Life easier for those careful with credit

Getting Started

Your Money

February 08, 2004|By JULIE CLAIR DIOP

YOU MIGHT have been one of those spring breakers who believed that "whatever happens in Mexico, stays in Mexico."

But when it comes to your credit record, whatever happens tends to follow you for years and years. Say you fall behind on a student loan payment, or skip out on a lease, or your roommate loses your cell phone bill. What's the big deal? Just that your chances of getting financing for a new car or renting that next cool apartment just went south.

Loan sharks might court your business, but most banks and insurance agencies and many employers won't want anything to do with you.

You're being watched by not one but three credit bureaus, Experian, Equifax and TransUnion. They sell businesses reports on how creditworthy you are, giving you a score ranging roughly from 350 to 850.

Any score exceeding 720 is super-prime, according to Gerri Detweiler, author of The Ultimate Credit Handbook: How to Cut Your Debt and Have a Lifetime of Great Credit.

Scores between 680 and 720 are prime, and scores of less than 680 are less than ideal. Experian's average score is 678.

Scores are based on data from banks, credit card companies, mortgage lenders and collection agencies.

As the saying goes, the bank always wants to lend money to the person who doesn't need it. In this case, that means those zero-percent financing deals are often available only to people in the first group.

Nowadays it seems no business makes a move without checking your credit score.

Insurance agencies use them because they're also good at predicting how many claims you will make.

Employers buy them to make sure you are responsible enough to manage your finances.

All three credit bureaus use a rating system developed by Fair Isaac Corp.

The score is divided into 35 percent for whether you have paid your bills on time, 30 percent for how much money you owe, 15 percent for the length of your credit history, 10 percent for new credit you've received and inquiries made for new credit and 10 percent for the types of credit you have.

Income is not part of the calculation, so the debts of a factory worker and an investment banker are counted the same way.

Credit bureaus do not have access to reliable income data, which is one reason it is not included in generic scores.

Many banks use custom scores to evaluate mortgage applications, which take income into account. And it turns out income is not an especially good predictor of creditworthiness. Studies show that people with lower incomes have higher scores, according to Fair Isaac's Craig Watts.

Credit bureaus determine whether you're swimming in debt by looking at how much of your available credit you're using.

If you have a total of $7,000 available on three credit cards and owe $2,000, your score will be higher than if you have maxed out your only credit card with a $2,000 limit.

If you always pay cash, you aren't looked at as a good credit risk.

The more data a credit bureau has about you, the better it can determine your creditworthiness.

That's why you should get a credit card early and use it.

But be careful how you go about seeking credit. Every application for credit shows up at the credit bureau as an "inquiry."

Bureaus differentiate between shopping around for a loan and desperately looking for someone to lend you money, but they give poor marks to people in constant search of credit.

Before applying for a loan, order your credit report and scores online to make sure there are no mistakes.

Detweiler recommends going to Fair Isaac's site at www.myfico.com and paying $38.85 to get a copy of the scores from all three agencies. (Soon you should be able to get a copy of your credit reports free each year, but the mechanism is not yet in effect.

Residents of several states, including Maryland, are already eligible to receive a free copy of their credit report once a year from each of the three major credit bureaus.)

Contact the credit bureaus if you find mistakes.

E-mail Julie Claire Diop at yourmoney@tribune.com.

How your credit score is determined?

35% if you pay your bills on time

30% how much you owe

15% length of your credit history

10% new credit received and inquiries for it

10% types of credit you have

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