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Financial Literacy - Credit scores
Craig Watts
This FICO expert offers tips for improving credit scores and clears up some common misconceptions.
Credit scoring, demystified

Interview: Craig Watts

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
Protecting your score
Checking score
Credit score changes
How often should a person check their credit score?

It's a great idea to check your FICO scores several months before you apply for any large loan such as a car loan, a mortgage or a mortgage refinancing, a private student loan or a personal loan. Most lenders in the U.S. are using FICO scores to help make those yes-or-no decisions and also to help determine the interest rate that they're going to offer you. Knowing your score far enough in advance to improve it if necessary, is a key to attracting the kind of interest rate you're hoping to receive. Our recommendation is six months, but even two or three months in advance of applying for the loan is still going to be enlightening and possibly useful.

For general maintenance purposes, it's a good idea to check your score at least once a year. If your score changes significantly, it could be an indication that something is not right. If you haven't changed your credit behavior but your score changes significantly, it could indicate that information has crept into your credit report at that credit bureau, which is inaccurate. It could even be an indicator of possible identity theft if someone else is using your identity to apply for credit and then not paying those bills. Before the bill collectors get to you, you may see your score drop when creditors report 30-day late payments, 60-day late payments, collection accounts and so on to the credit bureaus. So, just as far as routine maintenance, once a year would be a good idea.

What is the lag time between when a change posts to a credit report and the change in the actual score?

It starts with the creditor reporting your payment or account change to the credit bureaus. Typically, creditors report your data to the bureaus in a cycle unrelated to their billing cycle. Obviously, when you make a payment on an account it's immediately reflected in your account balance. At some point over the next 30 days, the creditor will report your balance to the credit bureaus.

What your "balance" is can be confusing. Many people think that if they pay off their balance each month, then they will automatically have a zero balance for that account on their credit report. Not so.

The balance that the creditor reports to the credit bureaus is  going to be whatever amount they last billed you in the last monthly billing cycle. So, to keep your credit score high you want to keep low balances on your revolving accounts. If you use three-fourths of your credit limit on a credit card, and then pay it down to zero as soon as you get the bill, very likely the credit report will show your balance being at 75 percent of your credit limit. That's quite high and will probably hurt your credit score to some degree.

And, when exactly over the 30-day period a creditor will report your balance to the credit bureaus is hard to say. I suppose the only way to really know that would be to check your credit report every day for 30 days and when the balance changed, you'd know that's when this creditor is reporting to that bureau.

Once the creditor reports the data to the bureaus, the bureaus typically post it reasonably quickly to your credit file and as soon as it's in the credit file, then it's available to the next calculation of your FICO score. So each score is calculated based on the information in the credit report at that moment in time. It's based on a snapshot of your credit data.

So, it can happen in a matter of days that your payment is suddenly reflected on your credit report, or there can be a lag of 30 days or more. That's another reason to check your score well in advance of applying for a large loan because it gives you more time to do things like pay down large credit card balances. Then if you stop using those cards for a while, your balances on your credit report will be lower, helping your score.

-- Posted: June 18, 2007
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