Your credit score: a few key points

THE REAL ESTATE WONK

August 10, 2008|By JAMIE SMITH HOPKINS

You probably know your SAT score, assuming you took the test. But what about your credit score?

Once you're past the college-application stage of life, the second score is a lot more important. Or, rather, scores, because a variety of companies are watching and grading you. Mortgage lenders look at your scores to help determine how big a risk you are, and therefore what interest rate you should pay. Many others will take a peek, too, from credit-card companies to insurers to apartment complexes.

Do they know more about you than you do?

"The U.S. consumer is grossly undereducated with respect to credit," says John Ulzheimer, president of consumer education for Credit.com, a financial services and consumer education firm.

Many companies look at your FICO score before extending you credit. FICO is the acronym for the company, Fair Isaac Corp., that developed the formula, but the scores themselves are produced elsewhere - by the three national credit-reporting agencies: Equifax, Experian and TransUnion. They use the FICO model and plug in data from lenders, public records, collections agencies and the like.

Your scores can vary in part because the agencies might not have the same details about you, says Barry Paperno, consumer operations manager for Fair Isaac.

Five overall factors influence your FICO score:

*Payment history. Whether you pay on time accounts for 35 percent of your score - the most important piece, but not as important as many assume.

*Amounts owed. This is 30 percent of your score and primarily refers to credit cards. The lower your balance compared with your limit, the better.

*Length of credit history. How old is your oldest account? How old are the rest? The longer, the better, and these answers add up to 15 percent of your score.

*New credit. Ten percent of your score is based on this factor. Opening a lot of new accounts lately? That can ding your score, as can multiple applications to credit-card companies, which show up as inquiries on your credit report. (Multiple inquiries as part of shopping around for an auto loan, a mortgage or an apartment aren't supposed to count against you, Ulzheimer says.)

*Types of credit used. This accounts for the final 10 percent of your score, and what the scorers are looking for is variety. You'll do better here if you have credit that's revolving (for instance, a credit card) and installment (i.e. an auto loan or a mortgage).

Got that?

In these days of rising mortgage defaults, you might be wondering what's worse for credit scores - a foreclosure or a bankruptcy? Answer: It depends. Filing for bankruptcy is a hit equal to foreclosure, Paperno says. If the result of that bankruptcy is multiple debts discharged, that hurts more, he says.

FICO scores range from 300 to 850. Like the SAT, higher is better. Fair Isaac's myFICO site (myfico.com), says a monthly payment on a 30-year fixed-rate mortgage can range from about $1,850 for someone with a credit score of 760-plus to $2,700 for someone in the low- to mid-500s. (That's for a $300,000 loan calculated with the going rates in late July.)

High income doesn't guarantee a great credit score, by the way, just as low income doesn't necessarily doom you to the bottom of the barrel. "Wealth is a measure of capacity, not creditworthiness," Ulzheimer says. A credit score "is the measurement of how you manage debt."

Next week: Managing that score

Find Jamie's blog at baltimoresun.com/realestatewonk.

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