Knowing your credit score is first step to controlling it

PERSONAL FINANCE

Your Money

September 26, 2004|By EILEEN AMBROSE

SOMETIMES what you don't know can hurt you, and that's especially true when it comes to a credit score.

This three-digit number is compiled from information on your credit report and is used to predict the chances that you'll get seriously behind on repaying your plastic, loans or other credit.

Mortgage lenders use the score to determine whether a homebuyer gets a loan and at what interest rate. Landlords and utilities use scores to screen prospective tenants and customers. Even some employers, in search of responsible and disciplined workers, consider scores when weighing job candidates.

And their use is only expected to increase. "This is an inevitable wave of the future," said Stephen Brobeck, executive director of the Consumer Federation of America.

Yet most people don't understand credit scores, or what's considered a good or bad score, according to a survey of more than 1,000 adults released last week by the Consumer Federation and Providian Financial. Even those aware of scores often don't know how to improve them.

Among the survey's other findings:

Only about one-third of those polled knew that scores gauge the risk of a consumer not repaying a loan or other credit.

More than half believed, incorrectly, that a married couple had a combined score.

Nearly two-thirds mistakenly believed income was a component of scoring. It's not what you make, but how good you are at repaying bills that's largely the driving force behind scores.

Forty percent didn't realize that paying off a large balance on a credit card could boost a score, while 28 percent wrongly believed that charging up to a card's credit limit would help.

Slightly more than 10 percent of consumers knew what was considered a good or bad score.

A consumer with a score in the low 600s might end up paying a high subprime interest rate or be denied credit altogether, the consumer group said. The lowest interest rates are reserved for those with scores above the low 700s.

"The shocker was the overwhelming percentage of consumers who do not understand what a good score and bad score is," Brobeck said. Even if they had the figure in hand, it wouldn't mean anything to them, he said.

But the difference between a high and low score can mean a lot to their wallet.

Take the case of two consumers applying for a 30-year, $150,000 mortgage. The applicant with the 550 score would receive a loan at a rate of 9.29 percent and monthly mortgage payments would be $1,238, according to Fair Isaac Corp., which produces the widely used FICO score. With a 720 score, the other homebuyer would secure a loan at 5.62 percent and pay $863 a month - $4,500 less over the course of a year.

Consumers, though, can't be entirely blamed for not knowing much about scores. For years, the folks who compiled credit scores kept them a secret.

It was only a few years ago, when scoring companies faced the prospect of disclosure legislation as well as some competition, that they raced to sell credit scores to consumers.

Because a variety of companies produce credit scores, consumers' scores can vary slightly, depending on the source. The FICO score, for example, rates consumers on a scale of 300 to 850. The higher the score, the better a consumer looks to creditors.

With FICO, too, payment history accounts for 35 percent of a score, the largest component. Amount owed, which includes the amount of debt in relation to available credit, is the second most important factor, making up 30 percent of the score. The remaining ingredients are the length of credit history, new credit accounts opened and types of credit used.

Today, you can buy your FICO score and a credit report from one of the three major credit bureaus for $12.95 from myFICO.com. Each of the Big Three bureaus - Experian, Equifax and TransUnion - sells a credit report along with their own credit score for around $15.

Beginning in December, mortgage lenders must disclose scores to loan applicants, under a federal law passed last year. Scores must also be made available to consumers for a "reasonable fee," but the Federal Trade Commission hasn't defined what that is yet.

(The federal law also will entitle consumers to one free credit report a year from the major credit bureaus, a perk that's been available to Marylanders for years.)

Brobeck advises that consumers check their credit report each year for errors that could lead to a lower score.

He advises consumers to check their credit scores as soon as they decide to make a major purchase, like a house, or know they will be moving and applying for a new job or apartment. That way, they have some time to improve a low score, he said.

Consumers can give sagging scores a boost. Fixing errors on a credit report can quickly raise a score, but other steps will take time to show up.

"It takes a while. It's like losing weight," said Ryan Sjoblad, a spokesman with Fair Isaac in Minneapolis.

Among the best ways to raise low scores is to consistently pay bills on time, experts agree. Also, avoid charging up to your credit limit on plastic.

Consumers often assume that if they never use their credit cards their scores will be higher, said Maxine Sweet, vice president of consumer education at Experian.

"You have to have credit and use it," or you aren't demonstrating you can manage credit, she said. Sweet advises using a credit card and paying it off each month to show you can handle credit responsibly.

Avoid opening lots of new credit accounts, which lowers a score, experts said.

Be aware that closing old accounts can reduce a score, too.

Older accounts give you a longer credit history, which can work in your favor. Also, by closing accounts, you may raise the amount of debt you carry in relation to available credit, which reduces a score.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose @baltsun.com.

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