max of 850 and a minimum of 300. It exhibits a left-skewed distribution with a median around 723. The performance of the scores is monitored and the scores are periodically aligned so that a lender normally does not need to be concerned about which score card was employed.

Because the three major credit agencies have their own, independent databases, each of us actually has three credit scores for any given scoring system. As these databases are independent of each other, they may contain entirely different data. Many lenders will check an applicant’s score from each bureau and use the median score to determine the applicant’s credit worthiness.

How to Get Credit Score Report

As a result of the FACT Act (Fair and Accurate Credit Transactions Act), each legal U.S. resident is entitled to one free copy of his or her credit report from each credit reporting agency once every twelve months. To guard against inaccurate information or fraud more often than yearly, one can request a report from a different credit reporting agencies available on the net.

This information is available from a number of websites across the net that offer a free credit report and use of their services for 30 days. After which, there is a monthly fee involved. The fee is nominal compared to the necessity of protecting your credit in today’s highly technological society where identity theft is becoming more prevalent.

In a time where identity theft and credit fraud in on the rise, the fee these firms charge seems like a small amount to pay to protect your credit and your good name.

Having a good Credit Score is becoming more and more common in our society. For example, credit scores are often used in determining prices for auto and homeowner insurance. Recently, some of the agencies that generate credit scores have also been generating more specialized insurance scores, which insurance companies then use to rate the quality of potential customers. These scores are unavailable to consumers.

Many employers reserve the right to do a credit check of job applicants; in the same manner they reserve the right to drug test potential employees. The fact is that your Credit Score is important.