[an error occurred while processing this directive]
No longer are credit scores a closely held, immutable secret. Savvy consumers can take control of their credit records and even improve them.
By HELEN HUNTLE
© St. Petersburg Times
published January 26, 2003
Good credit is golden if you're applying for a mortgage, a car loan, credit cards, insurance or a job. A consumer with subpar credit could pay thousands of dollars in extra costs or even be turned down flat.
Yet many people have no idea how their credit is rated or what it would take to make it better. Until two years ago, the whole process was shrouded in secrecy. Fair, Isaac & Co., a California company that compiles the FICO credit scores most lenders use, refused to let consumers see their scores.
"We were very shy about providing scores in an environment where we were afraid consumers would not benefit from the knowledge," company spokesman Craig Watts said. "We thought exposure of the system might hurt lenders' ability to use the scores."
Under pressure from consumers and Congress, the company changed its ways and its attitude. Now it not only sells credit reports and credit scores, it tells consumers how to think like a credit-scoring computer. And with some basic knowledge of how the system works, it is now possible to improve your score. That, in turn, improves your chances of getting a loan at the rate you want or of qualifying for an insurance policy or a job at a company using credit scores to screen applications.
FICO scores range from 300 to 850, with about 60 percent of adults rating a score of 700 or better, firmly in good credit territory. Depending on where they do their borrowing, improving their scores might or might not produce savings on interest costs. For the rest of the population, credit scores become a much bigger issue. Each company using scores sets its own standards, with a score of 620 often used as a cutoff point. Fall below that and you are likely to be labeled a high risk. For those on the bubble, even small variations in credit scores can have costly consequences.
"If your credit score is 610, it's not outside the realm of possibility for you to improve it to a 630 or a 640, which can save some big money," said John Danaher, chief operating officer for TrueLink, a California company that sells credit information and credit management products to consumers. "That's where we provide the most value."
Even people whose previous credit problems have left them saddled with high-interest mortgages or car loans may be able to refinance after improving their scores.
The first thing to know about credit scores is that the old adage "garbage in, garbage out" applies.
Credit scores are based on credit reports compiled by the three largest credit bureaus, Equifax, Experian and TransUnion. The reports frequently differ in the information they include. Sometimes they are simply incomplete, but sometimes they are wrong. If the information in a report is wrong, the credit score based on it will be, too. A lender may check only one report or may check all three and use the middle score in its lending decision.
Inaccuracies in credit reports are common, according to a study of 502,623 credit files the Consumer Federation of America and the National Credit Reporting Association did last year. Credit scores for the same person varied an average of 41 points, depending on which of the three credit reports they were based on. Four percent of the files had variations of 100 points or more.
A closer analysis of 51 files found the most common error was failure to include accounts in good standing. In addition, the reports sometimes had conflicting information about late payments.
Improving credit starts with getting a copy of your credit reports to check for omissions and inaccuracies. You then can write the credit bureau, including supporting documentation, to challenge anything you think is wrong or to request that missing accounts be included. While a challenge is being reviewed, the account will not be analyzed as part of your credit score. That might be a plus for your score if the item was negative, but it also could be a minus if the account was one of the older ones on your report.
Of course, there often is a reason that a negative item appears. Cleaning up a report sometimes requires going back to a creditor to dispute an old charge, settle a debt or clean up a case of mistaken identity or identity theft.
Maurits Rolf Burer of Gulfport discovered two people he knew had used his name and Social Security number to open accounts they never paid, leaving black marks on his credit report. The problem jeopardized his income because he buys houses as an investment, renovating them for resale or rentals, and needs good credit to secure mortgages for his purchases.
In one case, Burer said, he filed a police report and succeeded in getting the delinquent accounts removed from his record. In the other case, he decided not to pursue legal action. When the lender would not release him from the liability, he paid the account off to clear his record.
"I'm out of business if I have bad credit," he said. "It's the most important thing to me. I check my credit report on a regular basis now, at least twice a year in case something does come up."
Credit experts urge caution when settling debts. If you work out a deal to clear a debt for less than you owe, it can harm your credit record. During negotiations, it is a good idea to ask the creditor for a letter stating the debt has been paid as agreed and will be reported that way to the credit bureau. Check the credit report later to be sure that actually happened.
If you are unable to resolve an issue, or you want to explain a late payment because of unemployment or illness, you can post a statement on your credit record telling your version of events. While the statement will not change your score, a lender reviewing the file may give it some weight, particularly if the problems you cite have since been resolved.
So-called "credit repair" companies cannot legally do anything that consumers could not do for themselves, said Paul Richard, executive director of the Institute of Consumer Financial Education. He said some of the techniques that companies suggest, such as trying to create a new identity for yourself, are illegal.
Bankruptcies stay on your credit record for 10 years, and all other negative information must be removed after seven years. However, it doesn't take nearly that long to improve your credit record. The credit scoring formula gives more weight to recent activities than it does to those in the distant past.
