J.A. Berger
Milwaukee Journal Sentinel
September 26, 2009
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There are many things that are given numeric values: cholesterol levels, baseball’s ERA and relative humidity, just to name a few. But none may be as mysterious as a credit score. A credit score can affect your ability to get a home loan or add to the cost of a mortgage through higher interest rates or additional fees.
A credit score, or FICO (Fair Isaac Corporation) score as it is referred to in the industry, is a numeric value based on a statistical analysis of a consumer’s credit history. A credit score is based on credit report information from Experian, Equifax and TransUnion. The FICO formula for calculating a score has been compared to the formula for Coco-Cola. No one has access to it. However, a FICO score is the standard by which lenders assess risk.
Mark Steele, senior mortgage consultant with Johnson Bank in Franklin, said an applicant’s credit score is a major factor in obtaining a mortgage. A credit score is not the same as a credit report, Steele said. “We look at the FICO score from each credit bureau and use a merge-credit score,” he said, meaning a median score is calculated when assessing a borrower’s risk potential.
Factors that make up a score are payment history, amounts owed, debt-to-credit ratio, time in the credit system, new credit and types of credit, such as revolving (credit card debt) or installment (car loans).
A good credit score is 740 or higher, Steele said. “A less-than-good score can cost money when borrowing for a home.”
When applying for a mortgage, if a credit score is 720, with 5% down, no delivery fees will be assessed. If a credit score is one point lower at 719, with 5% down, lenders may charge a half of a point in delivery fees or assess a higher interest rate on a mortgage, Steele said. “Either way, that one-point difference in your credit score will cost you money.”
What can be done to improve a credit score? Steele first recommended accessing your credit report to make sure it is an accurate reflection of your credit history. Correct any errors that appear on the report.
In Wisconsin, residents are entitled to one free credit report per year. It can be accessed at Annualcreditreport.com. You will then choose a credit bureau from which to access and print out the report. Once you choose the bureau, you will have an option to purchase the corresponding FICO score. The report is free, but the score information is not, and can cost anywhere from $7.95 or more.
Raising the score
A reputable lender can advise customers on how to fix a credit score, Steele said. He suggested common sense strategies, such as paying bills on time and keeping credit card balances low. Be strategic about closing credit card accounts, he advised. Because a credit score is based on a debt-to-credit ratio, you want to keep that ratio low. “If you have three to four cards with little or no balances, that’s fine. If you have six or more cards with little or no balances, close out the ones you don’t need or use. But if you have six cards and three to four are maxed out, don’t close out the two to three that have no balances, because that will raise your ratio of debt,” he said.
Pay off the maxed-out credit cards first. FICO scores are sensitive to high credit usage, and consumers may see lower scores if their reported balance on one or more cards is near the account’s limit.
Checking your credit report will not lower your credit score, but avoid multiple inquiries of your credit score, Steele said. “That’s usually an indicator that credit is being applied for and could adversely affect your credit score.”
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