Why is 50 points such a big deal?

Just about everyone understands that your credit score is a very important number when it comes to your financial livelihood, but have you ever thought to understand why? The purpose of the FICO score is to predict the statistical chance of a consumer being 90 days late or more in the next two years. But more importantly let’s take a look at categorically how this breaks down in the eyes of your potential lender.

Below is a chart that indicates the odds of a consumer becoming 90 days late or more.

Score	Odds
800 & above	1%
750 to 799	2%
700 to 749	5%
650 to 699	14%
600 to 649	31%
550 to 599	51%
500 to 549	70%
Below 500	89%

Here is a real world example of how this chart works. Let’s assume that two people come to you and ask to borrow $5,000 from you. The only difference is that one person has a FICO score of 740 and the other has a score of a 549. How long would it take you to decide who you would give the money too? Understand the person with a 549 score means there is a 70% chance that person will be 90 days late or more in the next two years vs. the person with the 740 who has only a 2% chance of being late! Do you think that if you decided to lend your money to both people that you might have different rates and or fees between the two loans?

I understand the credit scoring process can be frustrating and very complicated, but the purpose of the system is very clear. It is all about predictive information for the purposes of lenders deciding who to lend money too and with what terms.

Based on this chart you can see how critical a few points can be, in some instances it means over a 50% less chance of being 90 days late or more depending on the score.

You Still Have Options!

If you recently applied for a credit card but were declined because you have bad credit or no credit history, don’t lose hope. You still have options!

There are two types of cards that you need to be aware of in this situation: secured credit cards and prepaid cards. Both have pros and cons.

Secured Credit Cards

As the name suggests this is a credit card that is secured by a cash deposit that you make and is tied to the card. Once the deposit is made you can use the card just like any other credit card- charging purchases and paying monthly bills. In addition, if you maintain a regular payment history, the card issuer will typically reward you by increasing your credit line without requiring you to add to your security deposit.

Pros: The monthly payments made on most secured credit cards are reported to the credit bureaus. For this reason, a secured credit card can help you build a good credit history — as long as you pay the bills on time.

Cons: The main disadvantage of secured credit cards is the cost. Because these cards cater to higher-risk consumers, most issuers of secured cards charge higher fees and interest rates.

Watch out: Avoid online credit card applications that don’t enable you to see the card terms and conditions until you’ve gone through the application process. They are likely to hide sneaky terms, like charges for increasing your credit limit or high annual fees. Also watch out for secured credit cards with high interest rates.

Prepaid cards
Prepaid cards look like credit cards, but they function more like debit cards. Your credit line depends on how much money you have loaded onto the card, and each time you make a purchase you draw down those funds. In other words, with a prepaid card, you don’t have access to a line of credit. You can spend only the money you put into the card account.

Pros: Anyone can get approved for a prepaid card.

Cons: Prepaid cards have two main drawbacks: They come with a multitude of fees, and they don’t help you build a credit history!

Prepaid cards have been criticized, not only for the fees they charge, but also because the pricing and structure of most prepaid cards make it difficult to determine how much it will cost you to use them.

Watch out: Recently there has been a lot of publicity over prepaid cards, most notably with a new program launched by Suze Orman. She is partnered with TransUnion for this card and claim that there is a possibility that some day it could be used in credit scoring. Even on the card’s website Orman says, "I'm proud to say that the Approved Card is the first prepaid card in history to share information with TransUnion, a major credit bureau." The actual truth behind all of this is if you sign up for new card and then opt into an anonymous pilot program for 18 to 24 months you can give TransUnion permission to use that data to see if they can find anything with your spending habits on this card that might be helpful for credit scoring purposes! That information isn’t as catchy as simply saying “the approved card is the first prepaid card in history to share information with TransUnion!”

Just in case you didn’t know, the industry standard for credit scores is the FICO score, so really what this means is just about every lender that you might actually want to get a loan from is evaluating you based on your FICO score. Not some score made up by TransUnion with the help of data from Suze Orman’s approved card! Take my advice on this, if your motive for getting one of these cards is to improve your FICO score, get a secured credit card, use it properly and don’t get suckered into getting a prepaid card just because Suze Orman sticks her name on it. Do what is best for you and your family, not just blindly follow others with ulterior motives.

Your Credit Score- Top 7 things you need to do before buying a house

When it comes time to purchase a house one of the things that mortgage companies are going to do is evaluate your credit report and credit score. Just having a score high enough to qualify should not be the goal so here are 7 easy steps that you can take to ensure you have no unwanted surprises. The sooner you can start on these the better!

1. Get a copy of your credit report. The best place to do this is www.annualcreditreport.com. This is a website that is set up where every consumer can obtain all three of their credit reports every 12 months for free from the 3 largest credit bureaus. This site will not give you a FICO score so I suggest that you pass on buying the score they offer to sell you as it is not the score a mortgage company will be using when the time comes.