"Just six months of timely payments will have an impact," Fair, Isaac spokesman Watts said. The impact is largest if the payments indicate a change in behavior, showing you have cleaned up your act. If you already have a high score based on a long history of on-time payments, continuing to make those payments preserves your current status but will not necessarily improve your score.
"Even people who have declared bankruptcy have a good opportunity to have a good FICO score within two or three years if from day one they stick to conservative credit habits and responsible credit management," Watts said.
A high credit score is based on more than just whether you pay your bills on time. Old accounts boost your score because the credit scoring formula rewards a long history of credit use. Having mortgages and car loans on your record also helps because they show that you've handled different types of credit, not just credit cards.
People with high scores are those who use credit in moderation.
"If you don't owe anything to any creditor, you're not demonstrating to future creditors that you know how to manage credit," Watts said. "People with fantastic scores tend to have very low credit balances. They are not zero, but they keep them low. People with very low credit scores tend to have high credit balances."
Credit reports make no distinction between balances that are paid off every month and those that are carried forward. What matters is the relationship between what you owe when the creditor reports your balance and what the credit limit is on the account.
"Any number 50 percent or lower will be a good number," Watts said. "The lower you go, the better the number will be."
In fact, paying down balances or refraining from incurring new charges is the quickest way to improve a credit score if you are getting ready to apply for an important loan.
"If you came back from vacation maxed out on credit cards and applied for a home mortgage the same day, the FICO score would be lower than you thought it would be," Watts said. "If you paid down those balances, your score would respond by becoming better. Part of the art of managing credit is getting your house in order before you apply for credit."
The management process includes being careful about new applications for credit. A flurry of recent inquiries and several newly-opened accounts may be damaging to your score, particularly if you are a borderline case. The formula makes allowances for multiple inquiries in a short period that indicate you are comparison shopping for a mortgage. But if you're actually opening up new accounts and taking on new debt, do it in priority order.
"If you want to buy a home, do it before you buy a car," advised Sarah Murphy, a Gulfport real estate agent.
In addition to lowering your credit score, the new loans may give you too much debt in relation to your income, one of the items lenders look at in addition to your score.
One of the most hotly debated aspects of credit management is what to do with old, paid-off accounts that you no longer use. In some instances, a lender may look at the available credit as a negative, particularly if it is a large amount with the potential to drastically increase your debt-to-income ratio.
"If you've got a couple of late payments or you're pretty highly leveraged, the fact that you've got open accounts and open credit lines that you're not using could be the deciding factor on whether you get approved or not," said Danaher at TrueLink, the credit management service. "But if you're paying your bills on time and you're making enough money, it's unlikely that it (unused credit) is going to result in your being turned down for credit."
However, Watts at Fair, Isaac, warned against closing old, unused accounts.
"Closing a credit account will never improve a FICO score," Watts said. "It could have the opposite effect. When a lender stops reporting information, it falls off your credit report."
As the credit score has become more important, some lenders say they have placed less emphasis on an applicant's debt load and income.
"The FICO score is much more important," said Donnell Smith, executive vice president of Market Street Mortgage in Clearwater. "If it's an 800 FICO score, I say, "Just make sure they fog the mirror and they'll get a loan.' It's not where they work, it's how they pay their bills over a period of time. It shows their character and their responsibility."
-- Helen Huntley can be reached at firstname.lastname@example.org or (727) 893-8230.
Old accounts (because they show a lengthy credit history)
Low balances (less than 50 percent of the limit on each card)
Variety (bank credit cards, car loans, mortgages)
Black marks (collection actions, lawsuits, bankruptcy)
High balances (the closer you are to your limits, the worse it is)
Recent applications for credit
Little or no use of credit
Each bureau's report may be different, so get a copy of all three reports if you want to cover all your bases. The report is free if you have been denied credit, you are on welfare, you are unemployed and looking for work or your report is inaccurate because of fraud.
Otherwise bureaus may charge up to $9 for an individual report. For about $15, you can buy a credit report plus a credit score, or for about $40, you can buy an online package of all three reports plus a score.
Equifax: www.equifax.com or toll-free 1-800-685-1111.
Experian: www.experian.com or toll-free 1-888-397-3742
TransUnion: www.transunion.com or toll-free 1-800-916-8800
If you are applying for a loan, you can ask your lender for your credit score. However, getting it in advance allows you to correct problems before you apply.
Credit reports and credit scores also are available from companies selling credit management services. In some cases, the report is free if you agree to a trial of credit monitoring services. Fair, Isaac & Co. compiles the FICO scores, which most lenders use. Other sources may use their own scoring methods, which differ from FICO scores. Two sources:
Fair, Isaac: www.myfico.com. Calculator on site shows how some actions can increase or decrease your score.
Do-it-yourself Credit File Correction Guide by Paul Richard, Institute of Consumer Financial Education, $10, www.ifce.info or (619) 239-1401. Workbook with sample letters to send
Credit Repair by Robin Leonard and Deanne Loonin, $17.90, and Clean Up Your Credit File by Robin Leonard, $10.36, both from Nolo Press, www.nolo.com.