Reading Notes: Your Score by Anthony Davenport

This summer, I read Your Score by Anthony Davenport. The book discusses consumer credit in the U.S. and Davenport addresses three main questions:

How do you understand your real credit score?
What is the ideal credit profile (and how do you build it)?
How do you protect yourself from predatory lenders, careless mistakes, and even plain bad decisions?

Reading Notes for Your Score

Below are my notes from reading the book, which are organized by chapter.

Chapter 1: “What You Don’t Know Can Hurt You”

A credit score is a number from 300 to 850 that estimates “how good you’re going to be at paying your bills and what kind of risk you’ll present to a potential lender” (6). This is your creditworthiness.
Income doesn’t directly affect your credit score, though it may affect credit limits, loan amounts, and your ability to repay debts, which do play into your credit score (8).
There are seven actions that have particularly devastating effects on your credit score (9). They are
- Missing a mortgage payment.
- Going delinquent on a student loan.
  - Delinquent generally means missing a payment for 60 days. A federal student loan is delinquent once it’s 90 days past due and it defaults after 270 days past due (156).
- Going 60 days late on a car payment.
- Ignoring a tax liability/debt to the federal, state, or local government.
- Going into debt collection on a credit card.
  - Generally after 180 days delinquent.
  - Automatically closes the account.
  - Moves your debt (and negotiations) to a collection agency, instead of interacting with the card provider.
- Going 90 days past due on medical debt.
- Maxing out a credit card.
Credit inquiries or “hard inquiries” won’t significantly affect your credit score unless you have several inquiries in a short period of time (a few months) (11). If you’re applying for car or house loans from multiple institutions in a short period of time, those inquiries will be bundled together as one inquiry.
Besides credit cards, loans, and mortgages, your credit score may affect
- insurance policies (especially for car insurance).
- employment (60% of employers check your credit history).
- rental agreements (11).
The best credit report is a tri-merge report that can only be pulled by mortgage and banking professionals. If you have a realtor or banking friend, ask them to pull your “real” report. The second best option is to purchase your tri-merge report from myFICO.com, which currently costs about $60 for a one-time report or $30/month for a subscription (13).

Chapter 2: Understanding Your Credit Score

The factors that contribute to your credit score (and their relative importance) are,
- Payment History is 35 percent.
- Amount Owed is 30 percent.
- Length of Credit History is 15 percent.
- Variety of Credit is 10 percent.
- New Credit or Average Age of Credit is 10 percent (17).
If you miss one payment, your score may not be hurt as long as you pay it and your next payment on-time together. If you miss two, three, or four payments, your score will take exponentially worse damage (17).
You don’t have to keep a balance on revolving accounts (credit cards or home equity lines of credit), but you do want to use them and make monthly payments on them (18).
You default on debt after 90 days of delinquency (18). The amount of debt you default on does not affect your score; the fact that you defaulted on your debt affects your score, whether it’s $100 or $10,000 (19).
As a rule of thumb, use less than 25 percent of your available credit on each credit card, not just across all of your cards (20). Distribute your debt proportionally, if you carry a balance at all.
If you’re preparing for a loan, especially a mortgage, keep your utilization rate (percentage of available credit used) below 10 percent for the 90 to 180 days before you plan to apply for the loan.
A line of credit under 6 months of age has no positive effect on your credit score and may have a negative effect if you have a high utilization rate (21). After 1 year, a line of credit gradually positively impacts your score. After 7 years, “you’re getting the total benefit of that history” (22).
Keep your oldest accounts with a good payment history alive and active (22).
Having one type of credit looks one-dimensional and may hurt your score. The ideal credit mix consists of five to seven lines of credit and a mix of revolving and installment accounts. If you’re young and don’t have or plan to have a mortgage anytime soon, focus on
- making payments on time
- keeping your utilization rate below 25 percent on every revolving account, and
- growing your credit history to five years of age or older (23).
2 years is the window of concern for new credit (24).
Multiple inquiries for a mortgage, car loan, or student loan in a 45-day period will be lumped together as one inquiry on your credit report. For example, there’s no need to worry about six inquiries while shopping for a mortgage (23).
The longer the average age of your accounts, the better (23). That includes keeping old accounts active and not applying for too many new accounts at once (which can dramatically drop the average age of your accounts).
The credit score categories and rating are,
- 740+ is super-prime.
- 700-739 is high prime or low super-prime.
- 660-699 is prime and “average.”
- <660 is subprime.
- <620 is bad. It’s an “F” in the credit market (26).
Expect a range of 15 to 20 points between your highest and lowest credit scores, according to different bureaus. Any difference beyond 20 points may be a sign of fraudulent activity or some information being reported to one bureau and not another.
FICO has 99 reason codes that explain the main reasons why your score isn’t higher. Addressing your top reason codes is a quick way to boost your credit score (30). Generally, if you apply for a credit limit increase and are denied, you’ll be told the top 4 reasons why you were denied. Davenport has a PDF listing the 99 FICO reason codes on his website.

