Rich Legg
Principal Broker

THEY KNOW YOUR CREDIT SCORE
Why Don’t You?

You lost, scoring only 550.  Your exemplary neighbor won, with an 800, and is headed for that five-bedroom dream home in the suburbs.  Your sister is right on the cusp, with a 620; her loan application is sitting in purgatory, awaiting further review.

This is the world of credit scoring, where a little-known number called your “FICO score” may well determine whether you’ll get the house or car of your dreams.  It’s not unlike high school, when SAT scores separated the most likely to succeed from the also-rans.  Someone is still keeping tabs, in a process long obscured from public view.

But that just changed.  In March, Fair, Isaac and Co. of San Rafael, California, creator of the FICO credit-scoring system (hence the name), began making these scores available to consumers.  To learn yours, which can range from 300 to 850, go to myfico.com.  (There is a small charge.)

Raising your FICO number can help you get the best deal on many types of loans.  In fact, three-quarters of all mortgage loans are sorted on the basis of credit scores, the most widely used being FICO.

“Lenders are increasingly relying on these scores,” says Chris Larsen, CEO of online lender E-Loan.  “Many loan products, including some home-equity loans and auto loans, are based almost entirely on your FICO score.

Most lenders will be happy if your score is 700 or higher.  Even though you may still qualify for a loan with a lower score, it will cost you.  E-Loan recently examined auto loans and found that consumers with scores of 730 could expect rates of 7.35 percent, while those scoring 640 were looking at 9.95 percent.  And the differences really add up.  A $20,000 loan for five years at 9.95 percent will cost you $1,500 more than if financed at 7.35 percent.

So what if your score falls below 680, the point at which many lenders begin examining an application more closely, or below 620, considered problematic?  What can you do to boost your score?  First, you need to understand how your score is calculated:

Payment record.  This is the key determinant of your score:  35 percent of the number is based on whether you’ve paid your bills on time.

Amounts owed.  Your total amounts of debt, including balances on credit cards, car loans and student loans, accounts for 30 percent of your score.  “Keep balances low, especially on revolving debt,” says Fair, Isaac general manager Cheri St. John.

That’s what attorney Paul Makris did.  In an effort to refinance his mortgage at a lower rate, he paid off $56,000 in car loans and credit-card balances.  This raised his score by about 20 points.  Though Makris was pleased, he was “a bit shocked” that erasing his debts didn’t raise his score more.

Makris’s experience illustrates one of the quirks of the system.  “Everyone would agree that paying off revolving debt is a good thing,” says Fair, Isaac spokesman Craig Watts.  But all things being equal, “having a little balance on a line of credit is better than no balance at all.”  Why?  Because a zero balance provides less information to FICO about one’s ability to manage debt than a small balance does.

Credit history.  How long you have had credit makes up 15 percent of the score.  FICO scores take into account both the age of your oldest account and the average age of all your accounts.  By closing out old cards, you may inadvertently lower your score by shortening your credit history.

Closing old accounts can hurt in another way.  The FICO model rewards consumers who maintain a big cushion between their outstanding balances and their credit limits – for examply, $1000 owed on a card with a $10,000 limit.  But close out an old account with no balance, and you will also reduce the overall amount of credit available to you.

New debt.  When interest rates are falling, consumers often shop for lower-rate cards.  While this may reduce your monthly minimum payments, it might hurt your score, of which ten percent is based upon your application history.  Each time you apply for credit, the lender pulls a credit report.  All this shopping around makes it look as if you are hungry to take on more debt.

“If you look at it from the credit issuer’s point of view, they don’t want someone who constantly jumps from lender to lender,” says Steve Rhode, co-founder of Myvesta.org, a financial-crisis agency.  “They want someone who establishes a line of credit and keeps it.”

Credit mix.  The final ten percent of your score is based on how much credit you have and the types of debt you have incurred.  Having too many accounts – say, a card from every store in town – could harm your score.

Now that FICO scores are available, credit counselors advise reviewing them – and correcting any mistakes.  “I run my own score twice a year to put my mind at ease,” says mortgage broker Jeff Lazerson.  Last October he discovered that some credit information belonging to his brother had found its way into his report.  Luckily, it didn’t affect his score because his brother also maintains good credit.

The bottom line:  take the same active role in managing your credit score as you would with any other financial matter, such as your 401(k) or IRA.  “People are doing a good job of managing their assets,” says E-Loan’s Larsen.  “Consumers need to think about their debt the same way.  They need to be opportunistic.”

Reprinted from U.S. News & World Report (February 5, 2001)

Ó 2001 By U.S. News & Worlds Report, Inc.
2400 N St., N.W., Washington D.C. 20037

 Helpful Links:  MyFico.com, FreeCreditReport.com

Rich Legg, Legacy One Real Estate

(801) 259-3500  -  www.RichLegg.com