Monday, May 14, 2007

Credit score: One number is key to your finances

It’s not a birthday, or telephone number, or address. Yet it’s a number that may become meaningful in your life, especially if applying for a loan.

It’s your credit score. In this case, safety in numbers — the higher the score, the better the report.

Credit scores are boiled down to a number of factors, including previous bill payments, loans, debt, and credit cards. Basically, the history you probably won’t save in a photo album.

The number is most often used by lenders to determine whether or not to give you credit, at what interest rate, and the likelihood the money will be repaid.

An average score ranges from about 600 to 700, and anything higher is considered exceptional.

Many different types of credit reports are available, but most lenders use FICO scores, developed by Fair Isaac & Co., the company that came up with the process of reducing all credit info into a three-digit number. These are available from three major national credit bureaus — Equifax, Experian, and Trans Union.

At-risk scores emerge when the previous history creates an undesirable candidate for a loan. But it’s not the Magna Carta. Experts know of many tricks that can adjust and boost a credit score.

“The most recent history is the most important,” said Melanie Sagia, a financial representative with American General. This means paying bills on time if possible. Although a higher FICO score can make it easier to get a loan, lenders will also consider the past five months of activity.

“If there hasn’t been delinquent activity over that time period, you can still get a loan,” said DeeDee Hoeft, a mortgage consultant with Wells Fargo Home Mortgage.

It’s also wise not to consolidate credit card debt. “It’s a common mistake to go for a free credit card offer in the mail for zero percent financing, and combine all credit cards into one. It’s wonderful in some cases, but can actually hurt a credit score,” Hoeft said.

The lower the ratio of credit card debt to credit card balance, the better it looks on a credit report. “

You are better off having a small percentage of the balance on three cards, than over 50 percent on one card,” Hoeft said. And it’s best not to do this right around loan time.

If you are going to apply, start planning early. “Changes do take some time to report on the credit scores. Leave at least 30 days if you expect to see a boost on the result,” Sagia said.

This means closing open lines of credit, like an unused department store credit card. “If they are maxed out, cleaning up any over-balance on cards is good. Too many open lines just looks bad,” she added.

It’s also worthy to plan ahead should a credit report reveal a major error.

“We see a lot of foul scores as a result of fraud. Contact the three credit report bureaus. Each of them individually has 30 days to investigate the matter and get it corrected,” Sagia said.

Other errors can range from misspellings to the same loan being listed more than once. The information may also not be timely, such as an account that is already closed, but is still listed as open.

The pay-off is there after improving a credit score.

“In a lot of cases, the higher the credit score, the less documentation you need for a home loan. And you won’t need income verification. Especially on a home equity line of credit, you’ll get a better rate if you have a better FICO score,” Hoeft said.

GET YOUR FREE CREDIT REPORT

Under federal law, you’re entitled to a free report once a year. The three credit bureaus have established one central Web site, telephone number and mailing address to use for ordering your free report. If you request the report online, you should be able to view it immediately.

Visit www.annualcreditreport.com; call 877-322-8228; or mail to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta GA 30348-5281.

By requesting a report from this source you will not be solicited for other offers. The free reports do not list your specific credit score.

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