Chapter 3: “Building the Perfect Credit Profile”

Credit accounts are ranked by risk and predictive value. The hierarchy of accounts is, (41)
- Mortgage.
- Home Equity Line of Credit
- Installment Loan (e.g. car, student, or personal loans).
- Credit Card.
- Medical Bill.
The average consumer with an 800+ credit score has, (37)
- 9 credit accounts.
- 7 credit cards.
- Approximately $62,500 debt.
- About $80,000 credit limit.
- Around $5,500 credit card debt (about a 7 percent utilization rate on $80,000 credit limit).
- 99.99 percent on-time payments.
The average consumer with a 700 to 799 credit score has, (38)
- 7 credit accounts.
- 6 credit cards.
- Approximately $125,000 debt.
- Approximately $36,000 credit limit.
- About $7,500 credit card debt (about a 21 percent utilization rate on $36,000 credit limit).
- 99.44 percent on-time payments.
A good credit card strategy is to have 4 to 7 cards but to only use 1 or 2 of them on a daily basis. Set up automatic, recurring charges and payments on the other cards so they stay active but don’t require active management (43).
A year or two before you plan to get a mortgage, get a personal loan from a bank and pay it on-time (44).
To get an ideal mortgage, you must have at least 2 to 3 credit accounts with at least two years of on-time payment history (44).
The following loans don’t improve your credit profile, so avoid them if at all possible (44),
- 401(k) loans.
- “Payday” loans.
- Title loans.
- Rent-to-own contracts.
Concentrate on improving your credit profile at least 1 to 2 years before you even begin shopping for a mortgage (47).

Chapter 4: Resolving Issues on Your Credit Report

Clearing mistakes or “derogatory items” from your credit profile is a tedious and necessary process. Your options are to address the creditor or to address the credit bureaus (51). The former tends to be easier but isn’t always an option.
If you have to dispute something on your credit report, do it by mail, not online or over the phone (52). Create and save the paper trail.
Handwrite (in legible cursive) your dispute on a non-white piece of paper. This method is likely to get your dispute on the desk of a person at a credit bureau (53).
After you resolve a dispute with one bureau, send a copy of the resolution letter, along with your own letter, to the other bureaus to make sure that their records are correct, too (55).
If you have a small blemish on an otherwise stellar credit account, call and simply ask for it to be removed. This is low-hanging fruit, such as one late payment on a credit card you’ve had for years (56).
Ask for forbearance (suspension of the minimum payment requirement for a short amount of time) if you have a sudden, temporary financial issue, such a job loss (57).
Negotiate a debt settlement if you will be unable to pay the full balance of a debt, it is 90 to 120 days delinquent, and it hasn’t been passed to a collection agency yet (58).
Be diligent and proactive about medical bills. Check with your hospital and with your insurance provider about any possible outstanding bills (63). You want to pay anything that arises before it goes to a collection agency, but you may never even know you have a debt unless you check periodically.
Davenport’s proactive action plan for credit maintenance is, (64)
- Request a credit report from one bureau every 4 months. Schedule and keep track of these reports.
- Request for outdated or unnecessary information to be removed from your credit report. The only required personal information is your name, social security number, and current address. Previous addresses, phone numbers, job history, et cetera do not need to be on your credit report.
- Write to any medical offices/hospitals opting out of HIPAA-authorized disclosure.
- Identify and attempt to resolve the items with the biggest negative impact on your credit score and profile.
- Take simple, small steps to improve your credit profile, such as reducing your utilization rate or paying off small collections.
- Add positives when possible, such as becoming an authorized user on a responsible person’s credit card or logging your years of on-time rent payments via rentreporters.com.

