4. Credit 101 – Understanding the Algorithm: How to Kick Bad Credit’s ASS!

Kenney Conwell here. Credit 101 – Understanding the Algorithm and How to Kick Bad credit’s Ass. So in this module, I’m going to really get into the nitty-gritty of the details behind the algorithm and explain to you the whole philosophy behind what we do here and what you’ll be doing as you go through this process to rehabilitate and fix your credit. But also you need to really understand the nuances. So I’m going to get into it. So here’s what we’re going to cover: so the very first thing is going to be the 700 Credit Score Academy Overview. So this is the philosophy behind how this process works, then I’m going to get into FICO versus Vantage score because there is a difference and it really, really is going to help you really, as you’re going down this process, know which score to be paying attention to. They’re both important, but there is a difference between the two.

The next thing I’m going to break down is how the Vantage score is broken down. Then I’m going to get into how the FICO scores are broken down because they’re broken down in different phases, so to speak. Then we’re going to talk about the total points available for you. So that way, you know exactly how many points you can obtain as you’re going through this process. Your credit report versus your credit score. Then we’re going to talk about why credit report content is King. So let’s hop in. So the 700 Credit Score Academy process. So I like to keep things simple before you got to this process, you understood that the first thing we need to do is clean the glass i.e. Your credit report. So it makes no sense to put clean water i.e. Money from the bank, credit card companies, whatever you’re trying to do in a dirty glass.

So number one, we have to clean the glass. The next thing we have to do is put ice in the glass. So while we’re cleaning the glass or we’ve gotten a clean glass, we want to be, you know, putting ice in there. Which is out all of this, obviously establishing credit. Then the last part is then we pour that water in a glass and we go out and we apply for the credit. So when it comes to step one, cleaning the past, I mean, addressing the past, we want to clean the glass. So what does this mean? I’ll get into this, but essentially these are all the items that we’ll call is your credit score and not even your credit score, your credit report to be dirty. And if your credit report is dirty, then your score is going to be low. So personal identifiers, we have to get those removed. Negative items,

they have to get removed. Collections and charge offs, they got to get removed. Derogatory closed accounts, which we’ll get into throughout this process, they needed to be removed. Late or missed payments with within reason if possible, they need to be removed and then any non-account inquiries and then any type of public records. So once we’ve done that, we also want to be putting ice in the glass, which is establishing new credit accounts. So this means we need to start establishing new credit history or credibility for ourselves. If we have current credit lines, which I’ll get into, we want to lower our credit card utilization on those lines, because it’s going to make us look more efficiently to the banks and also give us more points available. We want to establish unsecured, revolving lines of credit because what this is going to do is show, Hey, look, if we can be trusted with a line of money from the bank without any type of collateral, then that means, and we can manage that effectively,

then that will open us up to more doors of being able to get funded or get money. And then we want to make all our payments on time. We can’t miss any payments. And then we want to pay balances before the statement date, and really what this means is if you have a credit card line, and this is a little bit more advanced, but you want to pay that balance before the statement date because that’s what’s going to report on your credit file. But this is the ice. Then the next thing, excuse me, I’d need to drink some water. The next thing is we want to pour clean water in the glass, no pun intended. So we want to be able to put ourselves in position to where once we’ve done the first two steps, you can do a strategy, which is an advanced strategy, which is becoming an authorized user, which is going to establish literally credibility overnight.

But you don’t do this until you’ve done the first two steps. You can purchase tradelines, which is something we will cover. I want to say that’s in week seven or week eight of the program. However, even before this, when you’re pouring clean water in a glass, this gets you to a place where you look more established to the banks. It allows you to apply for higher credit lines. Also when you’re going to establish auto or home loans, those are examples of water. So when you’re getting that water, that’s going to be really, really good to have with the secure credit. And then also if you want to start building business credit, right? So let’s get into it. What’s the FICO versus Vantage score. So FICO scores have bureau-specific score models and score types based on what you’re looking to purchase and 90% of lenders use FICO scores.

