Credit Score Secrets

August 15, 2007
Courtesy of USAA

One mistake can make a good credit score – poof – disappear. But it’s not hocus-pocus. We reveal how the system works sure your score stays stellar.

Bet you don’t know your credit score, the number lenders use to decide how much to loan you, and the interest rate you pay. Don’t despair. You’re not alone. Most military personnel don’t have a clue.

Military personnel can purchase their credit scores from individual credit bureaus and get a free look at their credit report each year. But many fail to do so.

That’s astounding, since a consumer’s credit score touches nearly every aspect of his or her financial world.

Potential lenders and landlords use your credit score, which is tied to what’s on your report, to decide whether you’re creditworthy. The score can affect your automobile and home insurance rates. (It factors in to USAA insurance rates, along with other risk factors, in most states.)

A low score might even keep you from getting a job. About 20 percent of employers say they always look at it to judge your character and forecast your job performance, according to the Society for Human Resource Management. Another 24 percent say they sometimes look at it when hiring.

What it is
A three-digit number, generally ranging from 300 to 850. The higher your score, the better credit risk lenders think you are and the lower the interest rate they will charge you.

It can mean the difference in several percentage points on an interest rate for a 30-year, fixed-rate mortgage. With a loan amount of $175,000 or more, that translates into a difference of a couple thousand dollars in interest payments each year. Look at it this way: On a home loan of $216,000, the homeowner with the 6.31 percent loan has around $83,000 more in his or her pocket at the end of the 30-year loan than the poor guy who financed at 7.89 percent. (See chart.)

A good score means you’ll save on auto loans, too. Even a 1 percent difference in the interest rate you get when you buy your next car translates into several hundred dollars saved or spent.

So, you might wonder what qualifies as good. Half of all Americans have a score above 720, says Craig Watts of the Fair Isaac Corp. – which runs the scoring system, known as FICO scores, on which most lenders rely. Generally speaking, such scores mean those consumers have never missed a bill payment.

But there’s shelf life for a score. It’s recalculated every time a lender requests it. All it takes is one late payment to squash your score and make lenders leery. If you’re 30 days late with a payment and your creditor reports that delinquency to one the big three credit bureaus – Equifax, Experian, or Trans Union – a score in the mid-700s can plummet more thank 50 points, possibly sinking into to checkered 600 category, Mr. Watts says.

How it’s derived
Credit scoring is a complex process, involving factors such as whether you pay your bills on time and the length of your credit history. Never using credit, in fact, actually can hurt your because you have on record to rate.

Score are generated from data pulled from credit reports provided by all thee major credit bureaus. The reports reflect how you have handled your credit over the previous 24 months. The aim is to provide lenders a picture of how you will manage debt in the future. FICO scores are the most widely used, although the bureaus compute it with slightly different formulas and get varying results, even with the same data.

Earlier the year, the three competing bureaus came together to develop their own consistent bureaus came together to develop their own consistent methodology called Vantage Score, intended to standardize the scoring system. The jury’s out on whether lenders will switch to Vantage Score or stick with the industry standard of FICO.

Time on your side
You have the power to pump up your score and have an easier experience getting credit when you need it – with lower rates. But it won’t happen overnight.

Typically, a low score in the 600 range can be pulled up in several months, says Nick Jacobs of the National Federation for Credit Counseling, if you do three things:
• Pay bills on time.
• Watch the amount of outstanding debt, so that what you owe stays comfortably below your credit limits.
• Pay at least the minimum amount due, preferably more.
• But it’s a slow process. Your score might move up just 30 points in a year even if you’re on your best behavior.
And there are factors that will hold you back, including a personal bankruptcy or more than one payment that exceeds the due date by three months or more. Be patient. You can still build up your score; it will just take more time.

Monitoring for mistakes
One out every four credit reports contains a serious error that could lower your score and stop you from getting a loan, or one with the best terms, according to the Public Interest Research Group. You should check your report for:
• Outdated data
• Paid-off loans listed as due
• Money owed by someone with a name similar to yours
It can easily take six months or so to get an error fixed. So if you plan to apply for a mortgage, for instance, check your report a few months ahead of time and get your current score. Consider using a credit monitoring service. In any case, remember that your score is just a snapshot. It won’t be the exact figure a lender will obtain when it requests the score at a later date. “Don’t get hung up on a particular number,” advises Gerri Detweiler, author of “The Ultimate Credit Handbook.” The ballpark score will tell you where you stand. Then you can focus on what you need to do to improve or maintain it.