Chapter 5: The 5 Biggest Credit Mistakes

Never walk into a negotiation for a mortgage, car loan, or other big-ticket lines of credit without knowing exactly where your credit score stands (68). That means you should,
- Get your myFICO.com credit report 6 months before you plan to make a big purchase. Review the report and understand your position.
- Determine an honest estimate of the downpayment you’ll make.
- Use online mortgage/loan calculators to estimate the interest rates, monthly payments, and taxes you can expect to pay. Make sure that the monthly payments are realistically within your budget.
Take ownership of your credit situation, develop a plan to improve it, and start now (70). Bad news doesn’t age well and ignoring a poor credit situation can only make it worse.
Be aware of what affects your score and how much (72). Reviews the notes from chapter 2, “What’s in Your Score?”
Pay attention to timing (74). If you know you have a big-ticket item coming in the next 6 months, year, or maybe even 2 years, be wary of adding other new lines of credit in that time. You can add a new line of credit if it’s part of a detailed plan to improve your credit profile. For instance, getting and making on-time payments on a small personal loan in the year or two years before applying for a mortgage can positively boost your credit profile.
When dealing with credit issues, you want to have a coherent strategy that ideally ends with derogatory items being deleted or at least settled, if they’re younger than four years old. If they’re older than four years old, they should be deleted or perhaps ignored until after your big-ticket item is initiated and signed for.

Chapter 6: Preparing for a Mortgage

A mortgage originator is concerned with, in order, (83)
- Credit score.
- Credit profile.
- Income.
“Banks like to see no more than 28 percent of your gross monthly income going to housing and taxes” (86).
Follow 6 steps to proactively prepare for your mortgage negotiation (89).
- Find out your true score. Make a banker friend and ask them to pull your tri-merge credit report at least 90 days before you sit down with a mortgage originator. If you’re married, then consider your spouse’s credit, too. The lower score will be used.
- Erase mistakes ahead of time.
- Manage your credit accounts. For instance, if you have a 20 percent down-payment saved, have some amount of money that you’re thinking of adding to your down-payment, and have credit card debt above a 10 percent utilization rate on any card, use the money you have saved (about 20 percent of your down-payment) to pay down your debt.
- Improve your credit profile. Avoid having a utilization rate above 10 percent on any credit card for the 60 to 180 days before you plan to sit down with a mortgage originator. Considering transitioning most of your payments to debit cards.
- Know your options. Don’t “choose” a house before you have a loan and know your parameters,
  - What down-payment can you afford?
  - How large of a monthly payment can you afford?
  - What rates and loan amounts can you expect with your credit score?

Chapter 7: On Credit Cards

To calculate your daily interest on a credit card,
- Divide your Annual Percentage Rate (APR) by 365.
- Multiply that fractional number by your account balance.
A credit score of 750+ qualifies you for the most competitive credit cards and gives you leverage for negotiating APRs if you carry a balance (99).
Sketch out your credit game plan for the next year, then take action (109).
- Do you want to get a car loan or mortgage?
- Do you want to improve your credit score? What will you do?
- Do you want more or fewer credit cards? A new top-tier card? Higher limits on your current cards? Lower APRs? Fewer overall lines of credit?

