YOUR CREDIT

CREDIT SCORING 101
by Jean Chatzky with reporting from Arielle Gowen


Learn more about credit scores. Credit scoring, by default, is confusing, and in these times, it can really throw you for a loop. Whether your credit is determined "good" or "bad" depends on a simple three-digit number called your FICO score—the higher your score, the lower the interest rates.

Generally, a score of 680 and above is considered good enough to get you loans and cards at the best interest rates. But because the economy is experiencing a crunch, lenders are setting the bar even higher, meaning you now want to shoot for a score of 720 or greater, says John Ulzheimer, president of consumer education for credit.com.

So how do you do it? Start by pulling your report. You're entitled to a free report from each major credit bureau once a year, so three total. Unless you're a victim of ID theft, I suggest you spread them out, pulling one every four months or so. Go to annualcreditreport.com and get yours, then pinpoint what exactly is dragging your score down. Some possibilities?

  • A high debt to credit ratio. "You want to get your revolving debt to no more than 10% of the credit limits on the cards you have," Ulzheimer says. If you're a good customer, a fast way to bring that ratio down is to call up your lender and ask for an increased limit. Tell them you want a policy increase, which means they raise the limit without looking into your credit file.
  • Late payments. The due date on your bill isn't flexible, and one tardy can hit your score hard. Pay a couple of days early just to be safe.
  • Shopping around. Store cards may seem like a good deal—15 percent off!—but that savings will be negated later when they bring your credit score down and your interest rates up. Every inquiry into your score has a negative impact, so just say no.
  • No credit. Maybe you never took out a card, and now that you want one, you don't have a credit score or even a report. That's considered risky to lenders. Start building credit with a secured card, which basically accepts a deposit in exchange for a line of credit in an equal amount. Just be sure that the card you choose reports to all three credit scoring bureaus so you're not wasting your time.

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Check your FICO score to see if you qualify for lower interest rates on your cards.

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WHAT IS A FICO SCORE?

"It is a three-digit number that determines the interest rates that you will pay on your credit cards, car loans and home mortgages. The higher your FICO score, the lower the interest rates," Suze Orman says. "Your goal is to have a FICO score of 760 or above. FICO scores run from 300 to 850."

Chances are your creditor already knows your FICO score. "They're checking it in the hopes you don't know so that they can charge you a higher interest rate than what you honestly deserve," she says. "They're not going to tell you [that] you can get another credit card at 4 percent interest if you're paying 18. They make their money off of you being ignorant."

Your FICO score can also affect your car insurance rates. "There is a derivative of a FICO score figure the exact same way known as your insurance risk score that determines what your car insurance premium is," she says. "So if you have a low FICO score, you have a low insurance risk score. If you have a low insurance risk score, you're paying 50 percent or so more on your car insurance premiums."

Another thing to remember about paying down your credit cards? Don't pay any of your cards late. Your FICO score decreases when you make a late payment, which means you could be in for a rude awakening. "Let's say you have five credit cards. You're in good standing with them all. And you're late on [one] credit card," Suze says. "Guess what? These other four have the right to do what's called universal default and take you up to the default [interest] rate on all your credit cards, which could be as high as 23, 27, 30 percent."

Under federal law, every person is allowed one free credit report every 12 months for each of the three major credit bureaus. But be careful—checking your credit score more often than what's recommended can actually hurt your score. To get your free report, go to the website set up by the Federal Trade Commission, www.annualcreditreport.com or call toll-free: 877-322-8228

 

UPDATE JUNE 2009:

Your credit score determines how much interest you'll pay on a mortgage and how much you pay for your insurance. Credit scores are considered when employers make their hiring decisions. You need to know how to achieve a great FICO score. Good is considered 700 to 759, while 760 to 850 is excellent.

Recent changes to the most widely accepted scoring model, FICO 08, have proven advantageous for many consumers. This new version ignores small collections that may appear on your credit report. It is also less punishing for those who have had a serious setback, like repossession, provided their other active credit accounts be in good standing. The new version of the credit scoring formula allows some authorized-user information to be included when developing that person's credit score.

But it's not all good news. Here are three areas where changes in FICO 08 could send your score plummeting:

Credit limits. FICO 08 is sensitive to how much of your available credit you are using at any given time. If you are maxed out on a credit card, you're using 100 percent of your available credit. That is bad. You should never use more than 30 percent, even if you pay your balance in full each month.

Closing accounts. Now, more than ever, you should not close credit card accounts. To do so could seriously damage your credit score because you will reduce the total amount of your available credit.

Keep them active. While it pains me to suggest such a thing, if you want an excellent credit score these days, then the accounts you have need to be active. That means using each one for a tiny purchase every month or so, followed by an immediate payment that brings it right back to $0.

Credit scores are not free. You can purchase your TransUnion FICO score or the Equifax FICO Score at MyFICO.com for $15.95 each. You also can do an Internet search for "Credit Score Estimator." You'll find several websites that will give you a close idea of what your score would be if you purchased it.

To learn more about your credit score, how it impacts your life and how you can improve it, go to MyFICO.com and click on "Credit Education." You can also visit my blog, Money Rules, Debt Stinks! for the latest information on changes in the credit-scoring industry.

BEST WAY TO FIX A CREDIT REPORT

 

Click Here:

CORRECTING INCORRECT INFORMATION WITH A CREDIT REPORTING AGENCY (CREDIT BUREAU)

 



If you have a negative but accurate history, It will stay on your credit report for seven years. "If, however, there is information on your credit report that is not accurate, then you have to take an active role in contacting the three credit bureaus and stay on them to get it removed," Suze Orman says. "Because even after you've gotten it removed, it will reappear again a few months later. You just have to stay on it."

If you notice a mistake on your credit report, you should contact the three credit-reporting agencies:


TO PLACE A FRAUD ALERT ON YOUR  CREDIT REPORT FOR 90 DAYS, CALL ANY OF THE CREDIT REPORTING AGENCIES (SEE ABOVE)