Ask Kim Your Credit-Score Questions
Kim Lankford reveals ways to maximize your magic number.
There's more than one credit score?
Yes -- there are a lot of different credit scores. FICO scores (developed by Fair Isaac Company) are the most common, but even FICO scores have several variations. You'll have a separate credit score based on your credit record from each of the three major credit bureaus (Experian, Equifax and TransUnion). Mortgage lenders usually get all three scores and use the middle one.
Fair Isaac also has a new version of its score, called NextGen, which tweaks the calculation a bit. Unlike the standard FICO score, for example, bills sent to collection -- such as fines for overdue library books -- aren't included in the NextGen calculation if the past-due amount was for less than $100. Most lenders, however, still use the older version of the FICO score.
Credit bureau Experian also has its own score, which is becoming more popular with credit-card companies and auto lenders.
And other businesses, such as insurance companies, use their own variations on your score. Your insurance score, for example, puts even more weight on your payment history than your FICO score does and doesn't care as much about your mix of credit.
"The specific model is not important to a consumer," says Maxine Sweet, vice-president of consumer education for Experian. "What matters is that the consumer understands how to have a strong, low-risk credit history. That will result in excellent credit scores regardless of the model."
Because all of the scores are based on information in your credit reports, it's important to check your reports at all three bureaus and fix any errors. You can order a free credit report (but not free score) from each of the major bureaus every 12 months at AnnualCreditReport.com. Or you can order all three reports and FICO scores from MyFico.com for $44.85 (or $39.84 for a yearly subscription), which is a good idea to do at least six months before taking out a mortgage.
Why do auto insurance companies use credit scores when setting rates. What does that have to do with my driving record?
Surprisingly, a lot. When studying their claims records, insurers found that people with poor credit scores tend to have more claims than people with higher scores.
The Texas Department of Insurance conducted its own study in 2004 to see if there really was a correlation and came to the same conclusion. After studying the claims records of two million insurance policies, the insurance department found "the difference in claims experience by credit score was substantial," according to the regulator's report. The 10% of policyholders with the worst credit scores had 1.5 to 2 times more claims than the 10% of policyholders with the best credit scores. Drivers with the best credit scores were involved in about 40 percent fewer accidents than those with the worst credit scores.
A few states limit insurers' use of credit scores when setting premiums or deciding whom to insure, because they're concerned that the practice could discriminate against low-income people and minorities. And a few insurers don't use credit scores in their pricing. But most of them do, and each has its own variation on the calculation to determine your insurance score -- based on its own claims history. Regardless of the insurer's specific formula, improving your credit record and credit score will also improve your insurance score.
What steps should I take to improve my score if I want to buy a house in about six months?
First, check out your credit record with all three credit bureaus and get any errors fixed. You can order a free credit report (but not free score) from each of the major bureaus every 12 months at AnnualCreditReport.com. Or you can order all three reports and FICO scores from MyFico.com for $44.85 (or $39.84 for a yearly subscription), which is a good idea to do at least six months before taking out a mortgage.
Then, do everything possible to keep your score clean. Make big efforts to pay your bills on time. "This is the worst time to miss a bill," says Craig Watts of Fair Isaac. "Pay down any large credit card or other large revolving accounts if you can, because high balances will hurt your credit rating. And avoid opening any other accounts before the loan you're pursing is closed."
Watts says that too many people get preapproved for a loan then slack off on their credit habits before the loan is finalized. It's your record when the loan is closed that counts -- no matter what your status was like when it was preapproved. If anything changes during that time period, you may no longer qualify for those terms. "Wait until the paperwork is delivered before going out and borrowing more," he says.
And keep the balances low for a while. "Creditors normally report updates to their accounts only once a month, so a consumer can't pay down the balance and expect it to be reflected on the report the next day," says Sweet. The amount you've borrowed is what counts in your score -- not how much you pay. The lender looks at your credit amount as a snapshot in time, regardless of whether you plan to pay off the entire bill immediately.
If someone has a company credit card in his name and there's a late payment on it, will it damage his credit record and affect his score?
It depends on whose name the account is in. If the card is in the employee's name and the employee is responsible for paying the bill, any late payments go on his record. "Even though the company will reimburse the expenses, it is part of that consumer's financial obligations and history," says Maxine Sweet of Experian.
If the card is in the company's name and the employee is added as an authorized user, but the company is responsible for paying the bill, then any late payments would be reported on the business credit report.
My credit card company just increased the spending limit on my card. Will this help or hurt my credit score?
Increasing the limit on your card may actually improve your credit score. If you don't borrow more money, the higher limit improves your credit utilization ratio, which is the percentage of your available credit that you've used. Lenders like you to use only a small percentage of your available credit so you don't appear to be maxing out your cards. Charging $3,000 when you have a $10,000 limit, for example, looks a lot better than charging $3,000 when your limit is only $5,000.
What are some resources that can help me learn more about my credit score?
The best resource is Fair Isaac's consumer Web site, MyFico.com, which goes into detail about what your score includes and lists steps for improving your number. Also check out its table listing how a few points' difference in your score can affect your mortgage rate -- taken from daily polls of lenders' rates. You can order your score there and use its score simulator, which shows how much your score can improve by making specific moves.
Experian.com also has a lot of helpful information about credit reports and credit scores, including Maxine Sweet's Ask Max column, where she answers consumers' questions about credit scores.
And for ordering your credit report, see Annual Credit Report.com. Avoid companies with look-alike names. The Federal Trade Commission recently cracked down several companies for setting up sites with similar names as a ploy to get people to sign up for expensive credit-monitoring services.
Send Kim your questions. She can't answer every one, but she'll answer as many as she can.