Your FICO Score-Mystery no More!

 

Is your FICO score a mystery to you? Don’t feel bad, most American consumers don’t know their FICO score much less how it is determined. Generally, your FICO score can vary from 300 at the lowest to a high of 900. People ask me, “Hey, Credit Union Guy, what’s a good credit score?” Today, a good score would be in the neighborhood of 740. At this level you can access good rates on car loans, home financing, and credit cards. Go below 740 and you may find yourself paying higher rates of interest on your loans and credit cards.

“What is a FICO?” FICO is an acronym for the Fair Isaac Company; the company that invented the calculations that result in a measurement of credit risk. The score is determined by an algorithm. In a sense, it is a highly complex algebra problem that takes into account your payment history, the ratio of your loan and card balances vs. your available balances, the length of your credit history, your credit request inquiries and the types of credit you are managing. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac.

“Why does the FICO score exist?” In the old days of lending, loan managers looked at the physical credit report for a person and made a judgment call on the risk involved with making a loan to that person. Back then, two loan underwriters might look at the same report and have very different opinions on the applicant’s payment history. Credit Scoring took the judgment call out of the process. A person either scored well or they didn’t. Another reason for FICO score is volume. As our population grew and more people started using banks and credit unions, the loan volume increased significantly. In order to speed the loan process, the FICO score was used. Loan processors can input a minimum of data and get a score for a credit decision rather than reviewing the entire credit report.

Here is an approximate breakdown of how it is determined:

·   35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

·   30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have that have maxed out lines, the lower your score will be. The rule of thumb is to keep your card balances at 30% or less of their limits.

·   15 percent of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

·   10 percent of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are the worse for your credit score. FICO scores only count inquiries from the past year.

·   10 percent of the score is based on the types of credit you have. The number of loans and available credit from credit cards you have makes a difference; installment loans vs. revolving lines of credit. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the credit decision.

Questions? Ask the Meriwest Credit Union Guy at gmeyer@meriwest.com.

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The next Meriwest Credit Union Financial Education Workshop will be our Reality Based Budgets Workshop for teens and college students on Wednesday, Nov. 28th at our Monta Loma Financial Center in Mountain View. This workshop takes through a post college money management simulation where they are given a salary, rent, car payments, and other bills and build their living budget. 

Our Monta Loma Financial Center is located at the corner of Rengstorff and Middlefield  Road in the Monta Loma Shopping Center. The program begins at 6pm. We hope you can join us. Please RSVP at our Events Link.

 

Pay a Collection Fast and Put it in your Past!

  If collection agencies can buy my debt at a discount, can I pay it at a discount? Yes, often you can pay it at a discount but it depends on the age of the debt being collected. New collections are not typically discounted as they are being collected by internal collection departments or a business is using a collection agency as a vendor to collect for them. The collection is discounted when that debt ages and gets sold to an outside agency for collection.

 Contact the collection agency and test the waters of negotiation with them. Depending on how old your debt is, they may be willing to give you a significant discount. Often debt that is two years old or more is purchased from businesses and other collection agencies at 50 cents or less on the dollar. A $500 debt may be settled for half or less.

In your negotiation, make sure they will show your debt as paid or settled for a lesser amount. Either of these is preferable to an open and unpaid collection on your credit. Open collections will be a drag on your credit score for seven years. The “point cost” on your score will remain basically the same from day one to the last day of the seven years. Paying the collection changes the debt from open/unpaid to closed/paid. Paying an open collection has an immediate positive affect on your credit score. It will bump up right away and as it gets further and further in your past your score will improve with each passing year provided you don’t incur any further bad debt.

If you agree to an amount and how your collection will be listed on your credit report, the collection agency will want payment NOW and you should be prepared to cut them a check within a day or two. But, before you write the check, GET IT IN WRITING FROM THE AGENCY! Get the mutual agreement the collection agency made faxed to you, emailed to you, or snail mailed to you. Make a copy of the agreement and file the original. Attach your check to the agreement copy and you now have a contract with the collection agency.

Word to the wise: Never send a collection agency a check before you get your agreement in writing. A member of Meriwest Credit Union was in one of my workshops not long ago and complained about a major U.S. financial company. It is the sort of company that everyone believes is one of the most honest and forthright businesses in our nation. He received a call from them for a debt of $2,400 he had built up on his card. These had been business related expenses but the business had gone under in the recession and he was not going to be reimbursed for them. The financial company called him and said that if he paid $1,200 they would show his debt as paid. He mailed the check. The next month, they called him and asked when he would mail the other half of what he owed. He said the guy last month said his debt would show as paid. The fellow at the collection department asked, “Did you get that in writing?” Always get it in writing!

Free Financial Education Class: Real World Budgeting for Teens
Wednesday, June 13, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 

Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 

 

 

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