First Connecticut Mortgage Co. Newsletter April 2006

Why Is Your Credit Important: Part Three

HOW YOU PAY YOUR BILLS IS 35% OF YOUR CREDIT SCORE

Brought to you by Reynold Nippe

How many times have you awakened in the middle of the night in a panic because you know you forgot to pay a bill and you have just incurred a huge late fee, a loss of a favorable interest rate and a big ding to your credit score? In case you don't already know, your payment history is the largest consideration in your credit report and score. You owe it to yourself to make sure that you understand everything you need to know about this factor and how you can keep this factor as high as possible.

Your payment history is considered to be your financial fingerprint that tells potential creditors your tendency for paying your bills and when. Payment history accounts for a whopping 35% of your overall credit score, and for good reason. It is the best indicator of credit worthiness creditors can have for determining whether or not you will pay your debts in a timely fashion, or at all. You see, creditors naturally assume that if you are late in paying your bills, you mismanage your finances and your accounts, a pattern which is more likely to lead you into a default down the road.

Creditors view a late payment or a missed payment as a big red flag. They are not going to ask why you were late with your payments. It could be because you have lost your job, had a medical crisis, were on vacation, but it simply doesn't matter. They are going to assume that you are a high risk borrower and your credit score will reflect such as each late pay can lose you as much as 50-75 points off your score.

Late pays and missed payments are devastating to your credit score. Regardless of whether or not you have lots of money in the bank and plenty of unused credit, your payment history indicates how much control you seize to properly manage your situation and the level of care and responsibility you exercise to maintain your existing accounts.

Payment history is more than just a record of payments made on your accounts. There are several factors that influence it, things you may not even have considered, and knowing these factors and how you can manage them is one of the most important things you can do to improve your score whether you have good credit or not. Per Fair Isaac, the creator of the FICO scoring system, the following factors influence Payment History the most:

1. Payment Information On Accounts
   This includes payment information on any credit cards you have, retail accounts (such as a department store credit card), installment loans (this includes automotive loans or any loan that requires monthly payments), finance company credit accounts and mortgages. It includes the payments made and the dates they were made. Late payments are considered in your report also, as you'll see below. You should know that not only do late payments damage your credit score, they can also cost you money. Many credit card companies have a policy where if you miss a payment or are late with a payment, they consider it a breech and will raise your APR significantly. They often have a default APR listed when you apply for the credit card that can be as much as 26% or higher. That can cost you big bucks in interest payments.
   
   
2. Adverse Public Records
   This category reports any information on bankruptcies, wage garnishments, judgments, foreclosures and liens. If you have any negative public record on your credit report, it will cause your score to go down considerably. It is very serious if you have any of these on your credit report. The older the item is, especially if it is for a small amount, the less it will damage your credit score. Newer items with large amounts will cause the most harm. This category is the hardest to improve upon because it deals with the most severe credit problems and because items in this category stay on your report for a long time. Generally, bankruptcies and tax liens can stay on your report anywhere from 7 to 10 years. Unpaid judgments can remain for up to 10 years and are renewable for another 10.
   
   
3. Severity Of Delinquency
   Delinquencies include late or missed payments, as well as adverse public records such as bankruptcies and foreclosures. This category judges how severe the delinquency is, such as how late a payment was. Obviously, the sooner a late payment is made up, the better. A 30-day late payment will not count as much against you as a 60- or 90-day late payment, but even if you're just a month late, it can ding your report 50 to 75 points. Note: Some creditors do not report until you are 60 days late. If you know that you are not going to be able to pay all of your credit card payments on time, call each creditor to find out whether or not they report at 30 or 60 so that you can decide which cards to pay first. Do everything in your power to avoid 30-day late pays.
   
   
4. Amount Past Due on Delinquent Accounts
   This is tied to the severity of delinquency category. If you have a large amount on a delinquent account, it can cost you dearly. The less you owe on a delinquent account, the less it will affect your score. However, if you pay off a delinquent account, you should know that the item will not disappear from your credit report right away. It can still remain on your account for up to 7 years.
   
