This, my friends, is a very complicated question, and believe it or not, with everything that is known about credit ratings and how they are established, the truth is that there is still a little bit of a black art associated with it.  In order to understand how credit scores are calculated, it is important to understand the basics of credit bureaus and their rating system.

A credit bureau is basically a company that stores your personal and financial information in a database that is used to develop your credit report.  The information in the credit report is used to calculate your credit rating through a credit scoring system.

There are three major credit bureau’s:

Equifax: www.equifax.com

Experian: www.experian.com

Trans Union Corporation: www.tuc.com

On each website you can find out your credit score, credit report, tips on how to improve your credit, see what actions will improve your score faster, etc.  They are very informative sites and imperative to building long term credit worthiness.  I recommend becoming intimately familiar with each of them.

The official name for a credit rating or credit score is “credit scoring system”.  There is a mathematical formula used to determine your credit score and this score is the beginning factor used in determining your credit worthiness to a lender.  The most common credit scoring system is known as the FICO score and it stands for Fair Isaac Company.  There are other systems as well.

Most lenders are confident enough in the system that the number is sufficient to understand your credit worthiness.  However, you can explain your credit score to some degree.  Say you had a large medical bill that you paid monthly but technically you were late and it was on your credit report.  Some lenders would take that into consideration.

The credit report is a record of your financial and credit activities and holds the information that determines your credit score.  Since the rating system is very similar between the three major credit bureaus, people who need to establish your financial risk (creditors, landlords, etc.) will use this in their evaluation.

To the best of my understanding, the actual algorithm used to calculate the credit score is unknown.  But like with anything else in life, the best way to understand it is to keep it simple: pay your bills on time = good.  Don’t pay your bills on time (or at all) = bad.  Bankruptcy = bad.  Keep your credit card debt below 30% of your credit limit = good.  And the list goes on.

Unfortunately, the answer is “it depends”.  Your bank may have different requirements than the places a dealership uses.  There may be a minimum credit score needed, a minimum income you need to earn, a minimum down payment for the vehicle, or any combination of the above.

If you have a bad credit score, your interest rate will be considerably higher than the going rate.  Regardless, you will be able to find an auto loan regardless of your credit score, but you will have to search for it and be prepared to make a considerable down payment and pay a high interest rate.

This is why it is imperative to repair your credit and following a credit repair plan will do just that.  It is not just to be able to afford the things you want in life, but to be able to pay the least amount in interest.

For example, I recommend never getting an auto loan for over 36 months.  There are several reasons for this that are not important to this article.  But the interest rates are important.  If you have good credit and take out $15,000 for 36 months at 6%, your monthly payment would be $456.33 per month or $16,428 total.  If you have bad credit and take out the same loan with a 15% interest rate, your monthly payment would be $520/month, or $18,720 total.  That’s a difference of $2,292!!!

Put that money into an IRA giving you a tax break on your income (Traditional IRA) and allowing it to grow tax free, or put it into a Roth IRA  where you can withdraw it tax free in your retirement and you’ve generated tens of thousands of dollars over the years.  Take that savings from every car you own and you increase that money exponentially.

So again, it’s never as simple as “what is the minimum credit score to get an auto loan?”  There are many variables, and what I hope for is that you work on credit repair in order to get better interest rates so you are able to save the difference and develop true wealth!

Yes…a simple question!

www.annualcreditreport.com

Call 1-877-322-8228

Complete the Annual Credit Report request form and mail it to:

Annual Credit Report Request Service

P.O. Box 105281

Atlanta, GA  30348-5281

Warning: this site is not about quick fixes.  This site is about building long term wealth through responsible strategies.  If your credit score is low, it is due to either an unfortunate/unforeseen circumstance, being irresponsible, or more likely some combination of the two.  Do not obtain another credit card if you have difficulty managing your finances at this point.  It may serve to temporarily help during a difficult time, but it will eventually catch up with you.  With that being said…

As with any discussions about credit, the first question is how low?  I don’t even mean an exact number at this point?  Is your credit pretty good, mediocre, are you in serious credit (and probably financial) trouble?  Let’s start from the bottom up.

If you are trying to build credit because you are young and need to establish a credit history and increase your credit score, or you are trying to rebuild your credit due to mistakes, a bankruptcy or other reasons, you may not be able to get a traditional credit card for a while.  In either case you need to get a secured credit card to start.

A secured credit card is one that is secured by your cash.  You make a deposit, which is usually a minimum of $200, and then use the card like a credit card until the money has been withdrawn (please only spend the money on things you already need, like groceries or gas…therefore not increasing your spending).  You then make another deposit and continue the process.  In a short period of time you will have developed a history that can be used to get a credit card with a low credit score.  Your secured credit card will not be reported as secured, even to the credit bureaus, so it will improve your credit as well.

I do not want to recommend specific companies at this time.  There are good and bad companies out there and you need to be diligent in your research, but there are credit card companies that will give you a credit card with a low credit score or no credit history.