So that’s if you’ve ever gone to Credit Karma to go buy a car. You may say, well, my Credit Karma is showing this. They’re like, well, we’re showing this on our side. It’s because they’re pulling FICO versus Vantage score: is a single tri-bureau model that was created by Experian, Equifax, and TransUnion. So Vantage Score typically Vantage Score 3.0 is what Credit Karma is going to be pulling. And again, they’ve made it very similar to FICO, but that’s why your FICO score can be one thing and your Vantage score can be totally something different, either higher or lower, depending upon where you’re pulling your score and we’ll get into the weeds of this. So this is, this is a screenshot. This is even on my Instagram, but it kind of just talks about FICO score and Vantage score.

What really Credit Karma uses is Vantage score on the right and it kind of showed the difference because your Credit Karma can be really, really good, but it may not line up with FICO and FICO is really what lenders are using before they give you money. So I just thought this stuff was really funny. So let’s break down how Vantage Scores is structured. So Vantage Score has six types. So 40% of your Vantage Score accounts for payment history. So this means just simply just paying our bills on time in the past. So getting all those negatives removed essentially is 40%. 21% is the length of credit i.e. how long have you had this credit for? Like, has it been a year, two years, five years, all that good stuff. 20% is utilization. So utilization means, hey, look, if I have a $5,000 credit card, and I’m using 50% of that, that utilization accounts for on your Vantage score is 20%.

Hope that makes sense. Then we have the balances i.e. the overall balance of that account is going to count for 11%. So then, so that’s not just the balances with your credit card. That’s the balances with your actual loans too. Then 5% is going to be new credit, and then 3% is available credit. So this is how the Vantage score model was working. So this is why, and I’ll explain when we go into FICO score, this is why you can, you can really have a difference in your scores. So the most common Vantage score is 3.0. There’s an old 2.0 version. They no longer use that. But 3.0 is really what Credit Karma uses and a lot of, majority of credit monitoring companies are going to use, Vantage score 3.0. This isn’t really what lenders use. It’s just kind of like the efficient way that you can pull your credit report versus FICO score.

FICO score is broken down this way. So FICO score is what 90% of lenders are going to use. And FICO score is, let me get over here. So if I go score 35%. So it’s only five parts, but 35% is your payment history, right? Right at the gate, you can see that there’s a difference there. So 35% is your payment history and 30% is the amounts that you owe, which has to do with the utilization. 10% is new credit. 15% is the length of credit, and 10% is credit mix. So you can see the difference right there is in payment history and the amounts that you owe. And it’s only five categories as opposed to the six categories that the Vantage score has. And then there’s different FICO score types. So FICO Score 8 is the most wildly used version, but then you have FICO Score 2, which is an older version, is mostly used for mortgage and auto lending.

We have FICO Score 3, which is the older version, primarily used for credit card lending. FICO Score 9, which is a new version, used for all lending types. And then we have FICO Score 10 coming out as well. So all of these different FICO score types, it really depends on what you’re looking to pull. So that’s why you can go to Experian.com, pull their stuff, or myFICO. And you’ll see that your FICO auto score might be higher or lower than your FICO 2 so to speak, might be higher or lower than your FICO 8 or FICO 9. So this really has to do with the type of FICO score, and then this is what the lenders are using as well. So when we break down FICO scores, this means that your FICO score can range on the lowest end, which is very humble, a 300 all the way up to an 850.

So this is the range. So this means that if it can range between 300-850, that means we have 550 points available to us. So if we have 550 points available to us and we break down those categories, that means that category number one, which is 35% paying your bills on time is worth 192.5 points, right? So that 35% I was talking about right here, right? That’s worth 192.5 points. Then we have 165 points, which is managing our revolving credit. That’s the 30% right here. That’s worth 165 points. So just those two alone is worth close to 300 points. And that’s really in your control. Then 82.5 points is the length of credit. So that means that’s how long we’ve had our credit established, how long we’ve had that particular account. So we may have a credit card for two years, three years, four years, or, or a loan for one year, two year, three years.

