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Sep 19, 2016 Good credit can save you big bucks

Gary Sandler

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Published September 19. 2016

According to the Consumer Federation of America, “Most consumers still do not know basic facts about credit scores and their financial significance”. That point was driven home recently when a poll taken by Opinion Research Corp. revealed that only 47 percent of the consumers polled considered their own knowledge of credit scores to be good or excellent. The remaining 53 percent considered their knowledge of the subject to be fair or poor. From another perspective, that means more than half of all consumers lack sufficient knowledge about their credit scores to understand the impact they have on the cost of borrowing money, obtaining insurance, applying for employment or renting a home or apartment.

The concept is pretty straightforward. People and companies that extend credit assume you’re going to pay or repay them in the same manner you’re paying (or have paid) your other creditors. The level of risk you present to creditors – such as insurance companies, landlords and others – is expressed by your credit score. Credit scores are also commonly referred to as FICO scores. FICO is an acronym for Fair Isaac Corporation, the folks who own the scoring software. Credit scores can range from a low of 300 to a high of 850, with many plateaus in between. The lower your score, the greater the risk you pose to the creditor and the more you’ll pay to borrow, insure or rent. The three major bureaus – Experian, Equifax and TransUnion – all derive your score by rating five individual aspects of your credit history.

First up is your payment history, or how well you’ve paid your obligations in the past. Whether or not you pay in a timely manner makes up the largest portion of your score, accounting for 35 percent of your total. The next largest portion of your score, 30 percent, is based on how much you owe. Keep in mind that it’s better to owe $5,000 on a card with a $10,000 limit than it is to owe $3,000 on a card with a $4,000 limit. Ideally, your balances should not exceed 35 percent of your total available credit. The third component of your score is based on the length of your credit history and is responsible for 15 percent of your total. Has anyone ever suggested that you close your old accounts? Don’t do it! Doing so will shorten the length of your credit history, as will opening new accounts, which brings down the average age of your history.

Number 4 on the list of the five components is calculated based on new credit obtained and is responsible for 10 percent of your overall score. Have you opened quite a few accounts lately? If so, this portion of your score might only generate about 10 percent of the total potential it could have added to your score. Why? Because it appears that you’re on a quest to borrow, borrow, borrow (heading for Bolivia, are you?), which may put a strain on your finances in the future. And last but not least, the final 10 percent of your score is based on the type of credit you’re using. The mix includes mortgages, credit cards, retail accounts and the like.

A good credit score can indeed save you money. If your score is 680 or above, chances are you’ll be charged a relatively low interest rate. If your score is above 760, you can expect to be offered the lowest rate available at any given time. Just the opposite is true if your score is in the low 600s. The line in the sand is actually drawn at the 620 mark. Below that, you’ll have to shop for your credit in the subprime department. If you can keep your score above 620, you should be able to borrow at “normal” rates for most types of big purchases.

In the end, you are the on­­ly person on the planet who’s in charge of your credit scores. If you haven’t checked your credit file recently, it may be a good idea to do so now. Everyone in the U.S. is entitled to a free annual look into their credit files at each of the three credit bureaus. Free access can be gained by logging on to www.annualcreditreport.com or by calling toll free to 877-322-8228. There are also various other Internet sites that provide credit reports for a fee. No phone or computer? You can also request your reports by writing to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

With a little due diligence and an improved credit score, there’s a good chance that I’ll soon …

See you at closing.

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