The Insurance Doctor

Tag: credit rating

  • Good Credit = More $$$$

    Good Credit = More $$$$

    Your credit score is one of the most important measures of your financial health! I have found that few advisors have a handle on how to coach their clients to improve their credit scores.

    There are ripple effects to having good or poor credit. The better your score, the easier you will find it to be approved for new loans and or lines of credit. A higher credit score can give you access to the lowest available interest rates when you decide to borrow. Good credit will improve your odds of getting approved for credit cards. There are employers that will run your credit score before deciding on hiring you. In addition, the higher your score, the less money you will pay for auto and homeowners insurance premiums!

    Regardless of your age or current credit situation, it is NEVER too late to improve and/or build your credit. It takes some time, effort, discipline, and in some cases, breaking bad habits. There are niche companies that charge thousands of dollars to help fix your credit. You will not need to hire them if you heed my 10 tips below:

    1.   Review Your Credit Reports: You must start somewhere, so review your current credit reports. This is free and easy to do. You can pull a copy of your credit report from each of the 3 national credit bureaus: Equifax, Experion and TransUnion. This can be done for free once per year at www.AnnualCreditReport.com. To improve your credit, it helps to know what is working against you or in your favor.

    2.   If Possible, Pay Off 100% of Your Balances Every Month:  Carrying over balances from month to month is a costly way of doing business. If this is an issue for you, I suggest enrolling into “auto-pay” online, one credit card at a time, so you can stabilize your finances. Payment history counts for about 35% of your credit score. 

    3.   Correct Inaccurate or Additional Personal Information: Almost 90% of credit reports have your credit or personal information on you that is either inaccurate or dated. 

    4.   Keep Credit Balances Below 30% of “Available Credit:” Credit card balances should be below 30% of your available credit ALL the time! If you need more credit, get another credit line.

    5.   Consolidate Student Loans:  There are banks that have special programs designed to consolidate existing student loans (usually for balances of $100,000 or more) into one loan at a lower interest rate, which can save you $100’s per month from day one.

    6.   Limit Credit Inquiries: You should have a maximum of 7 or less credit inquiries per year. Any more than that can negatively affect your score.

    7.   Consider Adding an Additional Authorized User: This is an excellent way for parents to help young adults start building credit with little effort. The parent adds their child as an eligible user which starts building a history for the youngster. The more years you have credit, the better your score!

    8.   Consider Joining a Local Credit Union: Many Credit Unions have good initial offers for new member-clients and more liberal rules than banks.

    9.   Keep Old Accounts Open and Deal with Delinquencies: Do NOT close old credit cards that you might not be currently using. One of their formulas is to measure the “average age” of all your cards. The older the better.

    10.Use Credit Monitoring to Track Your Progress: Credit monitoring services are an easy way to see and learn how your credit score changes over time. These services can also protect you from identity theft. The best credit monitoring services notify consumers about changes in their credit and the reasons why.

  • FICO and Fixing Your Credit

    FICO and Fixing Your Credit

         In 1989, The FICO SCORE was released to the world by William R. Fair and Earl Isaac, who founded a computer software company.  They developed and sold their first credit system back in 1958.  FICO (short for the Fair-Isaac Co.) was the first credit-risk model that provided a universal and impartial tool for evaluating consumer risk.  The FICO SCORE is a three-digit number (between 300-850) based on credit data from your credit reports.   It helps lenders predict how likely a person is to repay a loan.  Over 90% of ALL credit decisions made in the USA today use the FICO SCORE!

         A good FICO SCORE can literally save you THOUSANDS of $$$$ in interest and fees to lenders.  A good FICO INSURANCE SCORE (FICO homeowners scores range from 200-997) can save you BIG $$$$ on your homeowner insurance premiums.   It can also save you BIG $$$$ on auto insurance premiums (FICO auto scores range from 250-900) depending on what state you live in.  Using credit scoring for auto insurance is banned in California, Hawaii, and Massachusetts.  Other states have restrictions but not an outright ban.  One should be over 700 on both scores.

