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Credit Reports and FICO Scores (oh my!)

By Brett Danko, CFP^®

In the article on “Financial Fitness” in the newsletter, we mentioned the importance of obtaining your credit report and FICO score (FICO stands for Fair Isaac Company). Why, you ask? Well, having incorrect/negative data on your credit report can harm you in several ways, such as:

1. It may affect the interest rate you pay on credit cards, auto and mortgage loans as people with low credit scores pay higher rates. In some cases, you may NOT qualify for the loan at all.
   
   
2. It may force you to pay higher rates for life, disability and auto insurance. Insurance companies are using credit scores as a way to reduce risk. People with poor credit are seen as bigger risks and therefore you may pay higher premiums
   
   
3. It may affect whether you get that job or receive a promotion. Employers are increasing looking at credit histories to determine the trustworthiness of a person.

So how do I get my credit report?

You can receive a free credit report through www.annualcreditreport.com. This is a totally FREE service but please note, it will NOT give you your FICO score (which will cost between $10-$20). You can also obtain your credit report for a fee (usually with your FICO score) through the three major credit agencies listed below:

Esperian (www.esperian.com)
Equifax (www.equifax.com)
TransUnion (www.transunion.com)

We recommend getting your credit report from at least one of these providers every year. The optimal strategy is to stagger your requests every four months from a different agency so you get a credit report from all three credit agencies each year (paranoid folks like me do that).

IF you notice anything wrong with your credit report such as credit cards you did NOT open, liens/judgments/unpaid bills you are NOT responsible or items that have already been resolved, you need to contact the rating agency involved immediately. It usually takes 1-3 months to have your credit report cleansed of incorrect data though it could take longer. If you have incorrect data on your credit report, please obtain your reports from the other agencies listed above.

Cancel Old Credit Cards

Another thing to do is cancel all the OLD cards you no longer use such as department store cards, gas cards, etc. Many people sign up for these cards at the register to receive the 10% discount on their purchase and then never use the card again. Even if you shredded the card, the account is still active and should be closed by sending a letter to the company. I realize canceling large amounts of credit could possibly lower your FICO score, BUT only in the short-term and usually these store/gas type cards have low balances so the impact should be negligible. Therefore, use some common sense - do NOT cancel all your credit cards right before you apply for a mortgage!

One commonly asked question concerns those $15-$20/month credit monitoring sites. We are NOT big fans of those sites UNLESS you have been a victim of identity theft in the past.

Now to the FICO score…

This is a value between 300 and 850 which rates your paying ability (according to FICO anyway) and is used by lenders and employers. Generally, scores above 720 are excellent and scores below 600 are not very good. Please note this FICO score is constantly changing and takes into account many different factors though the actual “formula” is top secret. Even if your credit score is poor or if you have declared bankruptcy, your score can rise quicker by simply paying your bills on time over a 6 month to 2 year period.

Please be aware that the three major credit agencies have their own credit score called VantageScore. This is offered for free in many cases when receiving your credit report. Unfortunately, your VantageScore is NOT widely used at this time as the FICO score is the gold standard. While this may change in the future, as of right now realize that the “FICO credit score” rules supreme.

In this difficult economy of high unemployment and weak home prices, many people have simply not been able to pay their bills on time. While their individual credit ratings have taken a hit, you can get back on track by staying current on your monthly utility, mortgage and credit card bills even if you are just making the minimum payments.

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