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Tuesday, January 12, 2010

Nice article with some good questions and answers, particularly for younger consumers.  The whole article is on the Chicago Tribune's website at http://www.chicagotribune.com/business/yourmoney/chi-tc-ym-started-bigda-0110jan10,0,4925763.story

So here are five common questions about credit scores, specifically FICO scores, the most widely used rating.


FICO scores range from 300 (the worst) to 850 (the best).
Q.  How do you establish a credit history and a FICO score?

A.  You need one credit account -- a student loan, auto loan, mortgage or credit card, for example -- open at least six months and reported to one of the three main credit bureaus: Equifax, Experian and TransUnion, says Barry Paperno, consumer operations manager for Fair Isaac Corp., the FICO providers.

Other bills, such as your rent or utilities, generally are not reported to the bureaus.

By law, you're entitled to one free credit report every 12 months from each of the three credit bureaus at annualcreditreport.com, the only site where you can access a free report.

You have to pay to get your credit score, however. If, for example, you request an Equifax report at AnnualCreditReport.com, you can buy the FICO score it's showing lenders for $7.95. Otherwise, you can buy scores for $15.95 each at myfico.com. (The Experian FICO score is available only to lenders as will the Equifax score after Feb. 14.)

Q.  Does carrying a credit card balance improve my rating?

A.  There is no advantage to carrying a balance, but the lower the better.

Nearly a third of your FICO score is based on your credit utilization, or the percentage of your credit limit that you use. Ideally, you want to charge no more than 30 percent of your available credit.

And even if you pay off your balance each month, it's unwise to charge the full amount of your credit limit. While lenders report to the bureaus every 30 days, the data may not reflect a payment, said Steven Katz, a spokesman for TransUnion. So it could look like you are using all of your credit.

Q.  Does it help my score if I close an old credit card?

A.  Generally, no. And it may hurt by raising your utilization ratio because you have less credit available.

In addition, 15 percent of your FICO score is based on your credit history (the longer the better). Closing an account you've had several years would shorten your history -- and lower your score.

Charge a small sum to the card every few months to keep it active and pay off the balance right away.

Q.  Will my score drop if I check my credit report?

A.  No. Applying for credit, however, does hurt your score so open new accounts sparingly.

One exception: If you are shopping for a mortgage or auto loan, FICO generally counts any applications made within a 45-day period as one. FICO recognizes you have to submit multiple applications as you shop for loan terms. [this is also true regarding car loan applications - those made within a short time of each other are considered one application].

Q.  How do late payments affect my score?

A.  Once you are 30 days overdue on a bill, your score could drop 60 to 110 points, depending on your credit file, according to FICO.

Your payment history makes up the largest portion of your FICO score, so don't pay late. If it's overdue, get back on track as quickly as possible. The more recently you've been late, the worse for your score.

"The key is to make sure you are paying at least the minimum due on time every month," said Katz of TransUnion.

On that last question, its important to note that a late payment alone does not affect your score, but a late payment over thirty days late does.  But its still a good idea to pay on time, since even one day late will cost you a $39 or so late fee. 

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