The saying used to go, “A man’s only as good as his word.” However, these days, according to banks and other lenders, A man is only as good as his credit. Whether it is applying for a home loan, car loan, personal loan, credit card, or even getting approved to rent an apartment. Your credit has taken the place of your word as to whether you can repay the potential loan that you are about to receive.
First off, it would be beneficial to understand how your credit score is calculated and what kinds of actions affect it. There are five different factors that are taken into consideration when calculating your credit score:
What do these percentages mean to you? To have the best possible credit score you want to ensure that each category is as close to perfect as possible.
Making late payments or skipping payments on your loans will always carry a negative effect on your score. Additionally, any types of public records will appear in your payment history, for example, bankruptcies, judgments, or liens. Furthermore, these negative notes could possibly remain on your credit report for up to seven years. In a perfect world, the companies would like to see that you are making all your payments fully and on time.
Carrying a high balance on a credit card relative to the credit line will also bring down your score. If you have a balance of $2,700 on a credit line of $3,000 credit companies calculate this debt to credit ratio as your utilization ratio, the utilization ratio in this scenario is 90%, a lender will look at you as a higher risk of missing or being late on a payment. A utilization ratio of 30% or lower is ideal. This section can become a little tricky when people believe that they are helping their cause by closing a paid off credit card, however, it has the adverse effect as it now lowers your credit line and therefore may increase your utilization ratio. For example, if you have two credit cards and each card has a $5,000 limit your total credit line is $10,000. Now if card 1 has $3,000 and card 2 has $1,000 your current utilization ratio would be 40%. If you pay off card 2 and then close the card most would think that this would increase your credit score, however, due to now decreasing your credit line from $10,000 on two cards to $5,000 on just one card your utilization rate went from what would have been 30% to 60% since it is being calculated as $3,000 of debt on $5,000 of credit.
This factor is basically what it says it is. How long have you had credit for? There are three factors that are considered under credit history:
- 1) How long your accounts have been open overall.
- 2) How long certain types of accounts have been open.
- 3) How long it’s been since you’ve actually used those accounts.
Most bureaus require a line of credit to be on your history for at least six months before it begins to affect your credit score.
Although this section sounds pretty straightforward there are a couple of other factors other than the obvious factor of how many new credit cards or loans you receive within a short period of time. Opening a new credit card every month while only skipping a month to get a car loan will not help your credit score. As previously mentioned, a line of credit doesn’t begin generating history until six months after it has been open. So, while you may think that having multiple cards within a short period of time will increase your credit score it may be doing the exact opposite as creditors take into consideration the average length of each account. Additionally, inquiries into your credit will also decrease your score, although it is a minimal effect, each inquiry could remain on your report for two years. On a positive note, this section also takes into consideration how well you can recover from any payment problems. If you can start making payments on time after having several late or missed payments this will have a positive effect.
This section looks at the types of loans you currently have outstanding and how well you have been able to pay off each. If you have a credit card, car loan, mortgage, and student loan which are all in good standing creditors will see you as being capable of handling multiple debts and will conversely increase your credit score.
Now that we have established how your credit score is calculated we can look at how credit slander can have a negative impact on your score. Credit slander is when agencies falsely or inaccurately make reports against your credit report. This can affect almost every aspect of your credit score calculations. Inaccurately reporting payment dates as being late when the payments were made on time or not crediting a payment when it was made would decrease your Payment History section or your Amount Owed section. Furthermore, any false liens or judgments that may be made against you may have a negative impact on your Credit History section. Also, creditors who are looking for payment may make inquiries into your credit which would negatively affect your New Credit section.
What to do to make sure you are not a victim of credit slander. Although it may negatively affect your credit score you could run your own inquiry into your credit score to make sure that everything that is being reported is accurate. This inquiry would only have a minimal effect on your score and the potential of finding errors that may be affecting the sections which account for a higher percentage of your credit score may outweigh the negative of running your own inquiry.
If you’re curious or have further questions regarding credit and credit repair, EPGD Law has a wide network of individuals that can help. We’re happy to provide a referral or assist in any IRS dispute issues that may arise. Both our Washington, D.C. office and, our Miami, Fl office, can be reached via (786) 837-6787 or simply email us at firstname.lastname@example.org.
*Disclaimer: This blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*