It's easy to become confused about credit scores. Myths abound about to improve a credit score, what goes into a credit score and which credit scores warrant attention.
To put certain misconceptions to rest, we caught up with Fair Isaac's public affairs manager, Craig Watts, whose company invented the FICO score -- the score that most lenders use to assess their applicants' credit risk.
Inside story on credit scores
for improving scores
What should people just starting to build a
credit history do to increase their credit score, and what should they avoid doing?
typical American consumer applies for credit less than twice a year. It's good,
in this case, to be typical when you're just starting out. Open one, or possibly
two accounts, but don't open half a dozen, at least in the first year. Stay within
your means so you don't fall behind in making your payments. And, by all means,
use the credit. If you're a college student and you've opened a credit card for
the first time to help pay for those incidentals during the school year, by all
means, use the credit card but try to use it moderately. My advice is: take it
slow, stay within your means, use the credit and keep your account balances low.
For those just starting out, is it a good idea to use credit "sparingly" or every
interested in getting a great credit score should use their credit sparingly.
By sparingly, I mean using it at least once every several months. If you don't
use it at least that often, the creditor is likely to put your account in the
inactive file or close it outright. That's not going to help your score. You want
to maintain an active account with the best standing that that creditor offers.
What tips do you have for someone trying to
rebuild their credit?
get current with any accounts that are in arrears and stay current. That
might mean contacting your lenders, explaining why you're four months late. In
many cases, creditors will negotiate with you for a longer payment period because
they really want their money. If they think they'll have a better chance of getting
paid by negotiating better terms, they'll do that. So, get current, stay current
with your creditors -- that will immediately start helping your score.
|Rebuild your credit|
one credit account.|
||Use it. |
||Pay on time.|
||Keep balance low.|
Open one new credit account and keep the balance low. If you've gone
through a bankruptcy or had a similarly extreme situation, you want to get back
on the horse again, which means open one credit account -- and likely, it's going
to have a low credit limit or a high interest rate, but open it anyway because
you need to re-establish a good track record. You need to show future creditors
that you have in fact, still got good credit habits and you are a responsible
consumer. Creditors will only trust that when they see it in your credit report
history. Do this immediately and in a surprisingly short amount of time you can
improve a bad score by consistently demonstrating good credit practices. "Surprisingly
short" to me means two to three years. But it means getting current with your
creditors and never being late again. Keeping your account balances low and only
taking on new credit sparingly.
You'd think you should
stay away from credit for awhile until you've learned your lesson or until the
irons have cooled a little bit, so they don't burn you. But in this case, the
sooner you can get back into the game of managing credit and demonstrating good
habits, the sooner you're going to begin restoring your credit reputation.
What advice do you have for people who have
a great credit score? What types of actions could ding their score?
The one that surprises people the most, especially if they have a terrific credit
score, is the impact that a single report from a creditor of a payment delinquency
can have on a person's score. We have an adage here, "The higher a score, the
farther it can fall." And in fact, that's true. The higher your credit score,
if suddenly on your credit report a collection account appears or you're reported
as being 30-days late paying a creditor, your score can drop by 100 points or
more overnight. That's not necessarily going to happen to somebody who has a low
score because their score doesn't have as far to fall.
the recommendation for somebody with a high score is keep doing what you've been
doing. The people with the very highest FICO scores tend to be people who have
few credit accounts, they are never late with payments, they use the accounts
very sparingly and they pay off the balance every month. They are almost immune
to offers from lenders for enticement rates or refinance offers because they're
very sparing in the way they approach the whole credit industry. So, they're not
very interesting stories, but to lenders, they're like gold because they're the
most trusted of borrowers. It's frustrating for lenders because they're also one
of the hardest groups to entice into applying for a new card or a new loan.
Any last words of wisdom for those looking
to improve their credit score?
Be thoughtful, rather than impulsive. That's the path to wisdom is so many parts
of life, and it's certainly the path to getting a great credit rating and a good
credit reputation. The kind of impulse opportunities that we all receive -- zero
percent introductory rate on a credit card, or 10 percent off on this purchase
at a department store checkout counter, if we just take out that department store's
credit card -- if we would resist those impulses, and instead thoughtfully consider
how we manage credit before we use it, as a nation we would have much better credit
ratings, and frankly, we'd probably be happier with our money.