That is 82.5 points. 55 points is new credit. And then 55 points is credit mix. So again, all we’re doing here is saying, Hey, look, there’s 550 points available and then of those availabilities of points, this is how it’s broken down. And what we really focus on the first two, which is paying bills on time. But that also means like I was saying, addressing the past. So that 35% still has a lot of those negatives that need to be removed. So if you have negatives, it’s causing all of the 192 points that you do have available. It’s causing the good accounts that you have not to show all points because you have those bad accounts that are still pulling 192.5 points down. So this is the algorithm broken down. So that’s why I say, Hey, look, make sure you continue to pay your bills on time.

However, simply paying your bills on time only, isn’t going to fix your credit. We still have to address the past while at the same time, continuing to pay our bills on time and manage our revolving credit. So the 35%, so this is three parts. So that 192.5 points. This means we have to maintain great credit, and I was already alluding to this, but when it comes to getting this in order, we have to number one, we have to be addressing the past. So those collections, charge off, negative accounts, inquiries. All of those things, that 35% we need to address. Then we also, while we’re getting the past in order need to be paying our bills on time. So we need to make sure we make our minimum monthly payments in order to keep all points available. So this means, Hey, look, if you do have current bills and you have a credit card, make sure you make the minimum monthly payment.

Don’t miss a payment. Don’t do not miss a payment. Then we want to be creating a cashflow control system. Because if we do all three of these, it’s by definition, we’re going to be able to get all 192.5 points available to us. But the biggest, the biggest two is addressing the past and making sure we pay our bills on time moving forward. But however, simply paying your bills on time only, isn’t going to get you all the points. It’s going to help you maintain any points that you have available, but we have to address the past. But then when we couple the addressing the past with the cashflow program, that means we ain’t gonna miss our bills, right? We’re not going to miss our bills. Now, once we understand this, then we can move over to the 30%, which is the other part that is a big amount of our credit, which is worth 165 points.

So case in point before I even break down how utilization works, if you currently have a $500 credit card, and you’re reporting that you’re using $500 of that credit card, then that means you’re not taking advantage of all 165 points that you have available. That means you’re not getting any points because you’re revolving amount of credit that you can use is not being shown in the algorithm. So by definition, we need to make sure that utilization is paid down. So let me get into the weeds of how utilization works. So let’s just say in a scenario that you have three credit cards, you have card number one that has a $5,000 limit, but you have a $2,000 balance on that card, but then you have card number two that has a $2,500 limit with a $1000 balance and then card number three has a $2500 limit and $0 balance.

Well, that means you have a total of $10,000 in revolving available credit. ($5,000+$2,500+$2,500), that gives you $10,000, but then you’re using $2,500, excuse me, you’re using $2000 on one credit card and $1000. So that means you’re using $3000 of the $10,000. So the way you look at your utilization is $3000 goes in the $10,000, that’s 30%. So that means your utilization overall is 30%. So to keep this even more simple, that means that I’m able to, if this is my scenario, get 30% of 165 points, that’s going to be reporting. So 30% of 165 points means if I’m looking at this, it’s actually will be 165 x .70, so that means I have 115 points available to me. If I’m using 30%, which is a common misconception, people say, well, this gets below 30%. Yes, get it below 30%. But ideally, you want to have a report between 1- 7%, because think about it:

If I have $10,000 in revolving credit available to me, but I’m showing that reporting, I’m using $10,000, then I’m not getting any of the 165 points versus if I say, hey, I have $10,000 in available credit, but I’m using $3000 of the $10,000. I’m only taking advantage of 70% of the available points of 165, which is 115 points, which is why, if you could just show, hey, look, I’m only going to show that I’m reporting to use anywhere between 1- 7%, and I’ll get into this more in detail. That’s ideally where you want to be. You don’t want to have any type of balances reporting in your credit file by the statement date if you could help it, because it’s going to help with the algorithm of the 165 points that you have available with the revolving credit. Whether it’s Vantage or FICO score, but more specifically with Vantage score.

