Secrets for Improving Credit Score Revealed
by
Anne Perry San Diego Union-Tribune
You're saving to buy a house in a year or two. Meanwhile,
you know it's important to have a good credit score to get a desirable
mortgage rate. Perhaps you already know your credit score. But
do you know how to improve it?
Now you can get some tips directly from Fair, Isaac
and Co., the creator of FICO, the most widely used credit-scoring
measure. The company describes its latest innovation at its www.myfico.com
Web site as part of its long-term initiative to demystify credit
scores for consumers.
In years past, your FICO - or the predictor of your
credit behavior based on computer modeling - was sold to lenders
but unavailable to you. But in March 2001, Fair, Isaac responded
to consumer complaints and a new state law and began offering
consumers the ability to learn their credit scores.
Since that time, for $12.95 visitors to the Web
site have been able to obtain their scores within minutes, get
copies of their credit report from Equifax (one of three major
credit reporting agencies) and read explanations of their scores.
In its first year, the site attracted 1 million users, far more
than expected.
"We were dazzled," says Craig Watts, a
spokesman for Fair, Isaac. But visitors wanted more, he says.
"Consumers from Day One have been saying, 'What you're not
telling me is how I can improve my score.' "
Now, for the same price, the package also includes
an interactive tool the company calls the FICO Score Simulator.
Once you've received your credit score and learned your strengths
and weaknesses, you can experiment with some interesting - though
limited - "what if" questions. What if you paid off
all your credit cards tomorrow? What if you didn't pay your bills
for three months?
You can only explore one scenario at a time, but
the results can be illuminating. Let's take my own due-for-improvement
case. FICO scores range from 500 to 850, with 720 being the median.
My own paltry 670 - nothing you'd want to take to a mortgage lender
- was due to two negative factors: the proportion of balances
to the limits on my credit cards was too high, and I had too many
credit cards.
I plead guilty to both. In the first instance, a
large expense check had gotten hung up. As for the second, it's
true I have seven credit cards, four to retail stores that I never
use. The average, according to the FICO site, is four or five.
My positive attributes included a relatively long
credit history going back more than 24 years, and no evidence
of seriously late payments on my credit accounts.
Before cranking up the Score Simulator, you'll see
a caveat. The simulation exercise provides an approximation of
the impact on your FICO score, which is made up of complex information
that is changing daily. And because you can only test one factor
at a time, you can't gauge the result of taking two positive actions.
So what could I do to put vitality back in my FICO?
I had six possible actions to take for a test drive: pay bills
on time; pay down the balances on all credit cards; miss payments;
max out the credit cards; seek new credit; and transfer credit
card balances.
Clearly the place for me to start simulating was
with my high balances. I asked the simulator to pay off 10 percent
of my total balances. The approximate impact: my score could range
from 670 to 710 - about the same or slightly better than my current
score.
If I paid off half? It could go from 710 to 750.
If I paid it all off? A nifty 740 to 780, with no questions asked about my improved cash flow. Just out of curiosity,
I asked what would happen if, instead, I completely maxed out
the cards? A possible 620 to 670 - that is, the same or somewhat
worse than my current score. Then I went to a second category.
What if I applied for new credit? How about an auto loan for $18,000?
My score could take a slight hit, dropping to a possible range
of 655 to 675.
I also tried a third category. What if I missed
the payments on all my accounts for the next three months? My
score would stay the same or drop to 635. You should come away
from the simulator, as I did, with the impression that the things
you could do in the short run, such as taking out a car loan or
missing some payments, are likely to affect your score incrementally.
Getting your score to move in a big way, however, such as by paying
off your balances, usually takes some time.
Watts compares trying to raise your FICO score to
trying to improve your cholesterol level - hard to move in the
short term, but your behavior can make a significant difference
over the months and years.
That's why anyone contemplating the purchase of
a home - as many visitors to the FICO site are - should start
planning to polish scores well in advance. The site itself offers
some motivation - a loan savings calculator - that provides current
auto and mortgage loan rates from your state and shows just how
dramatically rates can differ depending on FICO scores.
On the day I visited the site, consumers with the
highest scores of 720 to 850 averaged 6.812 percent for a 30-year
fixed-rate mortgage, while those with a 675 to 699 score averaged
7.486 percent, and those with the lowest scores, 500 to 559, averaged
10.198 percent.
The calculator allows you to plug in your current
FICO score, your target score and your projected mortgage amount
and see the difference in your future monthly house payments.
Not surprisingly, it's hundreds of dollars per month.
So don't get mad at your FICO. Just take charge
of it.
Here are some words of advice about credit scores from one of our contractor clients:
“An 800 credit score is one of the highest, so naturally it gets the best finance terms. Fleet truck leasing is an area that often has owners with a credit score of 600, or even less. While dealers financing helps those with a 650 Beacon score or better, what about the guy with a credit score 645, or even 640 credit rating?”
That’s where The Money Source has helped me. They offer leasing financing on used equipment trailers, tow truck leasing, dump truck finance (Freightliner dump, T800 Kenworth, for example) and even used equipment trailers.
Their plans are popular in construction used for just about any equipment type. Skid steer equipment, manufacturer equipment, and even equipment machines at auctions. Best of all, they are friendly and keep it simple.”
Manager’s Note: Don’t forget, IRS Section 179 now allows for even bigger tax write-offs this year! Ask you accountant or bookkeeper.
