[Qtip]

Anatomy of a Credit Score
By Toddy Gutner, BusinessWeek

During a shopping spree a few months ago, I opened several retail credit-card accounts to take advantage of an immediate 10% discount on that day's purchases. Surely this familiar offer was risk-free as long as I paid my bills on time, right?

It wasn't until I reported this story that I found out my credit score could have been negatively affected by the spate of new accounts I opened in such a short time. I had no idea.

Many people are ignorant of what their credit score is, how they can hurt or help that score and how it can be used against them. Some 49% of 1,013 consumers polled in a 2005 survey by the Consumer Federation of America and Fair Isaac did not understand that credit scores measure credit risk. Fair Isaac created FICO, the most widely used credit-score formula.

Lenders have used these scores for years to determine whether to grant you a loan and at what interest rate. "Credit scores are very powerful predictors of consumers' future (bill-paying) performance," says Mike Fratantoni, a senior research director at the Mortgage Bankers Association. But with the rise of technology that can automatically assess consumer creditworthiness while you wait, FICO scores now are requested by insurance companies, cell-phone providers, utilities, landlords and even prospective employers. That's a reason to make managing your FICO score a priority.

Recipe for a credit score

But first, just what is a credit score? To calculate a score, Fair Isaac uses 22 pieces of data collected from the three major credit bureaus, Equifax, Experian and TransUnion). The lowest possible score is 300, while the highest is 850.

The final number is a composite of individual ratings in five categories:
- Payment history (35% of the rating)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
- Debt (30%)

Income is not a factor. "A person can have a very high income and never pay their bills," explained Craig Watts, public affairs manager for Fair Isaac.

Fair Isaac calculates a FICO score based on the data provided by each credit bureau. It's not uncommon to see up to a 50-point differential between ratings. The reason: Bureaus collect data at different times of the month, and one bureau may have inaccurate information.

The higher the score, the lower the risk you are to a creditor -- and the less interest you'll pay. Only 13% of the population has FICO scores of 800 or above; the median is 723. There is no single cut-off for loans, however, and cut-offs employed vary from industry to industry. Generally, borrowers with scores above 740 receive the best rates.

To see how a change in your FICO score affects how much you'll pay, consider this example. On a $350,000, 30-year fixed mortgage, you'll pay 6.24% in interest and $2,153 a month if you score between 720 and 850. If your score drops to between 620 and 674, your interest rate jumps to 8.05%, and your monthly cost rises to $2,581. You will pay an additional $154,131 over the life of the loan, according to a calculator on myfico.com.

Keep an eye on your score

Want a peek at your FICO scores? Many people think they can get their FICO scores from their credit reports. They can't -- but it's still a good place to start. The Fair and Accurate Credit Transactions Act of 2003 entitles you to a free credit report from each major credit bureau once a year. I ordered my reports by telephone from annualcreditreport.com and received them all within 10 days. It's smart to request a report from a different agency every four months so you stagger the reports over a year. That way, if there's bad information in one, you'll spot it sooner.

When you request a free credit report, each bureau will offer to calculate a credit score for $6.95. Experian and TransUnion use proprietary formulas; Equifax uses FICO scores. Pass up these offers, because the information is not as comprehensive as you'll get elsewhere and lenders are less likely to look at these scores.

For the most detailed explanations on your FICO scores, go to the credit education area at myfico.com. A score from one credit bureau costs $14.95, all three are $44.85. It's useful to buy all three because large lenders either average the scores or take the middle one. You'll want to check your FICO scores once a year or several months before you apply for a loan.

The negative factors that bring your score down remain on your credit report for seven years and can adversely affect your FICO score. But lenders typically look back only in the past two years when they make credit decisions. One 30-day late payment shouldn't make a difference. Lenders look for trends.

I paid for three scores and anxiously waited while the computer calculated them on the spot. Within seconds, I was relieved (not to mention a bit proud) when 771, 751, and 738 popped up on my screen. Still, I wondered why I wasn't in the 800-plus range. To find out, I reviewed the various strategies credit experts recommend to raise FICO scores:

- Pay all bills on time. This is probably the most important factor in the FICO calculation. If you're consistently 30 days overdue, your score can drop by as much as 100 points, depending on how long the account has been open and how long ago the late payment took place. To avoid late payments, consider automating your bill-paying process. I got high marks in this arena.

- Think twice before closing accounts. Lenders are looking for consumers with long credit histories that have been managed well. But because of the increase in identity theft, you don't want too many open accounts that you don't use. "Be judicious about the accounts you have," says Norm Magnuson, public affairs officer for the Consumer Data Industry Association. In my effort to consolidate our finances, I had canceled an American Express account that I’d had for 20 years to become an authorized user on my husband's account. While I benefit from his 20-year credit history on that account, it was a mistake to eliminate my own. I have a few cards in my name only, but the history isn't as long.

- Minimize credit-card applications. Bingo. That was cited as a problem on all three of my FICO scores. On average, a consumer has a total of 11 credit obligations, of which seven are credit cards and four are loans. I had 21, of which six had balances. Each time you apply for credit, a lender requests to view your report. This inquiry is noted and can reduce your overall score. Don't apply for unnecessary credit. If you're in the market for a big-ticket item that requires a loan, avoid credit applications for 18 months prior to your purchase.

- Keep balances low. The FICO score evaluates your total balances in relation to your available credit. This is known as credit utilization. Credit cards that are "maxed out" can lower your score. Try to spend only 30% of your credit limit. If you have a $10,000 limit on one card, keep the balance near $3,000. My credit utilization was too high. It helps that I pay off my balances every month, but it is better to spread the spending.