So that being said, that’s why it’s so important to have a cash flow control program. So once you do use that credit, you paid off before the statement date, in the reporting date, because once you pay that balance off and it shows a lower amount, even if you use all that credit, then that means that it’s going to report a lower amount, which is going to help you with this particular algorithm, which is going to give you the maximum amount of points available. So your score stays where it needs to be. That’s the game right there. So that is the game. So if we break down this in layman’s terms, this is a screenshot of how not to use your revolving credit. So this person has $800 in revolving credit, but they’re using 976 of it. So they’re not taking advantage any points. Matter of fact, they’re negative because any of the 165 points that they would have had available, it’s completely gone

and then they’re getting an additional 22%. So this person’s credit score will be extremely low, right? Because they’re not taking advantage of that. Using 137%, using another one 118%. So it’s just bad. So that’s why we don’t want this to be our reality. So just simply by establishing new revolving credit accounts, paying down these balances will instantly give you a boost in score before you even start getting the negative items off your credit report. So this is why this is so important. Now, there are three things that we can do to get the 165 points or maintain our utilization. So the first thing is we want to get larger limits or apply for new accounts. However, the dilemma with this and I’ve addressed this dilemma, so not the worry, but the dilemma is if you don’t know where to go to apply for certain accounts, you’re going to get declined because they aren’t able to know if you can be trusted.

The second thing you can do is pay down on your current balances. But what I suggest you do is do a combination of both. You get larger limits and you pay down current balances and in our program, I show you strategically, I want to say in week four or week five of the course, no week six of this course, I show you exactly how to get $10,000, really $14,000 practically guaranteed revolving lines. So that way you can, you can pay down on utilization. I mean, you can get more available credit, and then when you get more available credit, that’s going to look like to the algorithm, Oh man, this person has a lot more credit available and it’s going to decrease if you owe any money. So that’s why I say you want to do a combination of both because this is going to get you all 165 points or allow you to be using or showing that you’re using all 165 points. Now, Credit Report vs. Credit Score, right?

So we’re really just gotten into the weeds. The two most effective ways, not to mention how to get those things removed on what’s going to really drive the algorithm in your favor when it comes to your credit report. So you understand, Hey, look, I have to pay my bills on time. Hey, look, I need to have a cash flow control program. Hey, look, I need to make sure my revolving credit is below 30%, ideally, I keep that between 1-7%, because I want to be maximizing all the points available to me. Now, we need to understand that our report is nothing, our score is nothing more, but our reflection of our credit report. Now credit scores aren’t as important as credit reports because all the credit score is going to do, it predicts the likelihood you’ll fall behind at least 90 days on a bill within the next 24 months.

Because what they’re looking at is your behavior and did you do this before? That’s what your score is doing. However, your credit report is everything about your credit past, basically the content of your report. So what we really want to make sure we’re addressing is the content inside of the report. And I’ll get into what this content looks like. But if, once not even, but when and when we address the content of our credit report, making sure those negatives are removed, making sure our utilization is paid down, making sure we have all those derogatory, personal identifiers, all that stuff on our credit report is good, then our score will go up. But the other thing about this, as well as like you can literally have a high credit score and have no content, you can be like brand new credit, have a high score, but no content and still not be able to get approved for a loan or get trusted with higher limits because you don’t have any content to back up your score.

