Know the Score

Financial Planning magazine

By Donald Jay Korn
June 1, 2009
… The days of the nothing-down, no-doc mortgage are gone. Returning to reality, homebuyers need a down payment and proof of income to get a mortgage.
Borrowers must also prove they're creditworthy; they need an acceptable credit score. The higher their score, the more likely applicants will get a loan and the lower the interest rate they'll pay. …
Boosting a credit score by 90 points might save a borrower about $250 a month, or $3,000 a year. … Landlords, employers and insurance companies also may evaluate credit scores…
DECIPHERING SCORES

Despite their importance, little is known about the inner workings of credit scores. …

Consumers have three consumer FICO scores, one from each credit bureau (Equifax, Experian and TransUnion). …

According to Fair Isaac, five components go into its credit scores: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit (10%).

… Not surprisingly, clients who pay their debts on time tend to have high credit scores. …
"The fastest way to blow your credit is with a late payment," says Lauren Lindsay, director of financial planning at Personal Financial Advisors in Covington, La. "Even one day late makes a ding in your score." On the other hand, Lindsay says that six months of on-time payments will help to rebuild a credit score.
A consumer who makes one late payment should follow up with the lender or credit card company and explain why the payment was late. "Most of the time, the company will remove the late payment from the record if you call to dispute or explain, especially if you are a good customer," Lindsay says.
A client's payment history and the amount owed are the most important components in a credit score, accounting for 65% of the total. While paying on time is straightforward, it's not clear how high a percentage of available credit is permitted before scores start to drop.
"Consistently paying more than the minimum on all your cards will improve your score," says Bedda D'Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, N.C. "Try to keep the ratio of outstanding debt to available credit under 40%."…
A large amount owed will lower a credit score, even if the payment is not late. …
The old and the new. Length of credit history and new credit account for only 25% of a consumer's credit score, but they are the source of much confusion. "Having accounts with long histories is generally a plus, so consumers are urged to leave older accounts open even if they are rarely used," Dan Moisand, principal of Spraker, Fitzgerald, Tamayo & Moisand, a financial planning firm in Melbourne, Fla., says. "Yet if you don't close accounts, you can get dinged for having too many accounts or too much credit available."

Jennifer Cray, a partner with Investor's Capital Management in Menlo Park, Calif, says that the credit history of a FICO score goes back 99 months. "Some people think the more cards you have, the worse your score, so you should have just one or even none. In fact, closing accounts can hurt your score." Cray advises some clients to use an old card once a year to keep it alive. "I also warn clients not to open new accounts."

GETTING INFORMATION
The more clients know about their credit score, the better. "Everyone is entitled to one free copy of their credit report annually, so I ask clients to provide a copy, …," Bedda D'Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, N.C. says. "Many credit card companies also give people access to their FICO score. When a credit score isn't available for free, I shop online for cost-effective ways to purchase credit scores." At myfico.com, for example, consumers can buy a credit score for $15.95.
Getting a credit score is crucial for clients who need a mortgage or a car. "I have my clients check their FICO scores before applying for a loan," Cray says. "Requesting your own credit reports or scores will not hurt your credit score."…
REPAIR KIT
Some clients with credit scores well below the national median of 723 may need a boost. "Credit repair requires time and patience," D'Angelo says. "It takes 10 years for a bankruptcy to drop off your credit report and seven years for adverse credit reports to drop off. Good things like paying off a car loan or a mortgage drop off after four years."…
In today's times of tight credit, it makes sense for clients to know their credit scores and take steps to improve them-before they need to apply for a mortgage or a car loan. Helping clients buff their scores is another way to keep them at your side.