Friday, February 29, 2008

Size Matters

The size of your credit score, that is :)

I was doing some research on FICO scores for work yesterday, and I realised that it was probably time for my own free credit report, as required by federal law (the for free part). You may get lots of offers for your free credit report, but they're usually companies baiting you to add on fee-only services like your actual credit score, credit monitoring services, etc.. is the site that meets the federal requirement of allowing you to see your credit report (for free once every 12 months) from the three major consumer credit reporting companies (credit bureaus); Equifax, Experian, and TransUnion. It is essential that everyone, without exception, knows what is on his/her credit report.

What is a credit report? A credit report is a detailed record of your current and past credit history. It will list creditors by name and address, time periods, how often you were late with payments (when and how much), your employment history, etc.. You are NOT the credit bureau's numero uno customer, the lenders are. Lenders pay these guys to track you and tell them what kind of risk you are, and your terms will be based largely on this info; ie your credit limit, your interest rate, whether you get a mortgage or not and how much, etc.. Identity Theft Resource Center has some great info on your credit report and how to read it, and I urge you to check it out when you get your credit report.

What is the difference between my credit report and credit score? Your credit report is just a report, your credit score is a three digit numerical score. So the credit reporting company (credit bureau) is one company that gathers your info in a credit report. Then your credit score is another company, most famously Fair Isaac and Company, the ubiquitous FICO. Over 90% of lenders use the FICO score (even though they're feeling the heat post sub-prime mortgage meltdown). However, the credit bureaus just this year made their own, the Vantage Score, because they want $$, too, after all.

So this is how it breaks down; lenders, let's say your credit card, have contracts with usually just one credit bureau, though they report to all three. So Billie Dollar wants to open a credit card, and Bank of Brawn pays TransUnion to check up on Ms. Dollar. TransUnion gives them her report and her score, either their own VantageScore, or in all probability Ms. Dollar's FICO score or both, who gets paid to calculate in some secret formula based on a (secret) mathematically complicated FICO scoring model. We know more about Knights Templar than we do FICO formula, but there you have it. Why do I bore you with these details? Because your FICO score is money, honey, and at no point is anyone held accountable for accuracy. They're too busy profiting off each other, and to a smaller extent, you. In other words, you have to check your credit report for errors, because nobody else is doing it for you, and a heck of a lot is riding on it, not the least of which is you are who they say you are.

And my score? My FICO score through Equifax is 778 (Excellent), 16 points higher than last year. Their suggestion to make it better? Get installment debt and real estate(?!). And this is the part where you have to step back and consider; when does a higher credit score require poorer financial planning? For example, I am perfectly content not having the very tippy top tier of creditworthiness. I am happier than a free range pig in $hit having paid off my student loan, I prefer to drive a car that has no loan, I'm lucky enough to be with someone who bought her apartment before she met me (commonly known as her life pre-PiggyBankBlues, a dark and dingy stain on history), and I can see no reason (let alone extra money) to buy a house or get a car loan just to improve my credit score. And, hello, what about my land in Arizona???

1 comment:

Ms. M&P said...

Great post! This is a nice overview ;)

I was just reading today somewhere (I think it was kiplinger's) that said that you're in the top tier of credit if you're 760 or above. They said that once you get to 760, the benefits of a better score are pretty negligible. So, if that was right, then getting an installment loan would definitely not be worth it.

My credit score was 705 the last I checked. They told me I needed a longer credit history and more diverse credit--they suggested a car loan. The only thing I can do to lengthen my credit is to live longer but I'm definitely not buying a car just to up my score! I guess you can call me a credit score underachiever...