While my FICO reports said that "most lenders would consider consumers in this score range as extremely low risk," the competitive spirit in me wants to get over the 800 mark. To that end, I recently refrained from signing up for a Target Stores credit card to get $10 off $100 purchase.

[roybean]

Good info Q and as I told Heddy, students are often the target of such practices. They have people who actually come set up tables on campus and they give out t-shirts, coupons, movie tickets, gift cards, free lunch, etc. BUT all you have to do is fill out about five or six different applications for credit cards. They don't tell students that the serious of credit checks hurts their credit rating, not to mention the freshman students who are just happy to have a credit card till the bill comes. The lenders know that most parents will pay the bill without ever questioning it OR it will go to a collection agency which helps to keep the cycle going. IT'S ALL A RIP!

[hannah]

Originally Posted by roybean

Good info Q and as I told Heddy, students are often the target of such practices. They have people who actually come set up tables on campus and they give out t-shirts, coupons, movie tickets, gift cards, free lunch, etc. BUT all you have to do is fill out about five or six different applications for credit cards. They don't tell students that the serious of credit checks hurts their credit rating, not to mention the freshman students who are just happy to have a credit card till the bill comes. The lenders know that most parents will pay the bill without ever questioning it OR it will go to a collection agency which helps to keep the cycle going. IT'S ALL A RIP!

There were some bills in severals states to make it illegal to market credit cards on the campuses of state schools to students. Need to check to see if any of those bills passed.

I recently found out that HIGH SCHOOLS sell lists of graduating seniors to the credit card companies. I raised holy hell at our school board and hopefully this will be stopped. When my son graduated from high school, he was inundated with credit card offers, a lot of them even pre-approved. Pre-approved?! No job, lives at home with parents, what are the credit card companies thinking? Fees fees and more fees!

[roybean]

I tell ya..."It's all a rip," and they know what they are doing! The last time I saw one of those tables set up to get students to fill out credit apps (I know what was going on now that you mention it) they set up in front of a restaurant across the street from campus and were giving out coupons for sandwiches. They had people come onto campus and lure students to the sandwich shop. Slick azzes!

[Pale Rider]

Originally Posted by hannah

I recently found out that HIGH SCHOOLS sell lists of graduating seniors to the credit card companies.

Hmmmm. What information do they sell along with the name? If they are not careful, they could easily become a CRA. Have your son ask the school for a copy of his credit report.

[hannah]

Originally Posted by Pale Rider

Hmmmm. What information do they sell along with the name? If they are not careful, they could easily become a CRA. Have your son ask the school for a copy of his credit report.

They are marketing lists. This kind of thing is done all the time and it depends on the product as to what list a company buys. Credit card companies love buying lists of young adults so as to market directly to them just as an auto parts store may buy a list of men 18-34 for off-road performance enhancing aftermarket add-ons, or since you are into computers, you may be a marketing list for computers and parts. Marketing involves targeting the best demographic for the product as as young adults, high school graduating seniors are a prime market for credit card companies. Normally all a marketer knows is the age, name and address of the prospect or a particular demographic the entire list is based on. No way could you say the list sellers are CRA's.

[Hedwig]

Originally Posted by hannah

When my son graduated from high school, he was inundated with credit card offers, a lot of them even pre-approved. Pre-approved?! No job, lives at home with parents, what are the credit card companies thinking? Fees fees and more fees!

What were they thinking? That teenagers living at home often have more disposable income than many adults. Usually a part-time job of some sort, and they probably don't pay rent, gas, or car payments. Of course some parents make kids pay this, but a vast number (probably the majority) don't.

Besides, Mom and Dad will pay if junior needs money. They don't want someone to come after their baby.

My husband worked at one time in a retail establishment. He was always amazed at how much money teenagers had.

[roybean]

Originally Posted by Hedwig

What were they thinking? That teenagers living at home often have more disposable income than many adults. Usually a part-time job of some sort, and they probably don't pay rent, gas, or car payments. Of course some parents make kids pay this, but a vast number (probably the majority) don't.

Besides, Mom and Dad will pay if junior needs money. They don't want someone to come after their baby.

My husband worked at one time in a retail establishment. He was always amazed at how much money teenagers had.

Easy game!!!

[Pale Rider]

Originally Posted by hannah

They are marketing lists.......No way could you say the list sellers are CRA's.

Well, they are not far from it. If they include anything credit related in the info they sell, they are a CRA wether they like it or not. Actually, according to the definition, it may not have to be credit related.


(f) The term “consumer reporting agency” means any person which, for monetary fees,
dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the
practice of assembling or evaluating consumer credit information or other
information on consumers for the purpose of furnishing consumer reports to third
parties, and which uses any means or facility of interstate commerce for the purpose
of preparing or furnishing consumer reports.


(d) Consumer Report

(1) In general. The term "consumer report" means any written, oral, or other
communication of any information by a consumer reporting agency bearing on a
consumer's credit worthiness, credit standing, credit capacity, character, general
reputation, personal characteristics, or mode of living which is used or expected
to be used or collected in whole or in part for the purpose of serving as a factor in
establishing the consumer's eligibility for

(A) credit or insurance to be used primarily for personal, family, or household
purposes;

(B) employment purposes; or

(C) any other purpose authorized under section 604 [§ 1681b].

[Pale Rider]

Or, just send an opt out notice to the school and the CRA's, then sue them for each offer that rolls in. It could add up to a nice graduation present.