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Paul Yamilkoski

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Creating Credit Scores

Credit scores are an important part of our daily lives.
They affect our ability to get a mortgage, get an auto loan, a personal loan or a credit card. They can even affect getting a job or our insurance rates. If, our score is bad, or worse yet, we don’t have a score, things can get difficult.

So, it is not surprising to me that people wonder what it takes to get a credit score. What is surprising, is how the perception is presented that, for many people,  it is really hard to have or get a credit score. Just a heads up, I may travel down a rabbit trail at some point. It is important to me that people get the help they need. In that zeal I can get a little worked up, so please show me a little grace the it happens.

There is not really a complex formula to creating a score. Basically, you have to have something positive about your financial activities being reported to your credit report.

According to FICO’s website, as long as your credit report contains the following minimum requirements, you should have a FICO credit score being developed:
    – At least one account that has been open for six months or more
    – At least one undisputed account that has been reported to the credit bureau within the past six months.
    – No indication of decease on the credit report (Please note: if you share an account with another person this may affect you if the other account holder is reported deceased).
That’s it. That is all it takes to have a FICO score get generated for your credit.

Now, there are many important elements to having a “good” credit score, and I will cover many of those in future posts, but it is generally fairly simple. 
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First you need to have an account that you get graded on. This is basically a credit card, a personal loan, auto loan or a mortgage. As noted above, you only need to have one to be able to generate a score.

Second, you need to get a good grade on that account, if you want a good score. You accomplish this by always paying your bill on-time. In the case of a credit card, you also keep your balances low compared to your limit, when it gets reported to the bureaus each month. You don’t need to spend lots of money and you don’t even have to spend any money each month. In fact, ideally you will spend very little each month (of course credit card companies would cringe at me saying that).

Now, you are probably wondering what is third. Well, you don’t have to have a step three in order to get decent credit scores. If you add a couple more accounts, so that you have what would be referred to as an ideal mix of credit, you will see your scores grow more quickly and reach into the top tier scores more readily. The ideal mix is basically 2-3 credit cards, an auto loan and a mortgage. Anything more is basically overkill and not going to get you any appreciable additional benefit.

The key from there is time, time always paying those accounts on-time, and in the case of the credit cards, keeping them open forever with balances low when they report to the credit bureaus. The older they get the more power they have on your credit. 

That’s it. Good credit is the result of discipline and consistent good fiscal behavior over time. That is basically all there is to achieving good credit scores.

I hope you can see that credit, in general, is indeed simple. However, that does not mean it is easy. Life happens, and I get that. The Lord knows that I am indeed aware of that.

That is where the complexity of the scoring equation comes from.       

The job of credit scoring basically is to create an indication of how likely it is that a person will default on a debt. The algorithm for credit scores is very complex and considers everything relating to credit transactions that is reported on your credit report, and from many different angles.

This happens because statistics show, for example, that there is a clear difference in the likelihood of defaulting on a debt, between one person who was late on five accounts all at the same time, indicating an isolated circumstance, and and another person who was late five times over a period of time, demonstrating a pattern of failing fiscal behavior.

Some people are really bothered by this and think it is unfair to be judged by past behavior. images.jpeg    Those people somehow have been duped into believing that accountability does not apply to them. But like it or not, the real world cares about your history. Those that ignore or forget history, are doomed to repeat it. (That is something I learned in late elementary or early junior high school, and it has stuck with me ever since.)

I have still had people try to disagree with me, in spite of what I just noted, but a simple analogy almost always stops them in their tracks… most of them anyway.

That analogy is to look at things this way: Suppose I had a dog that  was really nice. It was fantastic with children and adults alike, and seemed to have the best disposition you ever saw in a dog. Would you let you children play with it?

Almost always I get an affirmation that yes it would be fine for their kids to play with the dog.

Now, how about if I told you that the dog had bitten children, without any warning or provocation, on five occasions over the last year. Would you still let your children play with that dog? Or, how about if it had only bit a child once, but had really injured the child seriously?

The answer is always an emphatic "NO". 

So, though those people, just a short time ago, had told me it is wrong or unfair to judge them by their history, they were in fact completely willing to do the very same thing. 

This brings me to another element that finds its way into the conversation, and though it may be a bit of a rabbit trail, here it is.

There is a lot of talk about some sectors of society, millennials for example, and how credit eludes them, disenfranchises them, or that it is unfair to require them to get credit, when they don’t want to get it.           people-standing-in-line-up-1762501.jpg

Well, it’s not really true that they can’t get credit. For the most part, the notion that the scoring system disenfranchises them or is unfair to them is nothing more than political misspeak politicians use for the purpose of political gain, in my opinion. 

The reason I say that, is there are many avenues to establish credit, that are relatively easy to get, if you are willing to front a small amount of money to secure the line of credit. There are also some other less traditional things, such as getting your rent payment history reported to the credit bureaus, to show consistent good fiscal behavior.

But more than that, it strikes me as a bit silly to think you should be able to get major credit, such as a mortgage, when you have never done anything to show you can responsibly pay it back.

You have to pay to play folks. If you don’t want to use credit, or use it properly, then don’t complain about not having it or it costing you a lot. If you want to pay cash for everything, that is fantastic. That will prevent you from getting yourself into trouble. That is your choice.

But with all choices come consequences, either good or bad. In the case of paying cash and not having any credit, you will have to pay cash for your automobile or house too. You may also pay a little more on your insurance etc. You know that when you make the choice. If you don’t want it that way, then you will have to accept the fact that you need to establish credit, even if it is just to use as a tool for your future plans. The point here is that credit is available, and whether you choose to have credit or not, you know what you will get as a result of that choice.

Maybe some people are not ready for credit. And for those that are not ready for it, maybe that means they are not ready for the things that require a good credit score to obtain. Maybe they just need to work their way up to that point. Let’s face it, obtaining financing for something is not a right. It is a privilege that is earned by demonstrating fiscal responsibility over time.

That is what it takes to create good credit scores.             approved4.jpg

If you or anyone you know is facing credit challenges and would like some help, Heartland Credit Restoration is a great place to start. Call or email me for a free consultation.

The same goes for those of you who are realtors or lenders and have clients with credit challenges. Tell them you know a company that is fantastic at helping people get their credit loan ready, so they can realize their dreams a new home. Ask them if they would offended if you forward their contact info to me. I will be happy to give them a free consultation and see what we can do to get them back to you with loan ready credit.

Please share this with your friends and contacts on social media. I also welcome comments and encourage you to feel free to let me know if you have any questions. In the mean time, I hope you have a wonderfully blessed day!

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