2. Review the report. This should go without saying but just to be clear I will say it! Taking the time to order a report but then not looking it over will not do you any good! Make sure the information is accurate, some studies suggest as much as 80 to 90% of reports have errors on them, don’t assume it is accurate!

3. If you find inaccurate items dispute them or ask for help. If it is on the report, it is consider accurate in the eyes of the FICO score until it is removed or fixed. Be careful as the bureaus have lots of tricky was to try to get rid of you. This might be a step that you need some help with as it can become very frustrating and turn into a full time job!

4. Check your revolving accounts (credit cards). See how many open and active accounts you have. The best mix is 3 to 5. Depending on how long you have until you want to buy your house it could make sense to open a new credit, but I do not recommend going out and getting 3 at once if you have a short time-frame. Just get one, if you have more than 5, do not close any of them!

5. Compute your Aggregate Revolving Utilization. What? I know that is mouthful, simply put how much do you owe on your credit cards compared to the limit. For example if I have $1,000 limit and I owe $500 my utilization is 50%. With this, the lower the better, ideally you want to be less than 10%.

6. Avoid apply for new credit. Inquires will never be positive for your score and usually are negative. Don’t apply for anything unless you are doing it for strategic purposes. Buying the house is more important that getting a new credit card to safe 15% at your favorite department store!

7. Be careful where you get advice. Understand all kinds of people or companies are quick to give credit advice, just be careful where you get that advice. With your credit score a little bit of wrong advice or incomplete advice might just cost you your dream house. Make sure you are getting advice from someone that is an expert when it comes to credit scores, not just someone that you think “should” know!

Top 3 reasons NOT to apply for a store credit card

If you've gone shopping at a department store lately, I’m sure you have been asked to open a store credit card. For doing this, you could save 10-, 15- or even 20 percent on your purchase that day.

Here are 3 reasons this is a very bad decision:

1. When you apply for a credit card, retailers pull up your credit report and scores. Multiple inquiries in a short period of time can reduce your credit score, especially if you don't have many credit accounts. Inquires account for 10% of your total FICO score. This type of inquiry stays on your report for 2 years and will affect your score for one year from the date it took place.

2. Retail credit cards come with a low limit in most cases compared to a general credit card. This is highly important because the second largest factor in your FICO score is the amount of credit card balances or credit card debt compared to the limits. For example, take a $250 balance on a store credit with a $500 limit; you'd have a 50 percent credit-utilization ratio. But on a $5,000 credit limit on a general credit card, the ratio is just 5 percent. The higher the ratio, the worse your credit scores!

3. Store credit cards usually also have very high interest rates.

With all that combined, stay away from the ever so tempting offer next time you are checking out to open a new card for the 15 or 20 percent discount. Don't use a new credit card as a discount coupon.

Did you hear about this?

Have you heard about the newest gadget you can buy for your car? You hook it up to your car and then as you drive it will give you a very rough estimate of how fast you are going. Plus it will give you a vague estimate of what the speed limit might be in the area you are traveling! This service has a monthly subscription fee of only $14.95 per month! The service I just described doesn’t exist and I made up the scenario just to prove a point. We as consumers can easily see the flaws in a product like this one, but when it comes to our credit we fall for things like this all of the time!

Let me explain. There are all kinds of “credit scores” on the market, but the credit score model used by the over whelming majority of lenders is the FICO credit score. Other scoring models will evaluate the information on your credit report and give you some kind of scoring range to show you where your score falls. Referencing back to the example above, Police Officers gauge our speed on miles per hour, not on some “other” calculation; therefore we are concerned with what they use to determine our speed. Similarly we need to concern ourselves with the model that lenders are using when it comes to our credit score. Here is a quick tip for you: if you are buying a credit score online, or getting a score from any source and it doesn’t say “FICO score” on it, chances are it is not a score that any lender would ever use to determine your credit worthiness!

Next, if you are concerned with your FICO score (which you should be unless you can pay cash for everything you will ever need in your lifetime) then you need to make sure you are getting advice on things you can do to improve your FICO score, not things you could or should do to improve some other credit score that has no merit. So many of these monthly monitoring services, credit score simulators and other services give you advice on ways you can improve your “credit score” not actual advice on how to improve your FICO credit score. If I can get a ticket for speeding I would much rather be able to look at the speed limit sign that tells me the actual speed limit that I am being judged on rather than receiving a ticket based on someone else’s guess of what the speed limit is.

Lastly, why would you ever pay a monthly fee to look at something you can view for free and, with a little research, get free advice on how to improve (I’m talking about your FICO score), which as you now know is really the only score that most lenders currently care about.

Most of the companies that have developed these other products (monthly monitoring services, credit score simulators, etc.) suck us in with catchy advertisements or by using reputable people in industries that we would assume are giving us correct information when promoting themselves and their services. In reality they are not much more than services that prey on our lack of knowledge as consumers and add even more confusion to the topic just to rope us in to a monthly subscription fee. My advice for most people is stay away from these kinds of services. They will just cost you money and confuse you even more.