Recently, I caught up with Liz Pulliam Weston to discuss her book "Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future" (Prentice Hall, 2004). While I've touched upon the subject before, her knowledge is invaluable.
Q: Why did you write this book?
A: I was frustrated by all the bad advice coming from mortgage brokers, loan officers, real estate agents, even the media. There was nothing written for consumers. People need clear information for how credit scores work and what to do to improve them. An example: A person with a good score of 750 might get a rate of around 5 percent for an auto loan, while someone with a 650 score would average 10 percent, paying literally twice as much in interest over the life of the loan.
Q: If I don't plan to buy a house or car in the foreseeable future, do I need to be concerned about my credit score?
A: Credit scoring is creeping into many areas of life. Landlords use credit scores to evaluate applicants, so a poor score could make it hard for you to get an apartment. Insurers use a form of credit scoring to set premiums for auto and homeowners' insurance in many states. Even employers use credit information to decide who gets hired or promoted for certain jobs. People with good credit scores get the best deals. People with bad or even mediocre scores wind up paying through the nose.
Q: What about the person with only one credit card? Does that pretty much guarantee a low credit score?
A: Not necessarily. To get the very best scores, you need both revolving accounts (like credit cards and lines of credit) and installment accounts (like car loans or mortgages). But you don't need the very best scores to get the very best rates and terms. Typically, as long as your score is over 720 or so, you're going to get good deals on loans.
Q: Which is worse for a credit score? Credit counseling or a "charge-off" (not repaying all of your credit card debt)? Charge-off or bankruptcy?
A: Bankruptcy is the single worst thing you can do to your score. Charge-offs are pretty bad as well. Credit counseling itself typically won't hurt your FICO score, the one most used by lenders. The FICO formula treats any mention of enrollment in a counselor's debt management plan as a "neutral" - it neither hurts nor helps your score. But that doesn't mean your credit won't suffer.
Q: I'm sure many people are suspicious: Aren't credit scores just a marketing ploy to increase revenues? Unlike credit reports, credit scores are not free.
A: It's true that scores aren't free. They were developed to help lenders gauge the risk that someone might default. They've been in widespread use since the 1970s, and part of most mortgage lending decisions since the mid-1990s. As more lenders used them, more consumers began to hear about them and to demand more information about how they worked. (Before 2000, lenders weren't even supposed to tell you what your score was, let alone how it worked - and frankly, often the lenders didn't know what went into a credit score!) To get the right score, make sure you get your FICO score. The credit bureaus like to market their own "consumer education" scores, which aren't the same as the FICO scores used by lenders. If you want to see the same scores the lenders see, make sure you're getting a FICO. See www.MyFico.com for more information.