Credit Scores and Why you need to know yours

Ignorance is not bliss when it comes to knowing credit score
From Alabama comes reassuring news that Chucky, the 1,000-pound zoo alligator who escaped during Hurricane Ivan, has been captured. That means you can stop worrying about finding a giant reptile in your bathtub and move on to other concerns. Here's a good place to start: your credit score. Your credit score influences everything from the interest rate on your mortgage to your car insurance premiums, yet many Americans don't worry enough about their scores. A recent survey by TrueCredit.com found that only 10% of Americans know their score. Another survey released last week by the Consumer Federation of America found that many consumers harbor some dangerous misconception about their scores.
The knowledge vacuum is troubling, consumer advocates say.
"The cost of not knowing your score and its significance could be not only denial of credit, but also difficulty obtaining needed services and even a job," Stephen Brobeck, executive director of the CFA, said last week.
Credit scores are compiled by the three major credit agencies, Experian, Equifax and TransUnion, based on information provided by creditors. Most scores are based on a formula developed by Fair Isaac, a research firm. They're designed to measure the likelihood you'll repay a loan, based on your record of repaying debts in the past. Some common fallacies about credit scores include:
• Your credit score is like your golf score: the lower, the better.
A high score indicates a borrower is a low risk; a low score signals trouble. If your score is below 600, you can expect to pay above-average interest rates on a loan, if you can get one at all.
Borrowers with scores above 700 usually qualify for relatively low rates. If your score is above 760, you probably qualify for the lowest rates.
• You can improve your credit score by marrying well.
Married couples don't get a combined credit score, so you can't improve your number by marrying someone with a 780.
"When you get married, you're not mixing your credit history," says David Chung, interim president of CreditXpert, which sells credit-management products.
However, lenders will look at both scores if you apply jointly for a loan, such as a home mortgage, says John Danaher, president of TrueCredit.com, a subsidiary of TransUnion.
• Earning more money will improve your score.
The amount of money you make doesn't affect your credit score. Your score is based entirely on your history of repaying your debts, Chung says. If you're behind on your bills, your score will suffer, no matter how much you earn.
"I could be a multimillionaire, but if I don't pay my bills, the bank doesn't care," Chung says. "They didn't get their money — that's all they care about."
Your occupation, age and employment history don't affect your credit score, either. However, individual lenders may consider those factors, along with your credit score, when deciding whether to give you a loan.
• There's little you can do to improve your score.
Actually, there's a lot you can do, although it may take time.
About 40% of consumers surveyed by the CFA didn't realize they could raise their scores by paying off a large balance on a credit card. A disturbing 28% mistakenly believed they could improve their score by maxing out on their credit cards.
Most credit scoring calculations look at the amount of your outstanding debt compared with your credit limits. Borrowers who have maxed out on their credit cards are considered riskier because they may have trouble making payments. The formula rewards borrowers "who are using credit but using it responsibly," Danaher says.
Paying your bills on time will also go a long way toward improving your credit score. Your score is adjusted as new information comes in.
If you pay your bills on time, your score could improve in as little as three months, Danaher says.
• You can get your credit score for free.
Sadly, that's not true. A federal law enacted last year will allow consumers to get a free copy of their credit reports once a year. The rollout will start in December on the West Coast, expanding to cover all parts of the country by September 2005. But unless you're applying for a home mortgage, you'll still have to pay to get your score.
All three credit reporting agencies will sell you a copy of your credit report and score. You can purchase all three reports and scores HERE for $38.85.
To test your knowledge of credit scores, go to www.consumerfed.org/score.