Personal and Building Credit

Personal Credit Facts

• Credit scores didn't exist until the 1950s.

• In the 1950s, credit began to develop based on assets and liabilities to determine credibility.

• In 1970, credit scores were officially used for lending purposes, allowing financial institutions to assess risk.

• The main credit bureaus are TransUnion, Experian, and Equifax.

• Secondary bureaus, such as Innovus, LexisNexus, SageStream, Clarity Services, and CoreLogics, house consumer credit transaction data.

  • LexisNexis may house bankruptcy information.

  • Clarity Services may house installment loan account information (mortgages, auto loans, etc.).

• If you dispute information with a secondary bureau and they cannot verify it, the main bureau will delete it.

• Regular credit scores range from 300 to 850.

• Each country has a different credit scoring model, and debt typically doesn't follow you across countries (where credit systems exist).

• If you move to a new country, you generally start fresh with credit.

Understanding Your Personal Score and Credit Profile

• Credit scores range from 300 to 850, a span of 550 possible points.

• Different categories are weighted, impacting your score:

  • Payment History: 35% (192 points) - Paying back people on time.

  • Credit Card Utilization: 30% (165 points) - Strategically utilizing available credit.

  • Credit Age: 15% (82.5 points) - Average age of all accounts.

  • Account Mix: 10% (55 points) - Variety of accounts (revolving and installment).

  • Inquiries: 10% (55 points) - Number of recent credit applications.

• Payment history and credit card utilization account for 65% of your score.

• Lenders assess whether you pay back money on time. Not paying on time can significantly lower your score (almost 200 points).

• Strategically utilize the amount of credit, without maxing out. Maxing out cards can significantly reduce the score.

• Credit age considers how long you've had credit. Limited credit history can make lenders hesitant.

• Account mix refers to having a variety of revolving and installment accounts.

  • Revolving accounts: Amounts owed vary monthly (utility bills, cell phone).

  • Installment accounts: Fixed monthly payments (mortgages, auto loans).

• A good mixture is approximately five revolving and five installment accounts.

• Inquiries remain on your credit profile for 2 years (24 months).

• They reflect how often you've sought to borrow money, indicating either desperation or responsible behavior.

• Inquiries: each one impacts the score by 1 to 2 points.

• Focus on the credit profile, not just the credit score. A high score with negative history is still unfavorable.

Credit Profile Examples

• Profile 1: Good payment history (99%), low credit card utilization, high credit age (12 years, 3 months), 17 total accounts, 19 inquiries, 1 derogatory mark. Estimated score: 750+

  • The 19 inquiries bring down the score a bit, the person is getting between 19 and 38 points lost out of the 55 points available to earn within that category.

• Profile 2: Good payment history, good credit card utilization, low inquiries, 17 total accounts, credit age of 3 years and 4 months, one derogatory mark (bankruptcy from 4-5 years ago). Estimated score: 710-720

  • Although a bankruptcy can deduct ~ 100 points. Over time that individual has been able to build their creadit profile back over time.

• Profile 3: 3 total accounts, 3 hard inquiries, 3 derogatory marks (delinquent status). Estimated score: 400.

Building Credit: Primary & AU Accounts

• Primary Account: You have sole ownership of the account.

• Authorized User (AU): You are added to someone else's account to show on your credit profile.

Credit Builder Accounts (Primaries)

• These accounts help build a credit profile. They can help with: credit utilization, payment history, and account mix.

• Typically no credit needed; soft pull.

• Requirements: income of $1,400/month, U.S. citizen.

• Examples: Google them

  • Kikoff

  • Credit Strong

*Adding new accounts may lower credit age.

Considerations

• Repairing credit by removing student loans can remove seasonality.

• Student loans can often be your oldest, most seasoned account.

• Removing them can lower your score by 15%.

• If the negative reports on student laons is from years ago. Then it is more beneficial to learn how to play the game.

Getting Credit for Rent Payments

• Need multiple accounts to build up a credit profile.

• Reporting rent payments can help build credit.

*Examples:
* Rent Report
* RentTrack
* Rent to Common