Chapter 8: Protection from Identity Theft

Beware of phishing scams. Guard your personal information and don’t share it in questionable situations for transactions you didn’t initiate (118).
Shred any mail trash or recycling that includes identifying information (119).
Have your mail go into a locked mailbox, a door slot, or a PO box to avoid mail theft.
Be vigilant about and protective of your insurance cards and other medical information. Avoid sharing your SSN with doctors (you’re not legally obligated to share it with them in most circumstances). Keep track of medical mail and bills on a monthly basis (122).
Be wary of the implications of sharing information online. For instance, a photo of you on vacation in another country implies that your home is unguarded (123).
Some tips for guarding your data include (125),
- Enable 2-factor authentication on email and financial accounts.
- Use different passwords for different sites.
- Use a password manager that’s not tied to your browser or email.
- Always have up-to-date anti-virus software.
- Update your browser regularly.
- Only check financial accounts on private, trusted networks or from cellular data (on your phone, or making a mobile hotspot for your computer).
- Quit your browser after logging out of financial accounts.
- Erase your hard drive before selling a computer or phone.
- Use a PIN or biometric lock on your phone.
- Log out of the email on your phone.
- Use your credit card or cash at restaurants or anywhere else where you surrender the card temporarily to pay a transaction.
Credit monitoring offers a false sense of security. Monitor your own credit and you’ll be better off (128).
Create a system for organizing and reviewing your important data (129). The system may include,
- Request your credit report from one bureau every 4 months.
- Review your credit account statements in detail every month.
- Review your medical account statements regularly.
- Create a locked, central storage location for your physical papers, including,
  - Credit statements.
  - Insurance statements.
  - Identifying documents.
  - Tax refunds and other tax documents.
  - Important receipts.
  - List of accounts, account numbers, and contact phone numbers.
If/When your identity is stolen, you have a step-by-step game plan as follows (130),
- Put a specific fraud alert on your credit file with each bureau.
- Go through your credit report from each bureau and take note of any unauthorized activity (account inquiries, balances and debts, collections, alternate addresses, etc).
- File a report with your local police.
- Call each creditor linked to fraudulent activity and ask to speak to their fraud department. Tell them to close or freeze the fraudulent accounts. Send a written request for all applications and records pertaining to the fraudulent accounts.
- If your bank has been compromised, request to change the account numbers on all of your accounts or to close the accounts.
- File an Identity Theft Report form to the Federal Trade Commission at identitytheft.gov.
- Monitor your reports. After 60 days, you should see fraudulent activity deleted from your reports.
Freezing your credit is a proactive measure you can take which means that no one can even inquire about your credit without your direct authorization through the use of a secret pin you must provide to them (133). You have to set up a freeze with each bureau and pay a nominal fee when you want it set, removed, or reset. I’s the ultimate credit security.
After an incident is resolved, go to each creditor and request a letter recounting the basic facts of the incident – that your account was fraudulently opened or tampered with and it has been closed or assigned a new account number.

Chapter 9: (Re)Establishing Credit

The “Credit Slam” is a process for folks who need to build a 700+ credit score in 90 days. It has 2 components. In the first 30 days, you to need to (141)
- Be added as an authorized user on 2 folks’ accounts which are at least 2 years old, have 3 or more years of on-time payments, maintain a <10 percent utilization rate, and report full credit history to all 3 bureaus.
- Open 2 secured cards that you keep a small balance on (<10% utilization rate) and repay on-time, in full every month.
The “Conventional Credit Path” is a process to build your credit score to 700+ in 9 to 12 months without the use of authorized users. It has 2 components: (144)
- Open 2 secured cards that you keep a small balance on (<10% utilization rate) and repay on-time, in full every month.
- Go to your bank and ask to open a personal loan secured by a certificate of deposit. It’s risk-free for the bank and gets an installment loan on your credit report.
I have 3 credit cards ranging from 5 to 23 months old with a perfect payment history but a high utilization rate. Lowering my utilization rate, obtaining an installment loan, and waiting patiently while my accounts age (while continuing to make on-time payments) are the actions I can take that will significantly improve my credit score and profile in the next year.

Chapter 10: Student Loans

Student loans may either be federal or private.
Federal loans may be subsidized or unsubsidized. Subsidized loans have deferred interest payments until 6 months after you graduate. Unsubsidized loans accrue interest immediately.
Federal loans may be offered by the government or backed by the government and offered by a school or bank.
Federal school loans have lower interest than private loans and the terms can normally be renegotiated, but you cannot clear federal loans via bankruptcy. Furthermore, if you default on a federal loan, you are disqualified for other federally-backed loan programs, such as first-time home buying loans (152).
Private student loans can be cleared via bankruptcy and have an interest rate that is 5 to 6 percent higher than federal student loans.
There are quite a few repayment plans for federal or federally-backed student loans available at studentaid.ed.gov (154).
A federal student loan won’t be delinquent until 90 days past due (156). At 270 days delinquent (9 months), you default on your federal student loans.
Deferring loan repayment allows you to set the bills aside for a period of time due to military deployment, graduate school, or unemployment (158).
Forbearance allows you to skip or pay a reduced amount toward payments for up to 12 months (158).
Consolidating your loans simplifies your repayment options, allows you to refinance the loan over an up-to 30-year period, and may decrease your interest (158).
If you’re co-signing a loan, you need to have a frank conversation about the total cost of the degree, the prospective profitability of the degree, monthly payments, and what to do in the case of delinquency or default (161).
If you have student loans and responsibly pay them off over your first 10 years out of college, you’ll be well set with a pristine credit profile (assuming you manage the rest of your finances responsibly, too) (162).