        To improve your FICO SCORE, we must first examine the FICO “Scoring Formula.”  Fico data is grouped into 5 categories:

    1. PAYMENT HISTORY: (35%) Payment history refers to whether individuals pay their credit accounts on time. Credit reports show the payments submitted for each line of credit, and the reports details bankruptcy or collection items along with any late or missed payments.
    2. AMOUNTS OWED: (30%) Accounts owed refers to the amount of money an individual owes. Having a lot of debt does not necessarily equate to a low score. Rather, FICO considers the ratio of money owed to the amount of credit available.
    3. LENGTH of CREDIT HISTORY: (15%) As a general rule of thumb, the longer an individual has had credit, the better their score. However, with favorable scores in the other categories, even someone with a short credit history can have a good score. FICO SCORES take into account how long the oldest account has been open, the age of the newest account, and the overall average.
    4. NEW CREDIT: (10%) New credit refers to recently opened accounts. If the borrower has opened several new accounts in a short period of time, that indicates risk and lowers their score.
    5. CREDIT MIX: (10%) Credit mix refers to the variety of accounts.  For example, credit card, retail card, home loan, vehicle loan, etc.  It is helpful to have a few categories of debt; however, it is NOT necessary to have a card in each category to score well.  For more information go to MYFICO.com.

         Now that we have broken down the FICO “Magic Formula,” consider using these “Lucky 7” tips to improve your credit rating; hence, improving your FICO SCORE:

    1. DO NOT CLOSE OLD ACCOUNTS: While this might seem counterintuitive, closing a card may negatively impact your credit. It reduces your credit-to-debt ratio and credit history which lower scores.
    2. CONSIDER ASKING FOR AN INCREASE TO YOUR CREDIT LINE: For example, if you have a credit limit of $5,000 and you are using an average of $2,500, that is a 50% ratio.  If you asked and were granted an increase to a  $10,000 limit and keep your spending at $2,500, you lowered your “Credit-Usage” ratio to 25%, which will increase your score over time. 
    3. LIMIT THE TOTAL AMOUNT OF CREDIT CARDS: People are tempted by all the enticing initial credit card offers and frequent flyer points; however, applying for too many cards will lower your score.
    4. AVOID FEES: Credit card companies charge exorbitant fees (they can be as high as 36%, depending on what state you live in) for late payments, even if it is only by a day or two.  Making late payments may trigger a higher interest rate and will lower your scores quickly.
    5. PAY OFF 100% OF YOUR BALANCES EVERY MONTH: Carrying over balances from month to month is a costly way to do business.  If you have issues with this, I suggest enrolling into “auto-pay” on-line, one credit card at a time so you can stabilize your finances.
    6. REVIEW YOUR CREDIT AND FICO SCORES: Step one is to determine your starting point.  This is easy to do on-line.
  • 5 Tips to Improve Your Credit Rating

    5 Tips to Improve Your Credit Rating

    Not only is credit a key factor in securing loans, potential employers may review an applicant’s credit and it’s also used to determine auto and homeowners insurance rates you pay.

    1. Don’t close old accounts: While this may seem counterintuitive, closing a card may negatively impact your credit. It reduces your credit-to-debt ratio and credit history which lower scores.improve credit rating, tips, consumer
    2. Ask for an increase on your credit line: If you have a $5,000 credit limit and you are using $2,500 on average, that’s a 50% ratio. If you get an increase to $10,000 credit limit now you are using only 25% of what’s available which will improve your scores.
    3. Limit the total amount of cards you have: People are tempted by all the great initial credit card offers but applying for too many cards can negatively impact your scores.
    4. Avoid fees: Credit card companies charge fees for late payments even when it’s just a day or two. Making late payments may trigger a higher interest rate and show up on your credit report.
    5. Pay off 100% of your balances every month: Carrying over balances from month to month is a costly way to do business and it can also show up on your report.