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Blog: Paper Doll, Tackling The Stacks And Piles
 Paper For Your Plastic: Organizing a Better FICO SCORE
If you've ever bought a car or house, you probably know all about your
FICO score. If not, you might wonder what the big deal is. The bottom line is that the better your FICO score, the better
interest rates you can get on loans.
Let's say you
want to take out a 30-year fixed mortgage of $250,000. Someone with the highest FICO score
(760-850) could get an interest rate of 4.99%, for a monthly payment of
$1341; skip down a few rungs on the FICO ladder to the 620-639 range,
and the rate would be 6.58% with a monthly payment of $1594. That's a
difference of $91,080 over the course of the loan!
Oh, but you're not going to buy a $250,000 house?
What about a car--a sensible $15,000 car?
Someone with a top-flight FICO score, maybe 810, will pay 6.36% on a
36-month car loan...that's $459/month, but a lower-to-middle-tier
scorer (say 620) would end up with a rate of 12.76% and pay $504/month.
That $1620 difference comes out of (or stays in) your pocket,
depending on your FICO score.
So what is FICO? A credit score, in general, is a
number that represents creditworthiness -- the
statistical likelihood that someone will pay his or her
debts. The score purports to predict risk, and financial
institutions use it to determine how much interest they'll charge to
let you use their money. It's kind of like how the insurance tables
predict that it's less statistically likely that a 55 year-old-grandma
will be hot-rodding around town vs. a 16 year-old football star, and
thus charge car insurance rates accordingly.
FICO stands for the Fair Isaac Corporation, the
company that developed the fancy math behind the scoring system using
data from the major credit bureaus (Experian, Equifax and
TransUnion). FICO scores range from 300-850, and while there
are other credit scores, including the VantageScore and the NextGen
score, FICO is the most widely used by U.S.
lenders.
I
know some people out there will email me about the evils of credit card
use. If I were a consumer reporter, I could fill up multiple weekly
columns on the downside of the industry, but it's rarely possible to live
in our modern world on a cash basis. If you want to buy a home or even rent a car, you have to have a credit history. It's impractical to
purchase a house in cash (and it's likely the IRS and FBI might show up the
same day as the moving men, if you tried).
Obviously, we shouldn't purchase what we can't afford, but there are a variety of circumstances
(ranging from medical procedures that must be pre-paid to business
expenses that won't be reimbursed for a few weeks) that encourage even
the most frugal person to use credit. And of course, some
people find the added consumer protection of a credit card to be an
essential form of insurance against the vagaries and whims of big business.
So, let's assume, for the sake of happy blogging, that we're all responsible
users of credit, and that we're all doing what we can to avoid any
interest charges or fees. Given that, what can you do to make
your FICO as fabulous as
possible?
Knowing how your FICO score is calculated
is pretty much theoretical until you know your own data. Go grab all the paper on
your plastic!
Pull the folder for each of your credit card accounts from the financial section of your
Family Filing system. Look at the most recent statement
from each card issuer and note the following:
--The percentage interest rate
--The date due
--The credit limit
Now, let's look at the make-up of
the FICO score.
35% = Payment
History
Pay your bills on
time. Seriously. If you do nothing else to keep
your FICO score in line, do this. Plus, in 2006, the Government
Accountability Office reported that credit card late payment fees were
up to an average of $39. (Big surprise, those fees haven't receded.) Pay
one bill late per month, that's $468/year!
Flip through the last half dozen statements to see when your payment date was. Is it always the same day of the
month or does it vary? Credit card and loan companies seem to
thrive on the idea that you'll assume a due date will always stay the
same, that you won't read the due date (or the small print notifying
you of a change of date) and that you'll pay your card at the last
possible minute. Don't let them win.
Instead:
- Show up for mail call. Open the
mail the day it arrives, toss out the glossy advertising inserts, and
if you pay online, toss the envelopes, too.
- Read the statement ASAP and check for
new policies and/or errors.
- Circle or highlight the
payment due date. Write it on your calendar. Set
alarms on your computer.
- If the due date is inconvenient, ask your lender or card issuer to change the date to a more convenient one; most companies (even utilities) are willing to do so.
- Put your bills in one place, in your
bill-paying center, and arrange them in chronological order, by due
date. Alternatively, use a tickler file and put the bills in
slots at least 7 days in advance.
- If you use online
bill-pay, consider scheduling payments the day you receive your bills
(no matter what date you actually choose for assigned payment). Bank
of America, for example, lets you select the date you want the payee to
receive the money, and guarantees the transaction. Other banks schedule
by when the check or electronic payment is sent; if the payee requires a tangible check,
that can lead to delays, so know how your online bill-pay system works.
- If you snail-mail your
bills, note the fine print on your credit card statements.
Some say payments must be received by 1 p.m., or 12 p.m. or even 9 a.m.
or will be posted the next day. You'll need to mail the checks at least
seven days before they're due, and even then, you are dependent upon the Post Office.
You
already know that you should pay your bills in full. Failing that, you
certainly know that if you only pay the minimum, you'll not only never
keep pace with the interest rates charged, but will be old and grey by
the time you've paid off that Jonas Brothers MP3 download. But whatever
you pay, pay on time to keep your FICO, and your finances, healthy.
