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Credit Score Basics

Few people know their credit score or understand how it is calculated. Additionally, most people are unclear about how their behavior can affect their scores.

Your credit report and your credit score are not the same thing. A credit score is a measure of your credit worthiness. The most common credit score is called the FICO score because it was developed by the Fair Isaac Company. The score is a number between 350 and 850 and it predicts how likely you are to become 90 days late on a loan. It is an approximation of your present credit condition and is compiled directly from the positive and negative factors found in your credit report.

A credit report is a record of your credit activities (your current and past loan information). It lists any credit card accounts or loans you may have, the balances, limit & day of last activity, how regularly you make your payments, your employment record and the list of other companies who have reviewed your credit. It also shows your public record information (court judgments, bankruptcies, liens, etc.), or if any action has been taken against you because of unpaid bills paying history and outstanding debts.

What is a Credit Score?

Ever wonder how a creditor decides whether to grant you credit? For years, creditors have been using a credit scoring system to determine if you are a high risk borrower for credit cards and loan qualification. Lenders use your credit score in order to judge your reliability as a loan candidate. Your credit scores indicates your ability to handle debt responsibly and will help banks decide if you are a desirable loan customer.

What’s the Big Deal?

Before you qualify for a loan or credit card, creditors always evaluate your ability and willingness to repay your debt.  Lenders rely heavily on an applicant’s FICO score in making lending decisions.  The score also impacts the terms of any loan offered and it can also make the difference between getting approved or denied.

A high credit score can help you lock in low APR rates or secure special deals on loans, thus providing you with flexibility when financing. A bad credit report may prevent you from securing loans and can damage your ability to obtain a job, buy a car, open a credit card or even rent a home.

A history of inability to manage your credit successfully will make lenders uncomfortable about trusting you with additional funds in the future. Because your credit report is an important part of your life, it is very important to make sure it’s accurate and free of negative items before you submit a credit application.

You are Entitled to A Free Credit Report

Federal Law mandates that your credit report be made available to you freely on an annual basis. Go to and request your copy.

When you do receive your credit report, check to ensure that all information being reported is accurate and act quickly to correct any mistakes. This may include any clerical errors, identity theft issues or misleading information.

With so much emphasis on your credit score, empowering yourself by learning how to monitor your credit score will help you qualify for more favorable loan terms.

What Makes Up a Credit Score?

Your credit score is determined by an algorithm developed by the Fair Isaac Company. Three corporations, called credit bureaus (Equifax, Experian & Transunion), specialize in collecting and reporting on financial histories. While, the exact formula used to calculate your credit score is a tightly guarded industry secret, these companies provide general guidelines about financial behavior that can affect your credit score.

The credit score is divided into five categories and breaks down as follows:

credit score check

Understand What Affects Your Credit

35% Payment History
This includes late payments, collections, bankruptcies and tax liens. Each type of account will stay on your credit report for a specified period of time and each type of derogatory items will hurt your score differently. Global Credit Management works to remove accounts that are not 100% accurate OR verifiable and has a removal rate of around 70%.

30% Debt Ratio
Your debt ratio is the amount of revolving credit (i.e. credit cards) you owe in relation to the amount of credit you have available. For instance, if your credit limit is $10,000 and your current balance is $4,500, your debt ratio is 45%. We usually recommend that you keep a debt ratio no more than 30%. Carrying a low balances on credit cards result in higher credit score, but maxing out negative cards negatively affects your credit score.

15% Length of Credit
This factor shows how a borrower has behaved in the past, which is a pretty good indicator of how they will behave in the future. How long have your accounts been open? The longer the account has been open, the better. Closing out older cards, even if they have higher interest rates, will hurt your score.

10% Types of Credit
Types of credit include revolving (credit cards or line of credit) and installment (car, student and mortgage loans). By having different kinds of credit open, you show creditors that you are responsible and able to handle different kinds of responsibilities, provided you keep up with the monthly payments.

10% Inquiries
Inquiries are marked on your credit report when you ask for new credit (for instance when you apply for a home loan). Inquiries (soft inquiries) made by yourself or for unsolicited offers do not count against your score, but are shown on your report. Hard inquiries affect your score negatively every time you apply for credit. It is important to note that when searching for a home you are allowed unlimited inquiries over a 45 day period since it is assumed you are rate shopping.

If you believe that your credit is at risk or if you think that you have been a victim of identity theft, please call our experts today at (888) 247-8882 to set up a risk free consultation.