Credit Made Simple For the Amateur Consumer

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The following post comes from my Free Better Credit Blueprint Video Lecture Series available on the Udemy Platform

One of the first things you need to know is that a credit score and a credit report are two entirely separate things. Your credit report is raw data, while your credit score is what a lender makes of that raw data using one of dozens of credit scoring models that we, as Amateur Consumers, are really clueless about.

Unfortunately, a lot of you reading this post or viewing the video don’t even know that a credit score is a number that reflects your credit worthiness… at a given point in time.  It’s not just sitting there in some computer with a number already assigned to it.  It just doesn’t work that way.  Your credit score is based on the information contained in your personal credit report at the time that your credit report is pulled.

Different Scoring Models

To determine a credit score from your credit report, lenders use credit scoring models. As I say in earlier videos, there are dozens of these, but FICO is by far the most common and for sure you’ve probably heard the term Fico Score.

Different scoring models stress different aspects of your credit history. For example, one model might tell a bank how likely you are to default on a mortgage while another scoring model might tell how likely you are to let your credit card payments go 90 days late. Depending on what bank you apply for credit with, what type of loan you’re getting, and what model they use, you’ll wind up with different credit score from each one.

Not Just One Credit Score

What this means is that your credit score will change depending on what model is being used to generate it.  In other words, you don’t have just one stable credit score, but rather a range of scores depending on the information contained in your credit report by Experian, Equifax, and TransUnion.  The difference can be as much as 50 points and I’ve personally seen reports that differed by 100 points!

And yes; that is most definitely a wide enough range to push you up or down on a lenders interest rate scale or to just flat out get you denied. So now that you know this fact, think your credit report and credit scores are worth keeping an eye on?  You better believe it!

Building a Credit File

A lot of the information that I personally have learned throughout the years about credit reporting came from researching and reviewing numerous court proceedings, depositions, and testimony.  One of these court cases I reviewed was from January 2005 in the court case of Kirkpatrick vs. Equifax.

In this court case, Equifax Vice President Phyllis Dorman said that when “building a file” after receiving data from a creditor, or when deciding what data to include on a credit report that will be disclosed to a creditor, the first factor considered by the Equifax system was geographic region.

Then its “matching algorithm,” which is known as L90, relies on 13 matching elements. Two of the elements that constitute a distinct category are: (1) exact Social Security number (SSN) and (2) partial SSN (meaning that most, but not all digits are the same).  The remaining elements are (3) last name, (4) first name, (5) middle name, (6) suffix, (7) age, (8) gender, (9) street number, (10) street name, (11) apartment number, (12) City, state and zip, and (13) trade account number.

Credit Attributes

The summary variables that are generated from the raw data are referred to variously as “credit attributes,” “credit variables,” or “roll-ups.” Each of the CRAs has hundreds of attributes that have been created at various times for various purposes, but a typical scoring algorithm uses far fewer.  The primary factors that affect credit scores include:

• payment history, including late payments and collection items;

• balances, available credit, and the percentage of existing credit lines being utilized;

• negative public records such as bankruptcy, judgments, and liens;

• length of the credit history and the mix of credit types; and

• evidence of taking on new debt, such as new accounts or inquiries.

“Generic” Scores and “Industry” Scores

When credit scores are designed and sold to predict payment behavior on a wide range of credit products, they are referred to as “generic” scores. When they are designed to predict performance on a specific type of credit, such as automobile loans, they are referred to as “industry” scores. Some lenders, especially larger lenders, receive credit reports from a CRA and calculate scores themselves using models developed to predict the performance of their own customers and these scores are called “custom” scores.

Now be truthful with yourselves; how many of you reading this post or whom have watched the video knew all or any of what I just went over?   The simple fact is, not only is credit misused but it’s misunderstood by millions of people who don’t know or understand the credit system that they are participating in on a daily basis.

It’s almost like a foreign language to them and some people find the topic confusing or too intimidating to understand but again, you have to get over your fears and challenge yourself to be a better- more informed consumer for the betterment you and your family!

Amateur Consumers vs Credit Professionals

Remember, at the end of the day, we are all amateur consumers.  The banks, creditors, and the credit bureaus? They are all professionals!  The more you learn, like you’re doing by reading this post or watching the Free Better Credit Blueprint Video Lecture Series, the better you will manage your credit and finances moving forward.

Now, I’ve talked to hundreds of people that truly believed that after going through  financially devastating events like bankruptcy, foreclosure, or divorce to name a few, that they were powerless to recover their credit; almost as if their credit controls them, when in fact; nothing could be further from the truth.

Without a doubt, these events will hurt your credit and no one knows that better than me, but you need to understand how credit works so you can make it work for you – that’s the key so please… don’t be a mindless consumer.  Credit is a powerful tool that you can use in your financial life and affects you more than you know beyond having purchasing power.

Knowledge is Power

However again, if you don’t understand the world of credit you participate in every single day, then in fact, you are powerless!  You need to know, at the very least, the credit basics and you need to figure  meaning how to stay out of debt, manage your credit, and then create a new mindset or as I call it; a new “money consciousness” in order to be successful in life!

And for the record; I haven’t used credit in over 2 years which is why I say it affects you in more ways than being a consumer looking to perhaps – make a purchase… you shouldn’t make!

If you haven’t already done so, please read my 4 New Year’s Resolutions That Will Ensure Your Financial Success in 2013 !  So what about you?  Are you setting out to create a new “money consciousness” for 2013?  How much of the information I covered in this post did you even know about?  I’d love to hear your thoughts and comments icon smile Credit Made Simple For the Amateur Consumer