There is a difference between your Credit Report and your Credit Score.
Credit Score History
Prior to the creation of standardized credit scores, lenders and loan officers would often develop their own "score card" to asses the risk of lending to a particular borrower. This score card was based solely on a credit report and could vary drastically from one lender to the next.
In the 1970's, the Fair Isaacs Company set up the first credit scoring system in order to help remove the inherent inconsistencies that arose from having each lender perform their own credit diagnostics. It has since become known as the FICO score.
Information about you and your credit experiences, such as bill-paying histories, numbers and types of accounts, collection actions, outstanding debt, and the age of accounts, is collected from your credit application and credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay debt. A total number of points–a credit score–helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make payments when due. The most popular type of credit score is usually between 300 and 850. A higher number is considered a better score.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like–race, sex, marital status, national origin, or religion–as factors. However, creditors are allowed to use age in properly designed scoring systems. Any scoring system that includes age must give equal or better treatment to elderly applicants.
Your Credit Score May Be Different at Each of the Credit Reporting Agencies
The three major credit reporting agencies each receives has a scoring model they use.
What this means is that Equifax might not have exactly the same information as Experian and vice versa. Equifax may be missing an account that either helps or hinders your score and will therefore report a different final credit score than Experian.
Score Range
The higher your score the better, as it is a general gauge of your overall credit worthiness in the eyes of lenders.
FICO: traditionally between 300 and 850
Experian: 330 - 830
Equifax: 300 - 850
TransUnion: 150 - 950
VantageScore: 501 - 990 (often assigned a letter grade, A - F)
What Things Make up your Credit Score?
In 2009 a new version of FICO credit scoring formula, called FICO 08 (because it was originally scheduled to appear last year) will be available.
FICO 08 is intended to help lenders better gauge actual risk by better differentiating good customers who have made one mistake from people who have multiple delinquent accounts. Ultimately, FICO 08 aims to help lenders better identify people who are most likely to default on loans. This new credit scoring template has both positives and negatives for consumers.
The positive:
In the past, credit rating for spouses who did not have their own credit cards, but were "authorized users" on their husband or wife's card, was based on joint history. FICO originally said being an authorized user would not provide any credit rating. This decision was because a few years ago, some companies started to rent "authorized user" status -- charging people with poor credit to "borrow" the credit rating of someone with good credit. The practice skewed credit for those individuals. But because people who are authentic authorized users protested vigorously, FICO 08 will instead tweak the system and retain authorized users' credit.
Small problems hurt less. Individuals who had a small debt (less than $100) go to collections will not feel as much impact from that collection process. Previously, if you missed a $25 parking ticket, or you moved and the dentist sent your bill straight to collections, it could turn into a negative mark on your credit. While FICO 08 is not a license to run up bills, individuals will not pay as severely for a misunderstanding under the new template.
Big picture matters more. With the older system, one big problem, such as a vehicle repossession, could torpedo your entire credit score. Now, if all other accounts are in good shape, one serious issue will not matter as much.
The negative
More impact from less credit. Available credit will be a greater part of credit scores. Credit scores have always evaluated how much credit used as a percentage of available credit. But now that figure will weigh more heavily into the overall score. This change is especially important now, because some creditors are lowering credit lines, reducing the total amount of credit available. In addition, having fewer open and active accounts will have a negative effect on the score.
Closed and unused accounts hurt. If you are paying off debt, closing those cards can decrease your credit score. Rotate the one credit card you use (and pay off monthly), or set the cards aside, but do not close the accounts. And if a creditor closes your account - they must notify you 30 days in advance - call to ask that they reverse the decision. To keep cards active, have a monthly bill, such as telephone, charged to a card. Set up an automatic payment or a personal reminder to be sure you do not miss a payment.
Under the old Scoring System:
Payment history. 35%. Having a long history making of payments on time and no missed payments on all credit accounts is one of the most important items lenders look for.
Amount of outstanding debt. 30%. This measures the amount you owe relative to the total amount of credit available. Someone closer to maxing out all their credit limits is deemed to be a higher risk of late payments in the future and this can lower their credit score.
Length of credit history. 15%. In general, a credit report containing a list of accounts opened for a long time will help your credit score. The score considers your oldest account and the average age of all accounts.
Number and types of credit accounts. 10%. Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered. Opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries can represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer.
Other Available Scores
While FICO is the most famous, there are, in fact, several other versions and providers of credit scores. VantageScore, NextGen, BEACON, and EMPIRICA are a few of the other popular sources used in the financial services industry. Some scores are directly developed by credit bureaus while others, like FICO and CreditXpert, are developed by outside companies.
Most alternatives to FICO are still modeled after the same statistical method in terms of the output number, but the major difference for most lenders and other agencies that need to buy credit scores is cost. Companies like FICO charge the reporting agencies a licensing fee for each score generated.
Charge Off
This is an accounting term that creditors use when they assume after a period of delinquency that they are not able to collect on a debt. Creditors write that debt off as a loss against their income taxes. Just because a debt is charged off (or written off) does not mean the debt is forgiven. The money is still owed. The creditor will usually sell or assign the debt to a collection agency or a lawyer to effect collection. If you file a bankruptcy you need to be sure to include any "charged off" debts you know about. They should show up on your credit report which iI can order for you.
Some companies continue to charge interest, but most don't. If they do decide to keep charging interest, they have to continue to report it as income. Most companies would rather just write it off and be done with it.
Having charge offs on your credit report usually results in you being denied credit by others. It can also affect the interest rate that other lenders charge on current debts even if those lenders were not impacted by the charge off.
If you have charge offs on your credit report, it is possible to have them removed.
You can try to contact the original creditor and arrange a payment plan in exchange for them removing the charge off once it is paid. It doesn't hurt to ask them how it can be resolved or removed.
What Happens to My Credit After Bankruptcy?
You get a notation of your filing on your credit report.
How Do I Rebuild My Credit?
After filing bankruptcy, many people are afraid to take on new credit.
But not doing so can hurt you later on, particularly if you wish to later get a car loan or mortgage.
An important thing to do is make sure all of your accounts are listed in your credit reports as charged off or included in bankruptcy.In chapter 7s, the accounts should also show balances of zero. These accounts will remain on your reports for seven years.
This is accomplished by writing the 3 major report services and asking them to indicate that the accounts now have a zero balance. After your case is filed I can provide you with a form letter for this purpose.
It is also important to get new credit cards. Once your case is filed I can provide you with a list of credit card issuers who are willing to provide credit cards (sometimes secured cards) to people who have recently completely their case.
Another good way to build back your credit is "piggy-backing" on someone else's credit by asking a friend or relative to add you as an authorized user on one or more credit-card accounts. You won't be responsible for the bills, and you won't have access to the credit cards . The primary cardholder's credit record won't be affected in any way by your bankruptcy. You, on the other hand, get the benefit of their credit history right away. The potential drawback is that your own credit could be damaged if your credit benefactor gets into financial trouble.
The standard financial advice for paying down your debt would be to pay down the credit cards with the highest interest rates first. However, if you want to maximize your credit score as quickly as possible, make sure you pay down your credit cards that are closest to the limit first, and do not focus as much on what the interest rate is.
Paying the cards down in order of "closest to the limit gets paid first" is the best way to boost your FICO score because it will have an immediate effect on your debt - to - credit ratio.