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It’s important to know the details of your credit

By Larry Limpf
Press News Editor
news@presspublications.com

Not maintaining a good credit score can cost you hundreds of dollars on a car loan.

Kris Downey, marketing director at Bay Area Credit Union, offers this hypothetical example for someone seeking a five-year car loan of $18,000:

At an interest rate of 6.7 percent, a borrower with a credit score of 750 would have monthly payments of $354 and pay $3,235 in interest over the 60-month life of the loan. A borrower with a score of 650 would have an interest of 8.1 percent and monthly payments of $366. Total interest would be about $3,952.

The difference: $717.

If you’re like many consumers your knowledge of the regulations covering that piece of plastic in your wallet is limited.

A survey of consumers by the General Accountability Office indicates they were unaware of some of the finer points of credit reporting.

Two-thirds didn’t know their credit history could affect their insurance premiums.
About half didn’t know that information could stay on their credit report for seven to 10 years.
More than half didn’t fully understand their rights in a dispute process or the responsibilities of credit reporting agencies in responding to disputes.
More than 90 percent didn’t know the Federal Trade Commission is the office to contact with a complaint about a credit reporting agency.

The GAO, in a report to Congress in March, 2005, concluded consumers understood the basics of credit reporting but could benefit from some focused educational efforts.

Those efforts could start with the credit score. Only about one third of those surveyed by the GAO knew their scores, which is surprising when you consider that score impacts so much of your life.

From the time you took out a student loan or got your first credit card, you’ve been compiling a credit history that, in addition to income and assets and liabilities, will decide how much you pay for a car loan, mortgage, insurance premiums, and other areas of your personal finances.

Lenders use your credit history and score to determine whether to let you borrow from them and at what level of interest.

A FICO score is the score developed by Fair Isaac & Co. to determine the likelihood borrowers will pay their bills on time.

The scores analyze a borrower’s history, weighing numerous factors such as late payments, the amount of time credit has been established, amount of credit used versus the amount of credit available, employment history, and data on bankruptcies, charge-offs, collections etc.

The FICO scale runs from 300 to 850. If your score is below 600 you’ll likely be considered higher risk for a loan and charged a higher interest rate.

Downey offers another hypothetical example: For someone seeking a $100,000, 15-year mortgage with a FICO score of 750, the interest rate would be about 0.875 percent lower than someone with a score of 650.

If the borrower with a 750 score received an interest rate of 6.25 percent, for example, the monthly principal and interest would be $857.63. Total interest over the 15-year loan would be $54,373.

The borrower with a 650 score would have an interest rate of 7.125 percent, resulting in monthly payments of $906.07. Total interest would be $63,093.

That’s a difference of $8,719.

“In general, scores in the 650 range are considered average while scores below 600 are considered high risk and, if approved, will be charged a significantly higher rate,” says Downey. “If a young person, or anyone, is in financial trouble, they should immediately contact their creditors. Most creditors are willing to work out some type of payment arrangements if asked. Hiding from creditors is never a good idea and guarantees problems with credit scores.”

The FTC offers this advice on maintaining a good score:

Pay your bills on time. Payment history is a significant factor. It’s likely your score could be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
Outstanding debt. Some scoring models evaluate the amount of debt you have compared to your credit limits. If the amount owed is close to your credit limit, that is likely to have a negative effect on your score.
Credit history. Generally, models consider the length of your credit track record. An insufficient history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
New credit. Some scoring models consider whether you have applied for credit recently by looking at “inquiries” on your credit report when you apply for credit. If you have applied for too many accounts recently, that may negatively affect your score. Not all inquiries are counted, however. Those by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not counted.
Too many credit card accounts may have a negative effect on your score. In addition, some models consider the type of credit accounts you have. For example, under some scoring model, loans from finance companies may negatively affect your credit score.

An amendment to the Fair Credit Reporting Act requires each of the major consumer reporting companies to provide you with a free copy of your credit reports, at your request, once every 12 months. Reports can be accessed at www.creditreport.com.

To comment on this story, email mic@presspublications.com.

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