I would rather have you develop a plan to improve your credit score, improve your credit worthiness, and move forward with a wealth-building plan that uses good credit to obtain safe, sustainable financial growth in your life.

Stay tuned!  I’m in the process of developing that exact product.

There are home loans available for people with low credit scores.  Please remember that a low credit score changes with the economic times, and what was a low credit score a few years ago may be disqualifying now.  In our current economic environment, traditional loans for people with low scores are limited, but there are creative ways to get a mortgage with some effort and education.

The best way to obtain a traditional home loan if you have a low credit score is to look into an FHA loan (or VA loan if you are a veteran).  There are loans that can be obtained from private investors that will come with an extraordinarily high interest rate as they would take on the high risk of someone that does not have the financial credit to obtain a traditional loan.

There are people who are willing to owner finance.  The interest rate will be higher depending on the amount of your down payment, if any, and your credit history.  Many people think these loans don’t exist and that an industry has been created to make people think they can do this when they can’t.  You can.  I’ve done it.  You have to become educated on the process and follow a strict plan so as to limit your risk.  More on this is coming.

You can rent to own, where a portion of your rent goes into an escrow account to be used as a down payment on the property, whether it is to be used as an owner finance or through a traditional bank.  You can claim a portion of your income from a rental if you buy a two family house and are planning to rent one side.  This would help if you didn’t have the income necessary to obtain the mortgage and may help offset a low credit score.

The point is that having a low credit score, especially in today’s economic environment, makes it difficult to get a mortgage…but not impossible.  Anything can be accomplished through hard work, perseverance and creativity.

This is not a simple answer, but if you are just looking for a quick (albeit insufficient) answer, it is 500 for a limited amount towards a mortgage.

Okay, now to reality.  The minimum score of 500 is “by the book”.  Lenders may need (and from my understanding are requiring) higher scores in order to secure an FHA loan.  My contacts tell me that number is 620 as a rule of thumb.

By the book, the FHA requires 580 for maximum financing, 500 for limited financing, and you are ineligible with a credit score of under 500.  In reality, the credit scores required to obtain mortgage financing are much greater.  And there are different parameters for people with a non-traditional credit history or those who have been affected by a disaster.

There are also specific requirements that would be required in order to get an FHA loan, such as an FHA certified appraiser and the loans have caps on the amount.  Become familiar with all the FHA requirements if interested in this type of loan.

You can email me with any questions and I’d be glad to answer them.  Please understand that if you are asking the question, then others are probably wondering as well, so all answers may be posted on the site so everyone can benefit (your information will be kept private and confidential).

We can go into specifics for hours and I can write article upon article about one thing or another concerning what affects your credit score.  Over time, I will do that, one article at a time, as well as develop a step-by-step program to develop the top credit score.  In the meantime, it is imperative to understand that a credit score is the result of complex algorithmic formulas determining your credit worthiness, and there is a process by which the scores are evaluated.  This is what affects your credit score at its core.

There is something in the financial world called the Three C’s of Credit.  I don’t know where it came from but they are universal guidelines for what affects your credit score, determining your credit worthiness, and ultimately whether a creditor will lend you money.  The Three C’d of Credit are:

Character: do you have good character (from a financial standpoint)?  Have you utilized credit before (do you have a credit card, an auto loan, a mortgage, etc.)?  Do you pay your bills on time?  How long have you lived at your present address?  How long have you been at your present job?  The last two are hold-over’s from the days of old.  Today young people move more and change jobs more than their parents did.  However, it’s still a deciding factor in financial character and something to consider when building or rebuilding your credit.

Collateral (or Capital): something you own of value (called material security) that a lender can secure their credit against to lessen the risk of default.  The philosophy is that if you put your house, car, art work, or anything of financial value up for collateral, the lender will be able to collect that if you default on your payments.

Capacity: simply stated, can you repay the debt you are looking to borrow?  How long have you been in your current occupation?  Is it an occupation that looks likely to continue providing work at your current income level?  Do you have the savings, whether in the bank or in a non-retirement investment portfolio to cover the debt if you become unemployed?

If you have gone to one or all of the credit bureau sites you were probably overwhelmed by the services offered and the tremendous costs associated with those services.  Hopefully you didn’t purchase anything yet if you are just looking for your free credit report.  What you probably found is that you couldn’t get your free credit report on the site!!!  That’s right, below are the only ways to get your free credit report as authorized by the Federal Trade Commission (FTC).

www.annualcreditreport.com

Call 1-877-322-8228

Complete the Annual Credit Report request form and mail it to:

Annual Credit Report Request Service

P.O. Box 105281

Atlanta, GA  30348-5281

The first thing you need to determine is what your credit score is, why it is that particular score, and why you are trying to raise it.  If you are trying to raise your credit score because you are setting up a plan to build long term wealth, then take your time and do it right.  If your credit needs a quick boost to get an auto loan or to get a better mortgage rate read on…but I truly recommend putting together a long term wealth building plan as opposed to only looking at a short term fix.

