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A New Look at Credit Scores
By: Life Certain Wealth Strategies
A Respond Buyer's Club Member
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Nothing ever stays the same, and that goes for how your credit is
scored. Now, the size of your balances counts more than it did in the
past. This is due to concerns by creditors about large
balances—especially those that are getting close to the total
credit limit. Prior to the recession, we needed to be more concerned
about the effect of late payments and going over a credit limit on our
scores than we did our total debt.
So getting your balances down to under half of your credit limit is a
good goal. Even better would be to pay off your credit cards and only
use them if they can be paid off at the end of the month.
The recent changes to credit scores were made by the Fair Isaac
Corporation (FICO), the company that developed the scoring system,
which helps creditors assess an individual’s
creditworthiness. This latest revision in the FICO system will actually
allow a bit of lenience on late payments. This may be good news for
some consumers these days. Obviously, this won’t mean that
someone can chronically pay late, but once or twice won’t
have the same impact as in earlier FICO versions. Note that this is not
related to any late charges that a creditor might apply.
Here are some issues to keep in mind next time you head for your wallet
to pull out your credit card.
* Lenders look at the big picture during the slumping economy. They
examine the amount of credit you’re actually using relative
to your credit limit and are concerned with high balances overall. From
the lender’s perspective, more debt means a higher risk of
default.
* What is a good number these days? You’ll need at least a
740 score for the best rates. Although credit scores around 700 were
considered ideal in the past, you will want to have the best status
with lenders now. Always aim for the highest score and keep in mind
that for the lowest rates and best terms, you need to get your credit
score above 740.
* By the way, the highest score you can get is 850.
* If your credit score is low, and you are considering refinancing or
applying for a new credit card—even a department store or gas
card, you should wait until you have brought down your debt and your
score is better. Start by deferring any large purchases.
* Once your scores have improved, keeping them high means careful,
ongoing budgeting—or they will probably slide again.
* Monitor your credit reports regularly. Remember that you have the
right to get all three of your credit reports, from Experian,
TransUnion and Equifax, once a year for free. Contact each one
individually at www.annualcreditreport.com and ask for a report at
different points in the year. That means you’ll get an
extended picture of how your credit picture looks because the three
bureaus feed each other the latest information. You’ll also
be able to clean up errors as you find them—errors can
negatively impact a credit score—and you’ll also be
able to watch for identity theft. Make sure you use the website above
and avoid the businesses that use “free credit
report” in their title. If they ask for your credit card
number, don’t do business with them.
* Does mastering your scores seem like an overwhelming project? Get
some advice. Sit down with a financial planner to come up with a budget
plan and then get started on retirement planning, saving for
kids’ college and staying debt free.
Courtesy of Herb White, MBA, CFP, a Certified Financial
Planner™ with Life Certain Wealth Strategies in Greenwood
Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and
investment advisory services offered through Woodbury Financial
Services, Inc. Member NASD, SIPC and Registered Investment
Advisor. Life Certain Wealth Strategies and Woodbury
Financial Services are not affiliated entities.
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