Knowing the score can reduce finance charges

Knowing the score can reduce finance charges



By TERESA McUSIC
Special to the Star-Telegram
Take this quick true/false quiz.
Your credit score is influenced by:

A. Your income

B. Your age

C. Your state

D. Your ethnicity

E. Your education

If you answered true to any of these, you don't know what a credit score really is.

Low scores mean higher interest rates on everything from car loans to mortgages to credit cards. Low scores can also mean higher insurance rates, an inability to get services like cellphones, and difficulty getting a job or a place to live.

Your credit score has enormous influence on your daily life, yet a recent survey by the Consumer Federation of America and Washington Mutual reveals that most Americans still don't understand it.

"I'm surprised so many people know so little about their credit score," said Stephen Brobeck, executive director of CFA. "I expected to see an improvement of knowledge over the last couple of years."

Yet an amazing 74 percent of people surveyed thought income influenced their score. More than one-third said age, education and state of residence had some effect. Nearly 20 percent thought that ethnicity had an impact.

Wrong. Wrong. Wrong.

Let's all go back to Credit Scores 101.

Credit scores serve one purpose: They indicate your risk of not paying back what you owe.

FICO scores -- named for their creator, Fair Isaac & Co. -- range from 300 to 850. The higher your score, the better off you are with lenders, insurers, employers and landlords. Most scores fall between 600 and 700, according to Consumers Union, with higher-cost lending, called subprime lending, starting with a score of 620.

How much can that difference in cost be? FICO estimates that someone with a credit score between 760 and 850 will pay $466 less a month in interest on a 30-year, $200,000 mortgage in Texas than someone with a score of 500 to 579.

Washington Mutual estimates that $20 billion would be saved in lower credit-card charges if Americans raised their credit scores an average of 30 points.

The scores are generally made up of five different criteria. Fair Isaac breaks it down like this:

Payment history, 35 percent. This means just what it says. A long history of making payments on time leads to a better score. One or two late payments won't usually hurt, but missed payments, bankruptcies, foreclosures and liens can have a serious effect on your score.

Amounts owed, 30 percent. Owing money in itself does not trigger a low score. Your score is hurt if you are close to maxing out a credit card or if the amount you owe has jumped recently.

Length of credit history, 15 percent. It's possible to have a short history and a high score, but longer is better.

Type of credit in use, 10 percent. This portion looks at the mix of your credit, from mortgages and installment loans to credit cards and retail accounts. It's not a key factor unless there's not much other information about you.

New credit, 10 percent. Timing again plays into this part of the score, in that opening up several lines of credit in a short period can lower your score. Multiple card requests can also lower your score.

This year, the three credit bureaus introduced a new scoring system called VantageScore. Its range is 501 to 990 with accompanying letter grades from A to F.

Adding another score and range to the market complicates things for consumers, Brobeck said. But as long as you know the range, either score will give you an idea where you stand with lenders, insurers and others you want to do business with.

"If you don't know what a good score is, you can't understand if you have a good score," Brobeck said.

Getting your score generally costs about $14, although the new VantageScore is selling on Experian's Web site for $5.95.

For three years, Washington Mutual has given its customers free access to their credit scores online, said Alan Elias, senior vice president at the S&L.

"We have to pull the scores every month anyway to monitor them," he said. "And our customers can use it as a way to monitor identity theft."

Remember, credit scores can't generally be repaired overnight. But for most of us, working on some of our credit habits for six months can make a big difference.

Bottom line: if you're planning next year to buy a house or car, sign up for a credit card, cellphone or electric plan, rent an apartment or go to a job interview -- check out your score.

What's in your report?

Check your three credit reports at no cost at www.annualcreditreport.com, call 877-322-8228 or request a form at the Web site and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You will need to give your Social Security number. The report does not include a credit score.

Source: Consumer Federation of America

HOW YOUR CREDIT SCORE AFFECTS YOU

A good credit score can save you thousands of dollars, particularly when you're borrowing money to buy a house. Here are several ranges of scores and the monthly payment on a $150,000, 30-year mortgage associated with them:

700-759: Rate: 6.52% Cost: $950

680-699: Rate: 6.7% Cost:$968

660-679: Rate: 6.91% Cost: $989

640-659: Rate: 7.34% Cost: $1,033

620-639: Rate: 7.89% Cost: $1,089

Average U.S. credit score: 678

Source: Bankrate.com

Boosting your score

There's no magic to raising your credit score. Here are the basics:

Pay bills consistently and on time.

Don't max out credit cards or other revolving credit.

Pay off debt rather than moving it around.

Don't open new accounts often.

Source: Consumer Federation of America