Credit score is affected by several variables

PERSONAL FINANCE

Dollars & Sense

April 01, 2001|By EILEEN AMBROSE

WHEN YOU'RE allowed to open a credit account on the spot at a department store and begin charging, it's not because the clerk thinks you look reliable. It's your credit score.

The score, the result of your credit report information fed through a mathematical model, tells lenders the probability that you'll pay your debts.

It's widely used by lenders these days. And it can determine the fees, interest rate and terms you're offered, or even if credit will be extended at all, experts said.

If you haven't heard much about credit scores up to now, you can expect that to change.

For years, scores have been an industry secret. But a California law requiring disclosure by July and similar legislation pending in Congress have prompted credit bureaus and a crop of new competitors to begin selling customers their scores.

Last month, Fair, Isaac and Co., which developed the most widely used scoring model, joined with Equifax, a major credit reporting agency, to provide scores online (www.myfico.com). For $12.95, customers get their score, credit report, the top four factors influencing their score and advice on how to boost it. Customers, too, can call toll-free to discuss their scores with staff members.(Marylanders are allowed to get a free copy of their credit report from major credit agencies once a year, but they must pay the full $12.95 for this online product.)

The other major credit bureaus, TransUnion and Experian, expect to launch their own versions in the coming months. TransUnion hasn't set fees yet, but Experian plans to charge $6 for its credit score and sell the credit report separately.

Brian Sacks, branch manager with Integrity Home Funding in Owings Mills, deals with credit scores. "They are an accurate reflection of how someone has paid, but not an accurate [reflection] if someone will repay," said Sacks, who helps those with financial problems qualify for a mortgage.

Sometimes a setback, such as an injury or job loss, causes financial problems that lead to a low score, but it doesn't mean the person won't make good on future debts when the situation improves, he said.

Still, scoring is so important in lending decisions today that Sacks and others recommend that people get their score and a copy of their credit report. Some suggest getting the score used by lenders in your area a few months before applying for a major loan.

Knowing your score and what factors influence it can reveal how lenders view you and may give those with excellent scores greater negotiating power with lenders.

A credit score is a three-digit number. Fair, Isaac's commonly used FICO score ranges from 300 to 850 - the higher the number the better. Lenders, who generally also consider income, employment and other factors, set their own standard for what scores get certain rates and terms.

"Anything above the mid-600s looks good to most lenders," said Craig Watts, consumer affairs manager with Fair, Isaac. "It's when you get below 600, lenders take a deep breath and, generally, ask for more information before extending credit to you."

Improving a score may take six months to a year. "It's easy to hurt in a hurry and takes a lot longer to repair," Watts said.

How can you improve your score?

First, check the accuracy of the information on your credit report because your score is based on this. A 1998 study by U.S. Public Research Group in Washington found 29 percent of credit reports contained errors serious enough to result in a consumer's being charged a higher interest rate or being denied credit altogether.

The most common mistakes are wrong late-payment claims, data appearing twice and someone else's information, usually negative, appearing on the report, said Ed Mierzwinski, with U.S. PIRG.

Consumers can challenge errors, and credit reporting agencies must investigate. The report will be corrected if the creditor agrees that a mistake was made. If not, consumers have the right to add a statement to the report with their explanation.

One of the most important ways a consumer can improve a score is to pay on time. Payment history accounts for 35 percent of the FICO score.

"A lot of people don't understand why missing a payment is quite serious to credit grantors," said Don Girard, director of public relations for Experian. "It's a predictor in their mind of future behavior."

Reducing debt can help a score, too. Debt levels account for 30 percent of the FICO score.

Sometimes consumers hope to improve their scores by closing accounts or consolidating credit-card balances. This can backfire if debt isn't lowered, too.

That's because by closing accounts, the ratio of debt to available credit rises. So, instead of owing, say, $4,500 on two cards with combined limits of $10,000, you'll owe $4,500 on a single card with a $5,000 limit. "You'll still have the same debt, but you'll seem maxed out," Mierzwinski said.

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