10%-off credit card deal tempting but possibly costly

December 16, 2007|By Carrie Teegardin | Carrie Teegardin,Cox News Service

ATLANTA -- Holiday shoppers will inevitably face this question in the coming days: "Would you like to save 10 percent today by opening a charge account with us?"

Why does an extra charge account matter? "Statistically, you have become a slightly riskier borrower," said Craig Watts of Fair Isaac Corp., the Minneapolis-based company that developed the computer models used to calculate the scores.

Most consumers understand that paying bills on time and avoiding bankruptcy help to build a healthy credit score. But many do not realize that payment history makes up only about a third of their score.

A credit score is derived from information about a consumer's loans and charge accounts. A complex mathematical model calculates the score, which rates consumers by analyzing how similar consumers have performed in the past.

A flurry of holiday shopping can quickly ding a consumer's score, even if every bill is paid on time.

"People have no idea that the balance on their credit cards, even cards in good standing, has a huge impact," said Ed Mierzwinski, director of the consumer program at the advocacy group U.S. PIRG, the federation of state Public Interest Research Groups.

Consumers whose balance exceeds 50 percent of their credit limit will definitely take a hit on their credit score, he said.

Some consumer advocates suggest never topping 30 percent of the limit. "The lower the balance shown on your credit report, the better," said Watts, of Fair Isaac.

Consumers who pay their balances every month might think they always look good. That's not necessarily so.

Credit card companies take a snapshot of customers' accounts and forward them to credit bureaus. If the snapshot is taken before the bill is paid, that balance will be figured into the credit score.

Consumer advocates say it has never been more important for consumers to learn about credit scoring.

The scores determine how much consumers pay for a mortgage or auto loan. A willingness to extend subprime home loans - many with high fees and adjustable rates - to borrowers with low credit scores fueled the current mortgage meltdown.

Credit scores can also determine whether you can open a bank account, rent an apartment or turn on the electricity without posting a deposit. If your score dips, some credit cards will automatically charge you higher interest, even if you always pay on time.

The trademarked FICO score produced by Fair Isaac is the most widely used score.

The industry guards the details of its credit-scoring models, but it does disclose the factors that influence scores. The factors that Fair Isaac considers are:

Payment history

Amounts owed and relationship to credit limits

How many years you have used credit

How often you apply for credit and open new accounts, and

Types of credit, such as a mortgage, auto loan, finance company accounts or retail accounts

Some consumers try to help their score by closing unused accounts. But that can backfire because reducing credit lines and eliminating a long-term account can be seen as negatives.

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