What Is Credit and How Do I Know When My Credit Is Good?
What is a credit score?
A: The credit score is a numerical formula used to assign your credit history a score, usually between 300-850 depending upon the type of score. There are many types of scores such as FICO, Vantage Score, FAKO, etc. There are also industry specific scores such as for mortgages, vehicles, credit cards, etc. The most common score type used is the FICO 8, but there are also older and newer versions, hence the 8 there. The FICO formula often used is 35% payment history, 30% amount owed, 15% length of credit history, 10% new credit, and 10% type of credit used. The average score is around 695 on FICO 8 nationwide, with the rural areas such as the South Eastern U.S. having among the lowest scores. It is possible to have no score if you have no established credit history.
What is a credit report and what’s in it?
A: A credit report contains what the score represents, all of your accounts and credit information. Everything involving your personal credit history could possibly be listed in a credit report depending upon the type of report or the company it comes from. The information sections you will find would be the personal information section such as phone number, addresses, telephone numbers, etc. Then, it may list accounts in sections such as regular accounts (car notes, mortgages, credit cards, etc.), negative or derogatory accounts may be listed before or after the regular accounts section. This where you will find accounts with late payments, repo’s, charge offs, etc. The collections accounts are usually listed next if the report has any, followed by public records (bankruptcies, tax liens, child support, etc.).
What and who are the credit bureaus?
A: These are companies (notice I said companies, not government agencies) who collect information they can use to establish a credit rating on individuals and sell it back to creditors (CC companies, businesses, etc.). They get paid for collecting information, not to help you or establish a good credit history for you. If they can keep you in what is called a sub-prime category, they make more money. In other words, they don’t want you to have great or even good credit, but they can’t admit that. Federal law requires them to have accurate information listed on every person’s report, but who is policing them or keeping this in check. The answer is, if you aren’t then no body is keeping watch. There just aren’t enough agencies, federal employees, etc. to do the job. Also, how do they know if personal information about you is right or wrong? We have all seen what corporations often do when ran by profit and not checked for greed, they bend or break the rules in favor of profit. The three major bureaus include TransUnion, Equifax, and Experian. The smaller, although not less significant are the minor bureaus, which collect even more information. These include Lexis Nexis, The Medical Information Bureau (M.I.B.) and many others. Some of these bureaus are even used to perform background checks by jobs, which is why they request your permission to use that stuff even if they don’t necessarily check your credit scores.
Creditors, who are they?
A: These are the companies who offer credit or financing to consumers. These companies include credit card, mortgage, automobile financing, service companies, etc. These guys are the ones who check your reports and scores when you request credit from them. They are the local credit unions, banks, insurance companies, etc.
What are the types of credit checks?
A: There are two main types of credit checks or inquiries. These are soft-pull credit checks and hard-pull credit checks. Soft-pulls usually provide only a credit score or range. These types of checks do not provide the whole story for the creditor, just a glimpse at your credit history. Soft-pulls do not count against your credit score, but are often recorded in your history. Hard-pulls are full credit checks. These checks give a full credit report to the creditor, including your personal information, credit accounts, history, etc. These pulls are recorded on your history and do count towards your score. If you don’t have any inquiries or hard-pulls, one may help your credit score if you have limited credit, however once you obtain a certain amount, they begin to hurt your credit score and place you into what I call a “no approval” category. Credit card companies don’t like to see someone look desperate for credit by applying for lots of cards and will then deny your application due to the number of recent inquiries on your credit. While inquiries don’t impact your credit all that much (usually only a couple of points each), they can prevent you from being approved for major purchases. Hard-pulls can only be made with your permission and signed application. This is what happens when you go to a car dealership and they use a signed credit application, make copies of your license, etc. Soft-pulls can be performed on anyone’s credit report which has not opted out of being public through the credit bureaus. Being public in the database can often help as you will sometimes receive pre-approved credit cards that you can get for no hard-pull credit checks. This means that you would already be approved for the card; all you have to do is accept it because the creditor has already performed a soft-pull credit check and deemed you worthy or pre-approving. Soft-pulls and pre-approvals can be initiated by the customer through a company’s website as pre-approvals are now more popular than ever.
What is considered a bad, fair, good, or great credit score?
There are many different scales that determine what range or category a credit score falls under, but we will examine the FICO 8 here:
800+ = Exceptional (1% delinquency risk)
740-799 = Very Good (2% delinquency risk)
670-739 = Good (8% delinquency risk)
580-669 = Fair (28% risk for serious delinquency)
300-580 = Poor (61% risk for serious delinquency)
Notice that income doesn’t matter when it comes to score. There are millionaires who have poor credit scores and individuals who make less than minimum wage, but have and 850 FICO score.
What happens when you apply for credit?
A: The creditor normally gets a credit application done by you. They submit it to a software system or on the bureaus system/website. The bureau sends back your credit history and/or score. The creditor then makes the decision to either offer credit or not based on what they see in the report. Many websites where applications are submitted and instantly approved or not use formulas to make that decision depending on the parameters contained within your report. The credit reports which are checked during an application process depend upon the creditor. Some, such as my local credit union only uses Equifax, some use all three. Some creditors use soft-pulls to pre-approve and once you accept an account, perform a hard-pull.
Regardless of where you are in your credit journey either in the valley of death as I have been many times, or on top of your credit mountain, God loves you just the same. If you are struggling to get where you need to be in your credit, God can bless you and help heal your credit report just as He can heal your body of illness. You are in need of prayer, positive attitude, and a plan to go through with seeing your credit repaired. Step out in faith today and make a commitment to get your credit where it should be. Contact us and allow us to pray over your report and advise you on your next step. Thanks for joining us on Born Again Credit “where credit is restored, not just repaired”!