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12 Questions on Credit
1. What is the purpose of a credit report?
2. Which are the bureaus that report on personal and on business credit?
3. How and how often may I have my free credit report?
4. Will my free credit report include credit scores?
5. Who reports credit and who uses credit reports?
6. Have the three large credit bureaus both (a) the same formula for scoring and (b) the same range of scores?
7. What are the scoring components of personal credit, and what is each weight?
8. Are there tips for maintaining high credit?
9. What is the meaning of (a) the median score and (b) a high score?
10. Is there a major difference between personal and business credit reports?
11. Will a good score assure me and my business of the new desired credit?
12. Is FICO pronounced fie'-co or fee'-ko?
12 Answers on Credit
1. To assist a creditor lender) decide whether an user or a borrower has the character and ability to repay as agreed.
2. On personal credit, the largest are (a) Equifax (EFX), (b) Experian (XPN), and Trans Union (TU). On business credit, Dun and Bradstreet (D&B) and Experian.
3. Every 12 months. www.annualcreditreport.com
4. Not the free reports for EFX, XPN, or TU; however, for a fee or a subscription to a reporting service, scores can be included. Though Latin is a dying language,
its warning to buyer (caveat emptor) still lives. Alternatively, obtain free scores and simulate tracking of scores. www.creditkarma.com
5. Practically every grantor of credit also uses reports to decide whether to extend credit. Reports and scores are used not only for direct loans but also for
insurance,
leases and employment.
6. No. Each bureau has its own pack of analysts and its own proprietary model.
a) Equifax's Beacon 5.0 scores from 300 to 850,
b) Experian's FICO II scores from 300 to 850,
c) Trans Union's Classic 04 scores from 300 to 850.
Other models score from 150 to 950 and focus on a niche of risks.
Example:
d) for car loans, Industry Option FICO,
e) for riskier borrower, Next Gen, and
f) for those with slight or no credit history, FICO Expansion
7. The five components are:
a) history of "on-time" payments.............................................. 35%
b) ratio of current debt to approved maximum.......................... 30%
c) length of credit...................................................................... 15%
d) types of credit (installment, credit, cash)............................... 10%
e) new credit.............................................................................10%
8. A tip for each component:
a) pay on time, especially secured creditors,
b) borrow no more than 30% on each credit card,
c) use each credit card at least once each 6 months and avoid closing accounts with long and good credit,
d) have a variety of debt (mortgage, car loan, credit card) and pay more than the monthly minimum on each credit card,
e) restrain the urge to open new credit cards. Could a family member or friend help?
CAVEAT EMPTOR!
Before you accept a new low promotional rate and balance transfer, note not merely the rate and term but specifically the cost of the transfer.
Yesteryear's
minimal or free fee is now 3% or more. So, if the rate is 3.99% for 12 months and the fee is 3%, your new $10,000 transfer will cost you $699 (6.99%).
9. On the consolidated report from the three credit bureaus (called a "tri-merged report"), the median is the middle of the three scores. There is not an easy
definition of high. From 2004 to 2007, FNMA required 660, but some sub-prime lenders required only 550. At present, "good" credit starts at 750 on an 850
scale. Higher always is better.
10. A business credit report focuses on the punctuality of payments. Experian's business profile ($55) averages the number of date payments as DBT (days beyond
terms) and compares a particular business to its industry.
Both D&B's (a) business information report ($119) and its (b) comprehensive report ($159)
offer --
a) a credit rating from 1 (least risk) to 5,
b) the high-low credit, and
c) a scoring by percentile (PAYDEX).
Its comprehensive report adds a test of financial stress. For small business, D&B's reports have
limited utility because --
a) trade may be reported irregularly or through the owner's name
rather than the business' name, and
b) information from public records itself is limited and often
is not re-verified for accuracy.
11. No, but without a good score you will not obtain good financing. If your personal score is below 720 or if your business averages 25DBT, then begin improvement
immediately.
12. The former if you refer to a credit score or the Fair Issac Corporation. The latter if you refer to Shakespeare's fig in The Merry Wives of Windsor I.3.33.
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