Credit Score Secrets
By Kerry Hannon
USAA Magazine
Bet you don’t know your credit score, the number lenders use to decide how much to loan you, and the interest rate you pay. Don’t despair. You’re not alone. Two-thirds of Americans don’t have a clue.
They can purchase their credit scores from individual credit bureaus and get a free look at their credit report each year. But many people fail to do so.
That’s astounding, since a consumer’s credit score touches nearly every aspect of his or her financial world.
Potential lenders and landlords use your credit score, which is tied to what’s on your credit report, to decide whether you’re creditworthy. The score can affect your automobile and home insurance rates. (It factors in to USAA insurance rates, along with other risk factors, in most states).
A low score might even keep you from getting a job. About 20 percent of employers say they always look at it to judge your character and forecast your job performance, according to the Society for Human Resource Management. Another 24 % say they sometimes look at it when hiring.
MORTGAGES: High Scores = Big, Big Savings
What it is:
Your credit score is a three-digit number, generally ranging from 300 to 850. The higher your score, the better credit risk lenders think you are and the lower the interest rate they will charge you.
It can mean the difference in several percentage point on an interest rate for a 30-year, fixed-rate mortgage. With a loan amount of $175,000 or more, that translates into a difference of a couple thousand dollars in interest payments each year. Look at it this way: On a home loan of $216,000, the home owner with the 6.31 percent loan has around $83,000 more in his or her pocket at the end of the 30-year loan than the poor guy who finance at 7.89 percent.
A good score means you’ll save on auto loans, too. Even a 1 percent difference in the interest rate you get when you buy your next car translates into several hundred dollars saved or spent.
So you might wonder what qualifies as good. Half of all Americans have a score above 720, says Craig Watts of the Fair and Accurate Credit Transactions Act.
How to get your report and score:
Under the Fair and Accurate Credit Transactions Act, every American’s entitled to a free credit report annually from each of the three main credit bureaus. Order a report from all three bureaus at once, or get one from one agency, then check another’s report a few months later to monitor changes. Go to annualcreditreport.com or call (877) 322-8228.
But take note: Your actual credit score does not come with the free report. You’ll have to purchase it for around $6 a piece from each credit bureau. The scores will vary, based on information the bureau has about you. Obtain your scores when ordering your free credit report, or contact the bureaus directly:
Equifax- quifax.com
(800) 685-1111
Experian- experian.com
(888) 397-3742
TransUnion-transunion.com
(800) 888-4213
Isaac Corp. - Which runs the scoring system, known as FICO scores, on which most lenders rely. Generally speaking, such scores mean those consumers have never missed a bill payment.
But there’s no shelf life for a score. It’s recalculated every time a lender requests it. All it takes is one late payment to squash your score and make lenders leery. “If you’re 30 days late with a payment and your creditor reports that delinquency to one of the big three credit bureaus-Equifax, Experian, or the TransUnion- a score in the mid-700s can plummet more than 50 points, possibly sinking into the checkered 600 category,” Mr. Watts says.
How It’s derived:
Credit scoring is a complex process, involving factors such as whether you pay your bills on time and the length of your credit history. Never using credit, in fact, actually can hurt your because you have no record to rate (See “Raise Your Score”).
Scores are generated from data pulled from credit reports provided by all three major credit bureaus. The reports reflect how you have handled your credit over the previous 24 months. The aim is to provide lenders a picture of how you will manage debt in the future. FICO scores are the most widely used, although the bureaus compare it with slightly different formulas get varying results, even with the same data.
Earlier this year, the three competing bureaus came together to develop their own consistent methodology called Vantage Score, intended to standardize the scoring system. The jury’s out on whether lenders will switch to Vantage Score or stick with the industry standard of FICO.
Time on Your Side:
You have the power to pump your score and have an easier experience getting credit when you need it- with lower rates. But it won’t happen overnight.
“Typically, a low score in the 600 range can be pulled up in several months,” says Nick Jacobs of the National Federation for Credit Counseling, if you do three things:
• Pay your bills on time.
• Watch the amount of outstanding debt, so that what you owe stays comfortably below your credit limits.
• Pay at least the minimum amount due, preferably more.
But it’s a slow process. Your score might move up just 30 points in a year even if
you’re on your best behavior.
And there are factors that will hold your back, including a personal bankruptcy or more than one payment that exceeds the due date by three months or more. Be patient. You can still build up your score; it will just take more time.
Monitoring for Mistakes:
One out of every four credit reports contains a serious error that could lower your score and stop you from getting a loan, or one with the best terms, according to the Public Interest Research Group. You should check your report for:
• Outdated data
• Paid-off loans listed as due
• Money owed by someone with a name similar to yours
It can easily take six months or so to get an error fixed. So if you plan to apply for a mortgage, for instance, check your report a few months ahead of time and get your current score. Consider using a credit monitoring service.
In any case, remember that your score is just a snapshot. It won’t be the exact figure a lender will obtain when it requests the score at a later date, “Don’t get hung up on a particular number,” advises Gerri Delweiler, author of “The Ultimate Credit Handbook.” “The ballpark score will tell you where you stand. Then you can focus on what you need to do to improve or maintain it.”
Raise your Score:
Pay your bills on time.
Payment history affects about 35 percent of your score. So do whatever it takes to be timely: Set up automatic payments online, keep stamps on hand, maintain your budget.
Keep credit balances at 30 percent of your credit limit, or lower. Around 30 percent of your score is based on how much credit you have access to and how much you are using. If you’re cutting it close to the credit limit on your cards, that will reflect poorly on your score.
Don’t cancel credit cards to put up your score. About 15 percent of your score is based on how long you’ve held your credit cards. A card that you’ve had for a few years is better for your score than one you’ve just obtained. Having no credit history at all can really thro off the score, so do carry a credit care-just pay it off in full.
Don’t apply for too many credit cards.
About 10 percent of your score is determined by the number of times lenders request your credit report. Lots of request might indicate that you are desperate for credit and might be headed into trouble, or are already there.
Watch the kinds of credit you use.
About 10 percent of your score is based on the types of credit you are using-secured loans such as car loans and mortgages, or unsecured loans such as student loans, credit cards, and so forth. Unsecured loans are considered riskier on your report.
USAA Magazine Winter 2006
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