CREDIT CORNER

Know the Score:  Get Facts on Credit Rating

Three major bureaus calculate the number differently

 

- Mountain Homes Magazine July 2004

 

 

 

Many consumers are still buffaloed by credit scores – what they are, how they work, and why a low score means they’ll probably get turned down for a loan.

 

For example, Michael Hotz of Lone Tree, just sent for his credit report from each of the three major credit bureaus; Equifax, Experian and Trans Union.  “Trans Union included a credit score. The minimum is 150 and the maximum is 934. My score was 850, which I assume is good, but I don’t have any idea how it is determined or to what I should compare it. How high is high?”

 

Relax – you’re in clover.  An 850 score is upper high, and everybody should be so lucky. Here’s how the whole drill works.

 

A credit score is a numerical summary of your credit standing, based upon all the information in your personal credit file assembled separately by each of the three bureaus.  In a nutshell, it measures the likelihood of repaying what you owe – in other words, the chances that you won’t still your creditors.  The higher the score, the greater the chance you’ll pay a lower interest rate when you apply for a mortgage or auto loan.

 

The real big gun in the credit score business is Fair, Isaac & Co. in San Rafael, California, which does business in about 50 countries worldwide.  For years it’s had the widely used “FICO” score based on a mathematical scoring system it developed and which is provided to lenders by the three credit bureaus.  More than 75% of all mortgages written in the US use FICO as their loan-approval standard.

 

But here’s where it gets a little complicated.  In the past couple of years, each of the three bureaus has developed its own credit scores, except Equifax, which has a joint promotional deal going on with Fair, Isaac.  When you order your Score Power credit report and score from Equifax for $12.95, you get the FICO score invented by Fair, Isaac.  The other bureaus peddle their own score products.

 

Even more complex, where FICO’s score can range from 300 (bad) to 900 (excellent), the other companies’ numbers roam from 150 to 934 (trans Union) and from 340 to 820 (Experian).

 

What’s a “passing” score?  It depends on who’s doing the scoring.  In the case of FICO, it’s said to be 630 or thereabouts.  About 42% of consumers fall below the 707 level, says Michelle Blechman, Chief Marketing Officer for Trans Union’s Consumer Solution unit.

 

The Factors that make up a FICO score are these:

 

• Payment history (35%):  It’s the main thing that lenders look at.  If you pay bills late, had an account sent to collection or declared bankruptcy, your score is negatively affected.  The more recent the problem, the lower the score.

 

• Outstanding debt (30%):  This considers how much you owe on credit and whether you could overextend yourself with too many credit cards.

 

• Length of credit history (15%):  How long have your accounts been established?  What’s the average age of all your accounts?

 

• Recent inquiries on your report (10%):  Applied for a lot of accounts lately?  That could affect your score.

 

• Types or credit in use (10%):  Finance company loans generally lower your score.

 

 

How can you improve your credit score?  Most important, advises Tom Quinn, Director of Fair Isaac’s MyFICO operations: “Pay your bills on time. Don’t get overextended on credit or carry too much debt.”  Adds Trans Union’s Blechman:  “Think carefully about the accounts you really need – don’t become over leveraged.”

 

Because your credit information can differ at different credit bureaus and because experts claim errors show up on 1/3 of the reports, it’s wise to buy your from all three outfits.  If you’ve been denied credit in the past 60 days, or live in Colorado, Georgia, Massachusetts, Maryland, New Jersey or Vermont, your report is free.  Go to the following website to obtain your credit score along with a copy of your credit report.  Be sure to also check it for identity theft.

 

Sites:    www.equifax.com         www.experian.com       www.transunion.com

            Also Fair, Isaac has a ton of excellent information:         www.fairisaac.com       www.myfico.com