It’s just a score and to the banks, because you have no track record. They’re like, Hey, look, they have a high score, but they’re new. So I don’t really trust this person. So that’s why it’s really, really important to make sure that you have content and the content that you have is reporting good about you. So what is the content of your credit report? What is the most important thing that they’re looking at when they look at content? Well, these categories, the number one thing is a total of accounts. How many accounts am I showing that I have access to on my credit report? Then of those accounts, how many are opened, right? How many of those accounts are opened accounts that I am using effectively while at the same time, how many of those are closed accounts, but not just closed accounts,

we have closed accounts, we can have closed accounts that are closed in good standing, which is helpful. However, we could have opened accounts that are in delinquent status i.e. missed payments, but I still haven’t opened an account, that’s delinquent. We want to address that. Then we have derogatory accounts. So a derogatory account could be an account that was closed and it’s closed in bad standing, or it was closed and it’s still with the original creditor and in derogatory. A collection account is, Hey look, it was closed and it was sold to a different creditor, now with a third-party collection agency. So these things are huge. Delinquents, derogatories, collections. That’s all about the past, right? It’s that 35%. So the content here is pivotal. Then we have balances, okay. Balances mean our utilization, right? So this has to do with how am I managing my balances on my credit report?

Then we have payments. Are we making our payments on time to keep our balances effective? And then also mentioned that our open accounts look good. Public records: what this means is if you filed for bankruptcy, that’s a public record. If you have child support, that’s an arrear, that’s a public record. They generally don’t put tax liens on your credit report anymore, but if you do have a tax lien, that’s a public record. Then any inquiries in the last 24 months or two years. Content. So again, the content and these are the key points of a content is way more important than your credit report. So in week two, I’m going to show you how to audit this. While at the same time, I’m going to show you how to go get credit monitoring with one of our partners. And this is an example of what content needs to be done

in addition to everything I just explained. So personal identifiers. So this is something that a lot of people missed and they don’t address in a credit report. So what we want to do when it comes to personal identifiers is address this. So a personal identifier is your name, is your address, and any employers. So I can almost, you know, sure-fire guarantee, if you’re going through this process for the first time of fixing your credit, you may have your name on your credit report two, three, four different times. Why is this important? Well, you only want to have one name that is your current name, that’s reporting on your identification documents on your credit report, right? So any other names or aliases that are associated with your credit report needs to be removed. Because again, if we’re going to the bank and we’re asking for money and we in the bank sees that you have four different names, they’re going like, who am I loaning this money to?

Who is this joker? Then we want to remove old addresses. We only want to have one current address on our credit report. Which is where we currently reside. So you may have old addresses that are on your credit report, that number one is probably associated with bad credit, right? But number two, even if you have old addresses that probably aren’t associated with bad credit, but it’s a strong chance if you’re in this course, it’s probably the associated bad credit, you still look unstable to the bank. So again, this person multiple names, five different addresses. Hmm. Not really sure if I’m going to get my money back. Oh yeah. By the way, they’ve got seven different jobs on their credit report. This person is unstable. They’ve got multiple names, multiple addresses, multiple employers. Declined. So people are getting declined before even the bank

even gets an opportunity to look at the content of their report because of this. But even if you have fairly good content on your credit report, but this still looks suspect, then it’s a strong chance that they will probably give you a higher interest rate because they don’t know if they’re going to get their money back. So, Hey, look, we’ll just go and give them a higher interest rate, just because, so just in case they do default on us, at least we got more interest out of them. Again, think like how they would think. So we want to address this other item of the credit report, which is our personal identifiers. So I wanted to break that down to show you so you understand, but this is an example of a summary of a credit report.

So in week two, we’re going to go in and I’m going to show you how to pull this summary for yourself. So you can see where you stand in terms of your total accounts, open accounts, closed accounts. Again, you want delinquent, derogatory, and collections all to be zero. If if it can happen. If you have ones or any type of delinquent accounts, the delinquent again means you have a missed or late payment. And then you want to have your balances and your payments, because again, your overall payments have to do with any type of amounts of credit that you have and that goes into your debt to income ratio and then an increase. So we’re going to pull this right here so you can know exactly where you stand and we’re going to audit your credit report, but I want you to understand how this works and what to be looking for.

