Take steps to score good credit
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
It’s a credit scorecard that’s frequently used to determine whether you’re a good prospect to get a mortgage, auto loan or a new credit card. But it may also be used to help determine how much you’ll pay for your life insurance policy or your car insurance.
And your credit score could play a big role in deciding whether you’ll get that new job.
Consumers can begin the process of checking their credit reports by contacting these three big national credit bureaus, by phone or on the Internet.
Equifax (800-685-1111) or www.equifax.com
Experian (888-397-3742) or www.experian.com
TransUnion (800-888-4213) or www.transunion.com
Credit scoring is the computerized program that credit bureaus use to evaluate all the information in your credit report in order to create a risk profile for potential lenders. Lenders may take that score and add it to information in their own computer models to further refine your score as they make their lending and pricing decisions.
These scores are designed to mathematically sort out those people who present a high financial risk based on past payment history--and, in some cases, lifestyle patterns.
It is these scoring programs that allow department stores to authorize immediate credit on a new account, or a mortgage lender to promise a preliminary approval in a matter of hours. In that sense, these mathematical models are a benefit to consumers as well as lenders.
Typically a credit score is affected negatively by late payments and delinquencies, the amount of outstanding debt and the number of inquiries for applications for new credit.
The process evaluates how close you are to the limit on your existing cards, and even how much you ask for in cash advances.
The score is also affected by seemingly nonfinancial issues such as the length of residency in one place and length of time on the job. For instance, homeowners (with a good history of mortgage payments) get higher scores than renters. College graduates get higher scores than high school graduates.
By law, credit scores may not take into account factors such as sex, religion, marital status, ethnic group or nationality.
FairIsaac is the leader in creating credit scoring models that are used by all three major credit bureaus and many other financial institutions. But it does not actually create the “scores.” That’s done by lenders or credit bureaus. The company keeps the scoring formula a secret.
And FairIsaac notes that credit scores are only part of a lender’s decision to grant credit. Other factors might include the amount of liquid assets held by the borrower, and the value of collateral in the case of a mortgage.
Still, just as if you were trying to get the best score possible on a test in school, it makes sense to take every step possible to keep your credit score as high as possible.
So here are a few tips to keep your credit score high--especially if you’re about to seek a mortgage loan.
* Always pay promptly--even if you’re having a dispute with the merchant.
* Check your credit report before applying for a loan. If you dispute any of the items on the report, speak directly to the credit grantor in an attempt to have it removed. If that doesn’t work, you’re allowed to attach a short statement to your credit report, explaining your side of the dispute.
* Make sure you close unused accounts, and do not apply for multiple cards at one time.
Only inquiries that you initiate are included in your credit score. Other inquiries, such as those made by companies for promotions or employment inquires, are not counted against you in the scoring formula. Also, your own requests for a copy of your credit report are not included in the score.
* Finally, don’t waste time trying to get your “score.” It’s not like high school or college where you can request your grade. Each credit bureau and each credit grantor may modify the formula slightly, so there is no one “passing grade.”
But as long as you are aware that a computer is definitely keeping track of your financial lifestyle, you’ll stay at the head of the class.
And that’s the Savage Truth.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at email@example.com. Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.