• Gary Sandler
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    Published 2 December 2018

    In a joint survey of just over 1,000 adults that was released last May by the Consumer Federation of America and VantageScore Solutions, LLC, it was found that “…only 42 percent know that a credit score measures the risk of not repaying a loan rather than factors such as knowledge of, or attitude towards, consumer credit.”

    About the same time, Lexington Law, the nation’s leading credit repair service provider, commissioned the Harris organization to poll 2,000 Americans about their general familiarity with credit scoring. The results revealed that “only 45 percent of U.S. adults are only somewhat familiar with what goes into their credit scores, and 14 percent say they’re not familiar at all”.

    From another perspective, that means more than half and in some cases upward of 85 percent of consumers lack sufficient knowledge about their credit scores to understand the impact the measurement has on the cost of borrowing money, obtaining insurance, applying for employment and renting a home or apartment.

    Other national surveys, along with an unscientific email survey of a dozen Las Cruces-based mortgage lenders conducted last week by yours truly, showed that lack of a down payment, or a perception thereof, ranks right up there with credit as one of the two main obstacles consumers face when thinking about becoming home owners.

    The credit concept is pretty straightforward. People and companies that extend credit assume you’re going to repay them in the same manner you’ve repaid your other creditors. The level of risk you present to creditors; such as insurance companies, landlords, mortgage lenders and others, is expressed by your credit score. Credit scores are also commonly referred to as FICO scores. FICO is an acronym for Fair Issac & Co., the folks who developed 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 credit 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 you pay in a timely manner makes up the largest portion of your score, accounting for 35 percent of the 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 about 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! The effort will shorten the length of your credit history, as will opening new accounts, both of which bring down the average age of your history.

    Number four 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 only a portion of the 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 the Bahamas, 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 utilizing. The mix includes mortgages, credit cards, retail accounts and the like.

    A good credit score can indeed save you money. If your score is between 300 and 550, it is considered to be poor, according to Credit.org. If your score is in the 550 to 620 range, it falls into the subprime category. Scores between 620 and 680 are considered to be acceptable. Good credit is the term assigned to scores between 680 and 740. Those who have scores above 740 are considered to have excellent credit.

    According to Credit.org, a borrower whose score is in the top tier may expect to pay a mortgage interest rate of around 3.9 percent today. At the other end of the spectrum, people with poor credit may pay upwards of 9.5 percent for the same loan, if they can get one at all.

    According to the folks at myfico.com, there are five easy ways to improve your credit score.

    First, pay your bills on time. A person with a “good” credit score of 710 can raise his/her score by as much as 20 points by paying all bills on time for two months.

    Keep your balances low on credit cards. Maxing out your cards can lower your score by as much as 30 to 50 points.

    Keeping your balance at or below 35 percent of your maximum available credit is a good rule of thumb.

    Don’t open new accounts you don’t need. Has a department store offered you a 5, 10 or 15 percent discount if you open a new charge account? Opening new accounts can lower your average account age, lowering your score by up to another 5 to 10 points.

    Manage your debt. Keeping your debt and number of creditors in the “sweet spot” will raise your score. Someone who has no credit cards can be a higher risk in the scoring model than someone who has managed their cards responsibly. Delinquent accounts can knock up to 100 points off your score.

    Don’t close old accounts. Closing old accounts will shorten your credit history.

    One of the most positive developments in the credit industry is the recent introduction of FICO’s new Score 9 product, which “provides a more refined analysis of medical collections by bypassing paid collection agency accounts and offering a sophisticated treatment differentiating medical from non-medical collection agency accounts,” according to Fair-Isaac. While acceptance of the plan has yet to be fully adopted by the mortgage industry, it appears that it will be phased in over the near term.

    Everyone in the U.S. is entitled to a free annual look into their credit files at each of the three credit bureaus. Access can be gained by logging on to www.annualcreditreport.com or by calling toll free to 877-322-8228. No phone or computer? You can request your reports by writing to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. The site provides opportunities to dispute any erroneous information contained in the files.
    For information on credit scores and access to “what if” calculators that can anticipate what actions can raise or lower your score, log on to www.myfico.com or www.creditkarma.com.

    See you at closing!

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    • About Author

      Gary Sandler