30% = Credit Utilization (How much you
owe vs. how much you could
owe)
It's not just a matter of
how much you owe, but the ratio of how much you owe (in revolving, or
credit card, debt) to your credit limit. You and the person
reading this blog
over your shoulder may very well each owe $500 in credit card
debt. However, if your credit limit is $10,000, your
utilization is only five percent; if the person over your shoulder has
a credit limit of only $1000, he or she is utilizing
50%.
Financial experts vary on the utilization
limits they suggest. Before the current recession started,
for example, Business Week advised
no higher than 50%, but experts are being more circumspect
now, suggesting a utilization of no more than
30%, and preferably 20%.
So how can you be sure you're doing
that? Divide the
amount you owe by the
credit limit; unless you're a math whiz, use a
calculator. Then move the decimal point two spaces to the right (remember that from
math class?) and that's your percentage utilization. Higher
than 30%? Start whittling it down. When you find a
$10 bill
in a coat pocket, or your Aunt Tillie sends you an unexpected birthday
check, snowflake that money towards debt,
ostensibly until it's paid off, but certainly until your utilization
number comes down.
So is
0% utilization best? Sorry, nope.
First, if you're not using it, the credit agencies have no way of gauging how well you
can handle credit. It's like dating; if your blind date is
43 and this is the first date he/she has ever been on (and there's no
monastery or convent listed as a prior address), the lack of experience is
going to ring some alarm bells. Plus, many store cards close accounts if
you don't use
the card in a 12-month period, and major credit cards are frequently canceling cards due to lack of use.
And what
happens when cards are canceled? Your total credit limit
decreases, thereby increasing your overall utilization. Then your average
length of credit history (see below) is also
reduced--ouch!
Paper Doll isn't advising you to live beyond your means. However, you may want to rotate
the cards you use and
buy something (that you were going to buy anyway) to keep each card
active. If this gives you the jitters, there's no reason you can't go
home and immediately
transfer money in the amount of your purchase to your credit card
company via online bill pay. Talk about short-term debt!
15% = Length of Credit
History
Obviously, you can't always
have control
over all aspects of this category. If you're 22, have had
one credit card for about three minutes, and have never had a car,
student or other type of bank loan, a lower score in this category is
to be understood. As you age and responsibly use the credit you obtain,
this area will improve, until your credit history has reached its
maximum potential, usually at a 40-year credit history. So,
if you got your first credit card as a college freshman, once you hit
about 58 years of age, you'll probably max.
10% = New
Credit
"Do you have a NiftyStore Card? If
you open an account today, you'll get 10% off this
purchase."
Don't do
it!
Applying for and opening new lines of credit,
whether to get a discounted purchase, 0% balance transfers, free miles, or a cash
bonus for signing up, can ding your FICO score in a few
ways. First, obtaining lots of new credit lines shortens your
average length of
credit history. Plus, if you apply for lots of credit in a short
period of time, you may seem like a credit risk because if you have so
much more available credit open to you, you might run wild. (Yes, this does seem
like an opposing argument to the utilization issue of having lots of
credit but using only a small amount. Isn't FICO
fun?)
Three or more credit application/inquiries in the
course of a 30-60 day
period is going to have a small hit on your
score. It's not huge, but it makes sense to apply for credit in a
sensible way, once you've researched the options, and not
spontaneously, to get $3 off a sparkly T-shirt.
It
might be a comfort to know that credit inquiries for car or home loans
over a short period do not adversely impact your FICO score the way
applications for revolving credit will, so it's OK to check
different lenders to get the best mortgage
rates.
10% = Types of
Credit
The credit industry likes to see
that you
have the ability to handle many different types of "good" credit.
Rather than
just revolving (i.e., credit card) debt, they also like to see installment
loan (like mortgages and auto loans) history. Points are often
lost if you have finance company loans, not only because they tend to
have significantly higher interest rates, but because finance companies
are often considered last-chance lenders and because financed purchases
are often leveraged against second mortgages or home
equity.
See? Out of 100%, not even 1% of your FICO score is determined by how fabulous those shoes you bought on sale were.
Given all this, you can see
why it's important to keep on top of the paper representing your
plastic:
Be responsible with your payments. Read statements carefully--check due dates and make sure you're not utilizing too much of your available credit. Pay bills on time, or preferably early, and scrutinize statements to make sure all payments have been properly credited. Call to correct errors quickly.
Obtain and monitor your credit credit reports by using AnnualCreditReport.com to verify the accuracy of information and to make sure you're not the victim of any FICO-shredding identity theft. (Avoid imitators like the "free" credit guys, the ones with the great commercial jingles and pirate hats.) One report from each reporting bureau is free, but expect to pay about $8 for your FICO score.
Pursue new lines of credit thoughtfully. Research the best interest rates available at sites like BankRate.com or CardRatings.com.
Organize your financial records so that you can always check your revolving credit or installment loan agreements and payment history quickly and easily.
posted on: 8/18/2009 10:30:00 AM by Julie Bestry
category: Paper
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Paper Doll, Tackling The Stacks And Piles
by Julie Bestry
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Julie Bestry, President of Best Results Organizing in Chattanooga, TN, is a Certified Professional Organizer®, speaker and author. Julie helps overwhelmed individuals and businesses save time and money, reduce stress and increase productivity through new organizational skills and systems.
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