Your Credit Score

While looking through some old emails, I came across one sent by a friend of this blog. I am not sure why I never used it, but now seems like a pretty good occasion to revisit the subject. We live in a nation obsessed with easy credit. It should be no surprise that many Americans find their credit score an important topic. I guess the best answer to the question, “What is your credit score?” would be, “It doesn’t matter.” Avoiding debt wherever possible is still the best course.

Credit scores should not be a major issue in our financial life but they are. Of course your mortgage rate is driven by your credit score. That is the big one. Car loans, credit card rates, and other loans are also affected by credit scores. Unfortunately, that is not where it ends. Your car insurance rate, your ability to find employment, and even getting a security clearance are all affected by your credit score. Finally, every marketer in America wants to get that information to better target you.

The most common score is the so called FICO score produced and sold by the Fair Isaac Company. Wikipedia defines a credit score as, “A numerical expression based on a statistical analysis of a person’s credit files to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.” In the U.S. there are three such credit bureaus TransUnion, Equifax and Experian. The consumer is allowed to request a free report from each of these organizations once a year. This is a good idea, as it allows us to correct mistakes on our reports (I have found two mistakes on my reports over the years) and it can tip us off to identity theft activities. The bureaus are not required to provide a free credit score. That will cost you about $10.00 a pop.

Stay away from freecreditreport.com. It isn’t free.

http://www.ftc.gov/bcp/edu/microsites/freereports/index.shtml Is the only authorized site for your free annual credit report.

Again from Wikipedia, “In the United States, FICO risk scores range from 300-850, with 723 being the median FICO score of Americans in 2010.” Good and bad scores are somewhat difficult to define and are constantly changing with the economic climate, as lenders are alternatively driven by greed or fear.

Some important trigger levels:

620 Historic dividing line between prime and subprime

640 Current dividing line between prime and subprime

660 Some companies will not provide mortgage insurance below this number

740 Fannie Mae and Freddie Mac charge extra for loans with less than a 25% down payment if below this number.

The actual algorithm that produces your credit score is a carefully guarded secret. However, MSN.Money reports the following breakdown is used by the credit reporting companies.

35% - Payment History

30% - Amount of Debt

15% - Credit History (length)

10% - New Lines of Credit /Credit Mix (installment loans, credit cards, Amex, etc.)

10% - Credit Inquires/ Length of Employment /etc.

Lenders are looking for reliable debt serfs who have a long credit history, who apply for credit frequently but not too frequently, who borrow a lot but not too much, and always pay on time.

Here is a short list from Wealth Builders detailing the kind of things you can do that will quickly increase your credit score. I suspect the increase might be quick, but not all that great.

Pay all bills on time

Be aware that delinquent utilities, traffic tickets and library fines can show on your credit reports

Based on the new information, don't close accounts with a long history

Don't close credit cards that will result in a higher debt to income until you can pay the balances down

Avoid opening several new accounts at the same time

It is hard to remember if you are just starting out in life with nothing, or fighting your way out of a terrible debt trap, but the goal here is to reach a point where your credit score does not matter because you never have to borrow any money.

My prayer is freedom from debt for all my readers.