Sidebar 1
Is there a mistake on your credit report?

If you find one, contact the credit bureau immediately (the address will be on the report). By law, the bureau has 30 days to investigate and respond. It must correct or remove, inaccurate information.

Sidebar 2
Mortgage: High scores = Big, big savings

A person with FICO scores of 706 or better will pay $231 less per month for a $216,000 30-year, fixed-rate mortgage than a person with FICO scores below 640 – a savings of nearly $2,772 a year. On a $216,000 30-year, fixed-rate mortgage, hears a look at the numbers.

FICO Score	Interest Rate	Montly Payments	Payments Total Over the Life of the Loan
760-850	6.31%	$1,338	$481,680
700-759	6.53%	$1,369	$492,840
680-699	6.70%	$1,394	$501,840
660-679	6.92%	$1,425	$513,000
640-659	7.35%	$1,488	$535,680
620-639	7.89%	$1,569	$564,840
Source: This Chart is updated daily on www.myfico.com/crediteducation

In this scenario, the highest scores pay $83,160 less over the life of their home loan than those in the lowest-rated tier.

Sidebar 3
1 in 4 credit reports contains a serous error could lower your score and stop you from getting a loan, or one with the best terms. Source: Public Interest Research Group

Sidebar 4
How to get your report and score

Under the Fair and Accurate Credit Transactions Act, every American is entitled to a free credit report annually from each of the three main credit bureaus. Order a report from all three bureaus at once, or get one from one agency, then check another’s report a few months later to monitor changes. Go to annualcreditreport.com or call (877) 322-8228. But take note: Your actual credit score does not come with the free report. You’ll have to purchase it for around $6 apiece from each credit bureau. The scores will vary, based on information the bureau has about you. Obtain your scores when ordering your free credit report, or contact the bureaus directly:
■ Equifax • equifax.com
(800) 685-1111
■ Experian • experian.com
(888) 397-3742
■ TransUnion • transunion.com
(800) 888-4213

Sidebar 5
Auto Loans:

One percent makes a difference
On a $20,000 auto loan financed over 48 months, check out the savings one percentage point gives you.

Interest Rate	6%	7%
Monthly payment	$469.70	$478.92
Term	48 months	48 months
What you’d pay	$22,545.60	$22,988.16
The difference	$442.56

At the end of the day, the person with the 6 percent interest rate keeps almost $450 more in his her pocket.

Sidebar 6
Raise your score

There are five categories that affect your credit score. Here’s a strategy for each one to bring up your overall score fast.

1. Pay your bills on time. Payment history affects about 35 percent of your score. So do whatever it takes to be timely: Set up automatic payment online, keep stamps on hand, maintain your budget.

2. Keep credit balances at 30 percent of your limit, or lower. Around 30 percent of your score is based on how much credit you have access to and how much you are using. If you’re cutting it close to the credit limit on your cards, that will reflect poorly on your score.

3. Don’t cancel credit card to up your score. About 15 percent of your score is based on how long you’re held your credit cards. A card you’ve had for a few years is better for your score than one you’ve just obtained. Having no credit history at all can really throw off the score, so do carry a credit card – just pay it off in full.

4. Don’t apply for too many credit cards. About 10 percent of your score is determined by the number of times lenders request your credit report. Lots of requests might indicate that you are desperate for credit and might be headed into trouble, or are already there.

5. Watch the kinds of credit you use. About 10 percent of your score is based on the types of credit you are using – secured loans such as car loans and mortgages, or unsecured loans such as student loans, credit cards, and so forth. Unsecured loans are considered riskier on your report.

USAA is a diversified insurance and financial services organization that has served the military community since 1922. USAA Financial Planning ServicesSM refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency, and its wholly owned subsidiary.

USAA means United Services Automobile Association and its affiliates.