New Jersey bankruptcy Article
Come Sept. 1, debt-laden Americans everywhere can find out what creditors really think of them.
On that date, residents of the Northeast will be able to order free copies of their credit reports by logging on to annualcreditreport .com. People on the West Coast got access last December and the availability has been rolling eastward since.
But a credit report, in all its mind-numbing detail, is not what most people will be looking for. They want the quick snapshot of their creditworthiness. They want the FICO score, and it’s not free.
FICO is short for the Fair Isaac Corporation, which created the score.
Just as any college-bound student knows that his or her SAT score determines whether an Ivy League or a community college will be welcoming, the FICO score tells how eagerly creditors will give you money. The three-digit number from 300 to 850 is used by mortgage brokers, credit card companies, retailers and auto dealers to determine how much you can borrow and at what interest rate. The higher the score, the better.
You need to know that number, but you should not obsess about it. That can be hard, though, because the credit agencies and Fair Isaac would very much like you to monitor it closely. Andy Jolls, a vice president for Fair Isaac, said, “The more people who know about it the better.”
That is certainly true for Fair Isaac, a Minneapolis company that last year sold $706.2 million worth of financial data to companies that want to sort out the deadbeats. Over the last four and a half years, it has sold more than 10 million scores to consumers at $45 each. Revenue generated from the company’s MyFico.com Web site jumped 33 percent, to $32 million last year. The FICO score, invented in 1988, has in a very short time become the single most important indicator used by lenders to predict whether you will repay your debt. The company used to cloak the score in secrecy, but in recent years it has become quite open about its prized possession.
The score, it says, is largely based on just two factors: history of paying off debt and “credit utilization,” or the amount of debt you have in relation to your credit limits. Fair Isaac measures this, along with three other factors, applies an algorithm to compare that data with the payment patterns of millions of other Americans and generates the FICO score.
Any number below 500 and you are a financial pariah. Get above 750, where 40 percent of Americans are, and the credit card companies will never stop plying you with offers.
So, of course, you want to know what your score is. It is human nature to want to know that you, with your FICO of 816, rank in the top 3 percent of Americans. If your mortgage broker does not share it with you free of charge, by all means, buy it. Fair Isaac and each of the credit bureaus will be glad to sell versions of it to you. (It does not come with any credit report, free or otherwise.)
Here’s the first rub: the credit score you get is not really the score that a lender will use. Fair Isaac sells a variety of scores aimed at various markets. Its computers slice the data it purchases from credit bureaus any number of ways for clients. Some scores calculate the odds of a bankruptcy filing, while others help a collection agency predict the likeliness one will make good on a debt. Some lenders even have their own algorithm to generate a proprietary score.
“There are thousands of options and creditors choose which one they want,” says Maxine Sweet, vice president for consumer education at Experian, one of the three major credit agencies. In fact, FICO uses Experian data to generate the score that is very similar to what the majority of mortgage lenders ask for, but Experian also sells a version to consumers called Score Plus.
You can also obtain a credit score called Empirica from TransUnion, and one called Beacon from Equifax, that closely approximate the FICO score. All the numbers are different, but are not supposed to vary much.
You really only need to look at one score. But MyFico.com and each of the credit agencies not so subtly urge you to buy more with a variety of products, including some that will give you constant updates of your score. If you are checking your credit report three times a year as you should, watching your score change every few weeks is complete overkill.
They also urge you to buy products to improve your scores. It is not unlike the way Kaplan, a unit of the Washington Post Company, or Princeton Review Inc. exhort people to improve their SAT or GMAT scores. “It’s a nice analogy,” Mr. Jolls said. The difference, he says, “is that not everyone goes to college and most people in this country use credit.”
But does everyone need to obsess over this score? Suze Orman, the financial health evangelist, says they do. She sells a $50 product on MyFico that tells you how improve it. The advice is sound, but the truth is, nearly the same advice is found free elsewhere on the MyFico site. (Where the Orman package has real value is a feature to check your credit report for errors and automatically generate letters to the credit bureau to correct them.) “My advice is targeted to people who are broke,” said Ms. Orman, whose latest book is titled, “The Money Book for the Young, Fabulous and Broke.” “These are the people who need to get their scores up.”
She is right. But if you have excellent credit, you already know it. If you have bad credit, you also know that, too, and you should know what to do about it: pay your bills. It is everyone else who could benefit by knowing the score.
The people with scores in the 600’s could profit the most by nudging it into the 700’s. In that lower range, a difference of only a few points can mean paying thousands of dollars more in interest. In some regions like California and the Northeast, where home loans of more than $350,000 are the norm, anyone with a score below 660 will have trouble qualifying for a mortgage.
Widening the gap between your credit card limits and what you owe will pay off. Mr. Jolls says that a score can be raised 10 to 15 points in only a few months with a little discipline.
It seems fairly pointless to go through all that trouble if your score is already above 720. Since half of the credit score is determined by the length of time you have paid your credit card bills and mortgage payments on time, there is really little you can do to improve it except more of the same.
And if your score is above 780? Says Lara Blake, senior associate at Holmgren & Associates, an Oakland, Calif., mortgage brokerage firm, “It just means that you can frame the score and put it on the wall.”
Some companies will charge you $50, even $100 for this advice. We give it to you for just the cost of today’s newspaper.
The credit score is determined by five factors, some weighted more than others. If your score is anywhere above 700, do not sweat it. Keep doing what you are doing.
For everyone else, here’s where to apply a little discipline so you look less like a credit risk:
Payment History (35 percent) Pay your bills on time. The longer you do that, the faster your score goes up. It is that simple.
Amounts Owed (30 percent) If you have balances, start paying them down to zero starting with the cards carrying the highest interest rate. Consolidating debt onto one card can lower your score because a high ratio of debt to your credit limit, what the industry calls “credit utilization,” looks like you are about tapped out.
Length of Credit History (15 percent) This category trips up people who think they are improving their credit by tearing up their credit cards. Do not close any accounts. It does not hurt to let them sit there, because the longer you have accounts open – assuming you pay on time – the better your score gets.
New Credit (10 percent) Ignore the come-ons from stores offering a discount if you open a charge account. Taking out more credit makes you look short of cash. But do not worry about shopping around for a loan. Inquiries from potential lenders hitting credit bureaus within a 30-day period aren’t harmful.
Types of Credit Used (10 percent) Crazy as it sounds, if you have some debt you look better than someone who has none. So do use a credit card. If you have some small amount of installment debt – as dumb as that is to do – it can help to raise your score a bit.