With that being said, there are things you can do to quickly raise your credit score.  The first thing you can do is check your credit reports for accuracy.  There are three major credit bureau’s:

Equifax: www.equifax.com

Experian: www.experian.com

Trans Union Corporation: www.tuc.com

On each website you can find out your credit score, credit report, tips on how to improve your credit, see what actions will improve your score faster, etc.  They are very informative sites and imperative to building long term credit worthiness.  I recommend becoming intimately familiar with each of them.

You need to order your credit report, which is free, and I suggest you pay the nominal fee to obtain your credit score.  Why go through all the effort without seeing the results?  If you want to lose 20 lbs how do you know when you’ve lost it if you don’t know what your starting weight is?  Same concept with your credit score.

Alright, so now you have your credit reports with your scores.  Congratulations!  Now let’s get to work.  You first need to check all three credit reports for accuracy.  Make sure your name, address, and other basic information is correct.  Then make sure you don’t have any late payments showing or debt that is not yours.  You can correct simple information and dispute inaccurate information on the aforementioned websites.

Do this immediately.  Once the above information has been determined to be correct or is in the process of being corrected, go through your credit reports and look at what is making them bad.  Do you have delinquent accounts?  Do you have poor longevity at your job (you’re a job-hopper)?  Do you not have credit?  Figure out the pattern of what is holding down your credit score.

Once you determine what is holding down your score, come up with a plan to fix it.  I will go into a long term plan in other articles, but for a quick jolt you need to look at your individual situation.  If you have a lot of debt, begin paying it down starting with your highest interest debt, usually your credit cards.  If you don’t have a lot of debt, get a credit card and charge something small on it every month (preferably something in your regular budget, such as your groceries) and pay it off.

You can leave $10 or so on the account unpaid to show you are using the card.  Sometimes if you pay it off every month it will look as if you are not using the card and won’t give your credit the boost you are looking for.  Once your credit is where you want it, pay your credit card in full every month.

You can get a personal loan to establish positive credit, but be careful!!!  This is a temporary fix, and don’t do it if you have been irresponsible with your bills.  The best idea is to save some money, $500 for example.  Put that money into a CD at the bank.  Open a separate checking account and take out a personal loan for $500 using the CD as collateral.  Put the money from the loan into the checking account and establish automatic payments for the length of the loan.  For a quick boost make the loan for only 6 months.  At the end of the loan period you have taken a loan and paid it back on time showing credit history and responsibility.

However, this won’t work if you have a high debt to income ratio (if you have a lot of debt and low income) as this will just increase your debt making the ration worse…and lowering your credit score.  Again, credit is very personal.

For everyone, you can limit your credit card purchases or balances to 30% or less of your available balance.  If you are confident you will be responsible, you can not only develop a plan to pay down your card, but request that your limit be raised.  If your credit card has given you a $5000 limit and you have $3500 on the card, your debt is 70% of your balance.  You would need to pay your credit card down $2000 (to a $1500 balance) to be at 30%.  If, however, your credit card company increases your limit to $7500, then 30% is $2250, so you only need to pay your credit card down $1250 to attain your goal…but be careful about having that extra credit available to spend!!!  It is not to spend.  It is to reach a goal.

As you can see, credit can be very complex and it is very specific to your individual situation.  There are things everyone can do to increase their credit score and equally important, their credit worthiness.  Coming soon is a start-to-finish program for all, no matter where you are at with your credit, that will allow you to establish the very best credit for building wealth over your lifetime.

It would be impossible for me to determine a hard number that would be considered a good credit score.  This is because a good credit score is determined by the lender in which you are attempting to establish credit.

I will give a general rule of thumb at the end of this article, but I am first going to quote from Experian, one of the credit bureaus:

“A ‘good’ credit score depends on the scoring system used by your particular lender.  Different scoring systems use different scales.  However, if you have a good credit score from one of the credit reporting agencies, you are likely to have a good credit score with your lender.  Most credit scores fall between 600 and 750.  A score above 700 usually suggests good credit management” (http://www.experian.com/credit-education/what-is-a-good-credit-score.html).

With that being said, other factors are taken into consideration when trying to get credit, such as your employment history, income, your savings and investments, and your debt to income ratio.  One factor alone is not a determining factor for obtaining credit.

Also, it a good credit score depends on the market.  During the real estate boom in the early to mid-2000’s, having average credit (650) was okay to get a mortgage while a sub-prime mortgage (below 620) was a market specialty.  After the real estate market collapse which began in 2006, there was a period where you couldn’t get a loan unless you had perfect credit.

Consider your credit score like your grade in the financial school of life and your credit report akin to your report card.  If it’s bad, you need take corrective actions to improve it in order to be considered by financial institutions as a reliable candidate.  Once that happens, you will enjoy opportunities to save considerable money on loans.  Money which can then be invested for compounded interest to build real, long term wealth.

But you don’t need good credit to get started!  You just need to include credit building in your plan.