They Know Your Credit Score

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					  They Know Your Credit Score
                               Why don’t you?
                        By Paul J. Lim           From U.S. News & World Report




YOU        LOST, scoring only 550. Your                 Most lenders will be happy if your score is
exemplary neighbor won, with an 800, and                700 or higher. Even though you may still
is headed for that five-bedroom manse in the            qualify for a loan with a lower score, it will
suburbs. Your sister is right on the cusp,              cost you. E-Loan recently examined auto
with a 620, her loan application is sitting in          loans and found that consumers with scores
purgatory, awaiting further review.                     of 730 could expect a rate of 7.35 percent.
  This is the world of credit scoring, where a          And the differences really add up. A
little-known number called your “FICO                   $20,000 loan for five years at 9.95 percent
score” may determine whether you’ll get the             will cost you $1,500 more than if financed at
house or car of your dreams. It’s not unlike            7.35 percent.
high school, when SAT scores separated the                So what if your score falls below 680, the
most likely to succeed from the also-rans.              point at which many lenders begin
Someone is still keeping tabs, in a process             examining an application more closely, or
long obscured from public view.                         below 620, considered problematic? What
  But that just changed. In March, Fair, Isaac          can you do to boost your score? First, you
and Co. of San Rafael Calif., creator of the            need to understand how your score is need
FICO credit-scoring system (hence the                   to calculated:
name), began making these scores available
to consumers. To learn yours, which can                 Payment record. This is the key that
range from 300 to 850, go to myfico.com                 determines your score: 35 percent of the
(There’s a small charge.)                               number is based on whether you’ve paid
  Raising your FICO number can help you                 your bills on time.
get the best deal on many types of loans. In
fact, three-quarters of all mortgage loans are          Amount owe d. Your total amount of debt,
sorted on the basis of credit scores, the most          including balances on credit cards, car loans
widely used being FICO.                                 and student loans, accounts for 30 percent of
  “Lenders are increasingly relying on these            your score. “Keep balances low, especially
scores,” says Chris Larsen, CEO of online               on revolving debt,” says Fair, Isaac general
lender E-Loan. “Many loan products,                     manager Cheri St. John.
including some home-equity loans and auto                 That’s what attorney Paul Makris did. In
loans, are based almost entirely on your                an effort to refinance his mortgage at a
FICO score.”
lower rate, he paid off $56,000 in car loaned       your application history. Each time you
and credit card balances. This raised his           apply for credit, the lender pulls a credit
score by about 20 points. Though Makris             report. All this shopping around makes it
was pleased, he was “a bit shocked” that            look as if you are hungry to take on more
erasing his debts didn’t raise his score more.      debt.
  Makri’s experience illustrates one of the
quirks of the system. “Everyone would                “If you look at it from the credit issuer’s
                                                    point of view, they don’t want someone who
agree that paying off revolving debt is a           constantly jumps from lender to lender,”
good thing,” says Fair, Isaac spokesman             says Steve        Rhode,    co-founder of
Craig Watts. But all things being equal,            Myvesta.org, a financial-crisis agency.
“having a little balance on a line of credit is     “They want someone who establishes a line
better than no balance at all.” Why?                of credit and keeps it.”
Because a zero balance provides less
information to FICO about one’s ability to
manage debt than a small balance does.
                                          Your    Credit            final ten        of your
                                               Payment mix. The how muchpercentyou have
                                                  score is based on           credit
                                          Record affects types of debt you have incurred.
                                                  and the
Credit history. How long you have bad               Having too many accounts -- say, a card
credit makes up 15 percent of the score.
FICO scores take into account both the age
                                                 35 from every store in town – could harm your
                                                    score.
of your oldest account and the average age percent
of all your accounts. By closing out old
cards, you may inadvertently lower your
                                                    Now that
                                           of your score. FICO scores are available, –credit
                                                    counselors advise reviewing them          and
score by shortening your credit history.            correcting any mistakes. “I run my own
  Closing old accounts can hurt in another          score twice a year to put my mind at ease,”
way. The FICO model rewards consumers               says mortgage broker Jeff Lazerson. Last
who maintain a big cushion between their            October he discovered that some credit
outstanding balances and their credit limits -      information belonging to his brother had
- for example, $1,000 owed on a card with a         found its way into his report. Luckily, it
$10,000 limit. But close out an old account         didn’t affect his score because his brother
with no balance, and you will also reduce           also maintains good credit.
the overall amount of credit available to you.        The bottom line: take the same active role
                                                    in managing your credit score as you would
New debt. When interest rates are falling,          with any other financial matter, such as your
consumers often shop for lower-rate cards.          401(k) or IRA. “People are doing a good job
While this may reduce your monthly                  of managing their assets,” says E-Loan’s
minimum payments, it might hurt your                Larsen. “Consumers need to think about
score, of which ten percent is based upon           their debt the same way. They need to be
                                                    opportunistic.”

				
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posted:4/9/2011
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