Getting your credit score just got easier
-- and here's how you can improve it
By Pat Curry • Bankrate.com

April 14, 2000 -- UPDATED May 9, 2001: See new story.

It used to be that you needed to work in the credit industry to get access to your credit score. Either that, or be on good enough terms with your banker for him to share the magic number with you.

All that changed in February when E-Loan announced that it would give a consumer his credit score just for filling out a loan profile. There is no requirement to apply for a loan, and no fee for the service -- just log on and answer a few questions about the kinds of credit information that would be useful to you. Then, fill in your name, your Social Security number, your address, and the first six digits of any credit card account or installment loan you have. Within a few hours, you have the same number that lenders use to determine just how fast they'll say yes to your loan application.

E-Loan president and COO Joe Kennedy cites a primary goal of helping consumers manage debt as the reason for offering the score. You can't manage your debt, he says, without all the information about your credit rating.

"The FICO score is the single best summary score of one's credit worthiness," he says. "We developed and implemented the concept that we'd offer it for free as part of an overall strategy."

The number is often called a FICO score, for Fair, Isaac and Co., the California-based company that developed the system upon which it is based.

The score is supposed to distill all the information in your credit report, plus other factors such as your age (which is legal for scoring, according to the transcripts from last summer's Federal Trade Commission public forum on credit scoring), your income, whether you own or rent a house, how long you've lived there, and how long you've been in your current job.

It's designed to give lenders a fast, accurate prediction of the risk involved in giving you a loan. In the FTC forum, lenders attested to the score's value in streamlining the underwriting process and creating more opportunities for consumers to get mortgages.

The range is from the 300s to about 900, with the vast majority of folks falling in the 600s and 700s.

The Freddie Mac rankings
By Freddie Mac standards, borrowers with FICO scores above 660 are "likely to have an acceptable credit reputation" and their loan files need only a basic review. The credit risk is "uncertain" for those with scores between 620 and 660, with a thorough review of the borrower's entire credit history. A score below 620 indicates "high risk" with an unacceptable credit reputation that could make traditional financing difficult to obtain.

"Most very good FICO scores come in the mid-700s," explains Michael Feldman, a co-founder of MortgageIT.com. "You'll see standard pricing, assuming a FICO score above 680. A score above 720, the pricing gets better. If you get above 750 -- with some lenders in some cases -- you'd see another improvement in the points. On the average $200,000 (home purchase), it can mean up to $1,000 to a consumer. It's real money."

On E-Loan, the score comes with a lengthy list on what goes into creating the three-digit number that can make or break your access to the best and fastest mortgages. It also tells you some things you can do to make that number as high as possible.

So what to do with this gold nugget? Mortgage experts say you can use it to improve your creditworthiness and negotiate for the best possible terms.

"These are very intimidating transactions," says Eric Cunliffe, president and CEO of HomeSpace Inc., a Colorado company that provides consumers with "advocates" to help them manage the home-buying or refinancing process. "A mortgage is probably the single biggest transaction most people make in their lives. The traditional approach -- no one will tell me where I stand -- only exacerbates the process ... If you have very good or excellent credit, you know you should be qualifying for the best rate available. If an unscrupulous person is trying to pack in a little on the interest, (the score) would be good information to have."

That won't happen, though, if the first time you look at your score is when you have the contract for your dream house in your hands and the clock to closing is already ticking.

"The problem is that lenders grade mortgages on a FICO score," Feldman says. "At the point a lender is doing that, you can't change it ... If you do it three to six months ahead of time, then you have ample time."

Given the competition in the field, just about any mortgage broker will be happy to run a credit report for you -- even if you're not planning to buy a house for a year -- to get you pre-qualified.

What to look for
The kinds of things you'll be looking for are late payments and old credit cards you don't use that you never closed out or, most importantly, incorrect information on your credit report.

"You're guilty until proven innocent in the world of FICOs," Feldman says. "It's not always your fault, and even if it is, usually there's a very good explanation. Once you're in the mortgage process, you can't get it removed. You have to explain it to the bank underwriter. If you can't prove it, it results in a lower score, a higher rate, or a decline."

Cunliffe says the amount of bad information in credit reports and the difficulty involved in correcting it is the most compelling reason to give consumers access to their scores.

"You can almost guarantee that most people's reports have inaccurate information," he says. "We're driving toward a tool that, in effect, is not a valid number. Half of our life is spent cleaning up problems on the credit reports. You can request and request and request until your arms fall off."

Cleaning up your credit report
The general guidelines for cleaning up your credit report, Feldman says, include paying your bills on time, limiting the amount of outstanding credit, and resolving outstanding bills.

"I see this all the time," Feldman says. " A person has a $100 doctor bill and they say, 'I'm not paying it out of principle.' I say, 'Throw your principles out the window, it's going to cost you thousands on your mortgage.' "

Limiting the amount of outstanding credit is important even if you've never been charged a late fee, says Victor Benoun, a mortgage broker and author of the book, Your Castle, No Hassle.

"We think if we pay all our bills we should have perfect credit," he says. "That's not always the case. Say you have 10 credit cards and they all have credit of $5,000," he says. "If you have the maximum on all of them, even if you pay them all perfectly, you'll have a lower score than someone with lower balances or fewer cards."

That's not always easy, Benoun admits, in a market in which consumers are encouraged to use credit for even things such as gas and groceries. If you're shopping for a mortgage, though, how you handle your money makes a real difference in the kind of loan package you can qualify for.

"Every day you look at the television, you're encouraged to charge," he says. "Buy now, don't pay until 2001. That's going to show up as unpaid debt. Right now, the IRS is saying you can charge your tax return payment. If you're doing a lot of that, it's going to show up on your credit report. It will have an impact."

Pat Curry is a freelance writer based in Georgia