So as we wrap up, negative accounts is collections, charge offs, repossession, medical collections, and charge offs, public records. So all of those pieces of content could be a derogatory account. It could be a collection account or repossession is going to fall under that. Charge off or a derogatory account. Right? And a lot of questions like Kenney, what’s the difference between derogatories and collections? Well, there’s a really good example. A derogatory account is a repossession, right? A charge off is a derogatory account. A collection could be a collection account. So either way, whether it’s derogatory or collection, it hurts. Delinquent doesn’t hurt as bad because you can still have an open account and be delinquent, and you just have missed payments. But derogatories and charge offs, and public records, we need to be addressing those, right? So we need to get these things knocked out.

And then when it comes to hard inquiries, any non-account holding inquiries, we want to get removed i.e. if we don’t have an account established with that particular bank, because we applied for credit prematurely, because we didn’t look at the content of our credit reports and we went to apply in the intent to get approved, and we didn’t, we had no business applying because our glass was dirty, then we want to get those inquiries removed. And any inquiries associated, not associated with positive reporting accounts, with the same exact thing that I just explained. So when it comes to those inquiries, you need to get those things addressed. But if you have inquiries with opened accounts, especially opened lines of credit, do not, do not attempt to remove those because you could risk removing the entire account from reporting on your credit file in some scenarios or B, depending upon how you address that line of the credit inquiry, you can even get the account closed.

So we do not suggest removing inquiries that are associated with open accounts. So, this is excellent content versus very poor content. So on the left-hand side, we can see as we’re wrapping up this particular module, what excellent content looks like. So number one, credit card utilization is 0 to 9%. Payment history 100%. Derogatory remarks. Derogatory collections. All of those are what we would say as zero. Payment history 100%. That’s delinquent accounts, right? We can see 100%. We have no delinquent accounts and we have no derogatory remarks. Credit history. Again, that’s something we addressed today, 9+ years. So on the road of 850, you or even 800 credit score club, this is going to take you, five to seven years to get that 800 only because you have to have that history on your credit file, right? You just have to. Total number accounts is 21 accounts, and that’s not just 21 revolving lines of credit.

That’s all credit accounts reporting on your file. And then we have no inquiries. So that’s what excellent content looks like. Then we can see excellent. Then we have good, 10-20%. 99% history. We have fair 30-49% utilization. We have poor 50-74% utilization. In very poor content, 75% + utilization. So if you’re starting at a very poor content place, again, no judgments. What we’re going to do is help you address each one of these. So we spoke about, and we will address how to address the utilization. There’s three ways we talked about in this particular module. Three ways to address that. Payment history, right? We addressed how to address. We talked about how to address payment history because again, we want to make sure we pay our bills on time, but we also have to address those negative accounts in the past. Derogatory remarks.

Again, those are those collections and charge-off accounts, right? We need to get public record accounts, we need to get those removed. Inquiries. I mean not inquiries, length of credit. Again, when you’re ready, we can show you how to add additional credit history to your credit file, but you still need to have what’s called primary age accounts on your file. You may have no, 0-5 accounts. We’re going to show you how to open up more accounts strategically and how to get those non-account holding inquiries removed, right? Because again, you don’t want to have multiple inquiries for a number of reasons, because you’re going to look dirty to the banks. But again, content is way more important than your score.

Because once we addressed the content and we’re in the excellent, good phase, really the good phase is the 700 credit score club, and then an excellent phase is 800, but you’ll still be in the high sevens with excellent until you have 9+ years of history, no inquiries, and then no derogatory remark. It just takes time. So again, I am so, so, so grateful that we were able to break this down. Let’s get to work. You have the algorithm, and I will see you in the action steps of this week’s module. Talk to you soon.