Chapter 11: Credit Crises: Divorce, Foreclosure, and Bankruptcy

There are credit issues (like one missed payment) and then there are credit crises (164). The 4 credit crises are,
- Divorce.
- Foreclosure.
- Rental trap.
- Bankruptcy.
In a divorce, your goal (concerning credit) is to “separate your financial lives as cleanly as possible and to leave yourself open only to credit risks that you see and accept for yourself” (168).
A bank isn’t going to repossess your home after 1 missed payment. After 3 to 6 missed payments, though, the foreclosure process is likely to begin (171).
Make all of the improvements to your credit before you meet with mortgage originators. A small change in score can cause a small or even a large change in monthly payments. These changes may not seem like a big deal during times of plenty (when folks tend to buy houses), but can be saviors during times of scarcity.
The foreclosure process takes months to years, depending on regulations in your state (171).
If you miss one mortgage payment and foresee ongoing difficulty, contact your mortgage provider and discuss possible modifications to the mortgage to allow you to regain stability.
A “short sale” occurs when you sell your house pre-foreclosure for less than you owe and you settle the debt. It’s a red flag on your credit profile, but not as big of a black mark as a foreclosure (173).
Check “recourse laws” for your state to determine if you’re liable for remaining debt on a mortgage not covered by the cost of the resold, foreclosed house (173).
After foreclosure, begin rebuilding your credit like someone who’s new to credit: get added as an authorized user on a good, old credit account (if possible) and open one or two secured cards. If you have existing credit cards, don’t close them around your foreclosure (174).
Decent credit and steady income are essential to renting. Tally your income and expenses to determine a realistic, affordable rent or mortgage payment. Income 3 times the monthly rent is a good minimum requirement. If you have 5x, 7x, or even 10x your monthly rent, you will be golden (176).
Bankruptcy does not discharge federal student loans or tax liens to local, state, or federal offices (178).
“If you have more unsecured debt than you do take-home pay – and you could pay your mortgage/rent if the unsecured debt were to be cleared – you’re a good candidate for bankruptcy” (179).
Filing for bankruptcy leaves a 10-year penalty on your credit report, but it recedes over time, especially if you take action to improve your score early on in the 10 years follows bankruptcy (180).
Immediately after bankruptcy, try to be added as an authorized user and to open a secured card. After 1 year, reach for a low-limit unsecured card (181).
1 year after bankruptcy, consider getting a car loan from a “lower tier” automaker like Toyota or Volkswagen, not Lexus or BMW (182).
4 years after bankruptcy, you may be able to qualify for a mortgage, if you need one (181).
Don’t EVER consider credit counseling or debt consolidation services. Just declare bankruptcy and bite the bullet (183). Note that “debt consolidation services” are not the same as consolidating student loans through the federal consolidation plans at studentaid.ed.gov.

Conclusion

Your Score was a spontaneous read for me. I saw the book at FedEx, pondered Ramit Sethi’s book-buying rule, and decided to buy the book online the next day. As a working student, Davenport’s book caught my eye as a guide on setting myself up for success, as far as consumer credit is concerned.

If credit is ambiguous to you or if the information available online is too time-consuming to parse, then I recommend reading Your Score. It’s less than 200 pages long, conversational in tone with lots of anecdotes backed by statistics, and it just might help you change your life.

The featured image is by Morning Brew on Unsplash.

Note: The links to products (like the book and a myFICO credit report) in this post are not affiliate or sponsored links.