As complex as individuals are, the financial risk they pose a lending company can be summed up by one number - their credit score. Being "creditworthy," or having a satisfactory credit rating, opens up lending doors for people and can affect the interest rate and other terms of a loan.
A person's credit score is used by lenders to help determine the risk he or she poses a company that lends money. Generally, the higher the score the lower the risk the person presents.
The score is typically generated from information collected by the three largest American consumer credit reporting agencies - Experian, TransUnion and Equifax - and then saved in a credit file. This file includes bill payment history, type and amount of credit issued and public records (including bankruptcy filings and liens).
Mike Antonio, broker manager of First Metropolitan Mortgage in Billings, describes credit as the number one tool a person has. "You're given a lifetime tool box. Used well, they will suit you throughout your life," he said.
Antonio uses Credit Plus, one of hundreds of credit reporting companies in the country, to generate credit reports for his clients.
Credit Plus contracts with Experian, TransUnion and Equifax to collect, package and sell the credit information to Antonio. He can select a report from any of the agencies, though lenders require a "tri-merge" credit report that includes reports from each agency.
Items reported include any newly-opened, existing or closed accounts (such as mortgages, credit cards, home equity loans etc.) and any late payments to these accounts.
Every transaction is reported, but not always to all three, which is why a tri-merge is more accurate, showing the discrepancies between bureaus, Antonio said.
Each agency is located in a different part of the country. In Montana, the agency most actively reported to is TransUnion. Though businesses may report to all three, they are not required to.
Each agency reports at different times, and cycle every 90 days. After 90 days, a score can go up or down, depending on items reported.
A score of 720 to 740 is considered to be A+ credit, Antonio said. He mentioned the standards have changed in recent months, moving up from 680 to a minimum of 720, and varies with lenders and lending programs.
Be aware that pulling your credit report more than six times in a 90 day cycle will bring down the score, Antonio said. A tri-merge will pull credit three times.
"It's that important to be aware of what you're doing," Antonio said. A good rule of thumb is to make sure to have no more than six credit inquiries in a 90-day period. "If you have more than that, it's assumed that you're hurting for money and looking for credit, and zoom, down goes your scores," he said.
Trade Summary Balance
The Trade Summary Balance section of a credit report adds up an individual's outstanding debt and measures it against his or her total high credit (maximum dollar amount of all loans an individual can have outstanding at one time) issued.
For instance, an individual with $130,000 of secured debt (often a mortgage) and $6,000 of unsecured debt (usually credit cards) with a high credit issued of $160,000 has an 85 percent outstanding credit.
Creditors like to see the percentage at 65 or lower, and 50 is an ideal number, Antonio said. "If you've taken out $200,000 and owe $200,000, it's not a good place to be in. The lower the percentage, the stronger your credit grows, and the higher your score goes."
Antonio said this ratio of active credit and how much is still owed is important to consider before making any major purchases.
Raising a credit score
Ways to improve credit are as diverse as the people with the score. People with "A+" credit have room for improvement, just as individuals with lower numbers.
For instance, reducing the number of revolving accounts that are above 50 percent has the potential to increase a credit score. This can be done by paying down the balance or transferring some of the balance to another account.
Example: Reducing a credit card with a balance of $4,500 and a credit limit of $6,000 to 50 percent (currently at 75 percent), the cardholder would have to pay it down $1,500, which could increase the credit score.
Example: Transferring this $1,500 to an empty credit card has the potential to increase the credit score, since it reduces the percentage to 50 on one card and increases the percentage on the other.
Disputing an item
The most memorable credit report Antonio received was a report where he turned to the client and said, "Do you know you're dead?"
Inaccuracies can exist on credit reports. For instance, if a check was lost and taxes were reported as not paid on time, often someone could go months without knowing this late payment is pulling down their credit score.
In such an instance, a letter of dispute is needed. The credit report will have a derogatory summary, and it is recommended to deal with the reporting agencies in writing. Creditors are also listed at the end of the report, with addresses and phone numbers, if applicable.
"Credit sticks from day one till you die. It is important to learn how to use it and manage it," Antonio said.
Antonio can be reached at 245-4441