Credit score a key part in loan decisions
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: April 21, 2002
Do you know the score? This week marks the first anniversary of publicly available credit scores. And it might pay to check in to see where you rank.
Credit scoring has long been a behind-the-scenes method that lenders use in determining who should get credit--and what interest rates they should pay. Unlike a credit report, which simply tracks your bill-paying habits as reported by your creditors, your credit score assigns a weighting to other variables in your personal financial history.
Learn your score
Credit scores were kept secret until a year ago, when Fair Isaac, the company that created the best-known scoring model, decided to make its FICO-brand credit scores available to the public online at its Web site, www.myFICO.com .
There, for $12.95, you can securely get both your Equifax credit report and your credit score.
Plus, you can learn how to improve your score--and your chances of getting reasonably priced credit. Credit scores range from 300 to 850, sort of like SAT scores.
About 40 percent of the American public has a score of 750 or higher. And just as your college entrance exams affected your schooling opportunities, your credit score can impact your finances for many years.
Fair Isaac says that more than 75 percent of all mortgage-granting and loan rate decisions use the FICO score as a key factor. Your credit score is derived from multiple factors, all with different weightings.
For example, your payment history is a key ingredient. A series of late or missed payments can dramatically lower your credit score, because this component carries a 35 percent weighting in the scoring process. The total amount owed is another heavily weighted factor.
Using up a large percentage of your available credit counts heavily against you. For that reason, you may not want to consolidate all your credit-card debt on one card, nearing the limits.
That strategy could make debt easier to pay down, but weighs against you in the scoring process, something you should consider if you’re about to seek a mortgage loan. The scoring process also looks into the length of your credit history (not much you can do about that if you’re just starting out), the mix of credit you’re using, and how recently you’ve taken on more debt. All are part of the formula, and are explained at the myFico.com Web site.
What’s the difference? How much of a difference can your credit score make? A handy calculator on the Web site shows you that the difference between a a low score of 599 and a score of at least 720 could make a huge difference in the interest rate you are granted on a mortgage.
The low scorer may pay an annual percentage rate as high as 11.4 percent today, while moving your score up to between 720 and 850 could result in a loan rate as low as 6.5 percent.
That’s a difference of $352 per month--or more than $126,000 in additional interest payments over the life of a 30-year mortgage!
When you get your credit score, you’ll be able to do your own calculations to see just how your late-payment habits cost you money today--and in the future. So don’t hesitate out of fear or ignorance.
Lenders know the score.You should too.
And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to email@example.com. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Copyright © Terry Savage Productions