   
5. Recency of past due items and delinquencies, adverse public records, or collection items
   This category is a positive because it is where you can make up some points if you have previously had credit problems. It considers how long it has been since an account has been past due. Late-free periods of time, for all accounts, will help your score increase. So even if you have had a delinquent account, if you keep up with your payments from now on, you will gain some ground in this category. Note: A collection is a derogatory account, paid or not. Paying an old collection may cause your score to go down because it will make the date of last activity on that account current, making it a recent derogatory. If you are going to pay a collection, old or new, try to negotiate a deletion letter from the collection agency. Use your payment as negotiating power. You will have to be persistent and call back 3-4 times until you get the right person on the phone who will agree, but it is possible, so be patient and insistent. Make sure that the collector understands that you are aware of how the scoring system works, and that you have no motivation to pay the debt unless it is deleted because it will bring DOWN your score.
   
   
6. Number of Past Due Items
   Along with the previous categories, this one deals with late or delinquent accounts by counting the number of accounts you have that are past due. If you are late on just one account, it will be reflected in this category and will be better for you than if you are late on several accounts.
   
   
7. Number of Accounts Paid as Agreed
   This is where good credit items count most. This category reports how many accounts you have paid on time, without any late or missed payments. It reports even closed accounts that were paid off as agreed.

Some Steps to Beef Up Your Score
If your credit is less than perfect, or if you want to keep from damaging your credit, here are some steps you can take to raise your score.

• Get a complete picture of your current credit situation by ordering your credit report and score for all three national credit bureaus, TransUnion, Equifax and Experian. You should get your score from all three bureaus because each bureau may have slightly different information about you depending on which companies have reported to them on your accounts. Do not have a creditor pull your reports because you will lose points for a hard inquiry. You can pull all three credit reports and scores for $1.00 at www.privacyguard.com. Please be sure to read terms and conditions of the Privacy Guard Agreement.
  
  
• Verify that the data affecting your payment history is being reported accurately. A few examples would be:
  
  
  • Check all accounts for late pays. Were you late? If yes, is the late being reported in the correct month? If not, by law it should be removed.
    
    
  • Check for collections. There are so many nationwide collection scams going on that it is now necessary to check our reports quarterly (at a minimum) to make sure that we are not victims. Per Sec. 1692g. of the Fair Debt Collections Act, the burden of proof is on the collector not you, and if you ask them for it, they have to provide you with the following information:
    
    

    -Date they purchased the debt
    -Amount they paid for said debt
    -Date of last payment/activity if any
    -Original creditors full name and address
    -All records pertaining to actual debt to prove validity

    If they cannot provide you with this information, then the account must be deleted from your credit report.

  • Make sure that there are no past due amounts being listed. Sometimes creditors forget to update this part of your file.

• Pay all of your accounts on time. This is the most immediate factor you can control in managing your credit score. Mail your payments in plenty of time for them to reach your creditor (at least seven days), or try online bill paying from your bank. You can schedule automatic payments or log on and pay them manually as needed. Set up a system to help you remember when to mail or make payments, not just when they are due.
  
  
• If you should happen to forget or miss a payment, immediately get back on top of things. The faster you get current on accounts, the better off you'll be because if a late payment is reported, the time since a late payment is reported too. If you make future payments on time, you'll prevent the score from going down even more.
  
  
• There are times when you cannot manage your credit, whether it is because you have lost your job, are injured and unable to work, or have just gotten in over your head. If this should happen to you, you should contact your creditors. Often times, they will negotiate different payment terms, a lower interest rate, or some other arrangement to help you pay off your debt.
  
  
• Give it time. It will take some time for some things to be removed from your credit report. If you have had credit problems, remember that the time that passes since the problem occurred counts in your favor. If you started to manage your credit now, in six months your score would be higher than if you did nothing at all. Remember that negative items will stay on your report for many years, even if you pay them off because it reflects your past credit history.
  
  
• The best advice I can give you about the payment history portion of your score is to be proactive. It is easier to prevent credit problems than it is to erase them. If you are already managing your accounts by paying your bills on time then keep up the good work. There are other factors that influence your credit score, but payment history is the largest and pulls the most weight of any of them.

In Conclusion:

Your payment history plays an enormous role in your credit score. So much so that it constitutes more than one-third of your score. Your payment history is also the factor in your credit score that you, hands down, have the most control in protecting. It is so much easier to avoid a problem with your payment history than it is to try and undo it over time. Additionally, you will save so much money by simply making sure that you make at least the minimum payment and making it in plenty of time. Finance charges for late pays and jeopardizing favorable interest rates will hurt you in the short run. And late pays will put you into a higher interest rate category going forward, if not prevent you from getting credit completely.

Follow the simple steps outlined in this newsletter and just relax and enjoy yourself. Once you get organized, you'll find it's easy to handle your creditors wisely.

All the best.