How important is your credit score? Very important according to Mike Schiano, America's Family Money Coach. Mike recently sat down with LoveToKnow to share his knowledge on credit scores and how they can affect our finances. Enjoy!
Credit Score Interview
What is a credit score?
The credit score is an important number that summarizes your creditworthiness and indicates your level of risk to a potential and current lender.
The score is based on the information in your credit report. The original creator of the score calculation is the Fair Isaac Company. This company created the FICO score.
Scores range from 300-850. The higher the better! The current national average score is 674. We all start with a score of 680 and can improve from there or decrease. The score is fluid and changes depending on how you are managing your finances from month to month.
How important is it that people know their individual score?
Anyone who has ever applied for a loan of any type, a credit card, or an apartment rental, knows how important the credit score is. The score is used by lenders, utilities, insurers, landlords, and a growing number of employers!
The credit report and score are the key pieces of your financial resume which is being used more and more to determine not only your credit worthiness, but your very character.
The score qualifies you for higher or lower interest rates--by the way a common myth is when people get married their credit reports and scores become one. Married couples maintain their own separate credit reports and scores. They may enter into joint accounts but that account information is included in the credit reports of both people. Late payments on a joint account negative effect the scores of both spouses. Another common myth is that having a higher income will lead to an increase in your score. Income is not a factor in the score calculation.
Could a credit score be lowered because of inaccuracies on a credit report?
Absolutely. Information provided by InCharge Education Foundation and others, indicates that 79% of credit scores contain mistakes; 25% have mistakes so bad that the consumer would be denied credit.
The score is derived by weighting the information contained in the credit score. For example, the greatest weight, 35% of the score is calculated based on the consumer's current credit performance (how the consumer is managing their current credit accounts). If payment history is reported incorrectly on the report, for example, showing late payments on an account which has no late payments, the score would be affected negatively.
Can someone get these mistakes corrected?
Yes, in fact, Federal Law, by way of the Fair Credit Reporting Act, requires that we have the ability to dispute incorrect and outdated information.
Consumers should keep in mind that credit bureaus, TransUnion, Equifax and Experian simply report information that is reported to them by creditors. These companies do not police reports nor do they know what is accurate and what information is inaccurate. They simply take data provided to them by hundreds of thousands of creditors and enter it onto consumer reports that it then makes available to lenders and others who purchase the information.
It is the consumer's responsibility to make sure the information being reported about them is accurate and up to date.
What are some of the reasons why people might want a better score than they currently have?
The higher the score the better your chances of qualifying for the lowest interest rates and best terms on financing, loans and credit. Insurance companies routinely use scores to set insurance premiums and 40% of employers are reported to now routinely use credit reports in their hiring process.
What are the first five things people should do if they want a better score?
- Get copies of your credit reports. Under the new FACT Act federal law, all consumers are entitled to a copy of their three credit reports once every 12 months. Those are available online at www.annualcreditreport.com and by phone 1-877-322-8228.
- Buy your score. When you order your free credit reports, you will be given the opportunity to buy scores from each of the three credit bureaus for $6.95 each. If money is an issue, buy at least one of them. You need to know your score and how your credit report relates to the score.
- Review the reports carefully looking at each piece of information to ensure you recognize the information and that it is indeed accurate. Many people overlook personal information such as current and past employers and simple things like address and their name when checking credit reports assuming those items are correct.
- Dispute any information that is incorrect or outdated. Information can cover a period of up to 7 years; 10 years for bankruptcies and court judgments. If negative information appears on the report that is older than these time frames, the consumer should ask for the information to be removed.
- Be vigilant with the credit bureaus to be sure they update disputed items. This process can take several months as the bureaus will notify your creditor of the dispute and the creditor has 30 days to respond. If you don't see a change within 60 days of the date of the request, dispute the item again.
At the same time, it is very important that all monthly payments to creditors and lenders are made on time all the time. Late payments bring down your score. Also, be sure not to max out credit cards. Anytime a consumer carries a balance of more than 50% of the available balance, the score goes down.In your new book, Credit Booster: Ultimate Guide to a Better Credit Score, you talk a lot about how you can get out of debt faster. Can you offer an estimate as to how long it would take someone to better their score by 100 points if they followed these tips?
It is very difficult to give an estimate of time and points because there are so many factors that go into a credit score including the consumers total debt, amount of negative information contained on the report and how recent it is; how much the consumer can pay down debt within a given period, etc. However, I believe that a realistic time frame for improving their score by 100 points would be 18 months. As I say, there are many variables that come into play and depending on the individual's situation, it could be done sooner but 18-24 months is more realistic if they are working to reduce and eliminate debt and keep payments on time each month. Someone who comes into a large sum of money and can suddenly pay off all of their debt immediately will see faster results than someone who requires several months or years to pay down excessive debt.
Do you have any other tips you can offer to people who want to improve their score fast?
- Get any past due accounts paid up to date and then keep the monthly payments paid on time.
- Reduce revolving credit balances to less than 50% of the available balance.
- Call your creditors and ask for lower interest rates on all of your accounts to help you pay down debt more quickly. While you are at it, ask them to eliminate any annual fees you might be paying. That won't help your score directly but will save you some money.
- Don't close accounts that you have had open for many years. Having accounts open and in good standing for many years helps your score. It is impossible to have a perfect 850 score unless you've had a revolving credit account open for at least 15 years.
- Limit your credit and loan applications. Too many applications reduce your score. New accounts also lower your score for a short time until you prove that you will be responsible with the account.
- If you have credit but never use it, use it a little and pay the balance due in full when the bill comes. Using credit responsibly improves your score.
To Learn More about Your Credit Score
If you want to learn more about your credit, pick up a copy of Mike Schiano's book, Credit Booster: Ultimate Guide to a Better Credit Score, or tune into his nationally syndicated, weekly call-in radio show Mike about Money.