"Take a quiz: Score your understanding of credit score"

By Lew Sichelman
United Feature Syndicate
Published October 16, 2005

What's the score with credit scores?

Most people don't have a clue, according to the second annual survey commissioned by the Consumer Federation of America (CFA) and credit card company Providian Financial. And that sad fact can be costly, especially when it comes to financing a house.

Someone applying for a $150,000, 30-year, fixed-rate mortgage would be charged 7 percent if his credit score is below 620, if they qualify, according to the Web site, www.myFICO.com. But if the same borrower's score is above 760 and all else is equal, the rate will drop more than 1.5 points, to 5.42 percent.

The difference is perhaps even more meaningful when you think of it as cash in your pocket: At 7 percent, the monthly payment for principal and interest on a $150,000 loan is $998. But at 5.42 percent, it's $844. That's a savings of $154 a month, or $1,848 a year.

Credit scores are not the same as credit reports. A credit report basically represents your financial history over time, while a credit score is a snapshot of your credit profile at a particular point in time. Scores are not stored in your file. Rather, they are generated on request and can change from day to day, depending on the latest information in your file.

Much like the infamous bell curve, which grades students according to how well the class does as a whole, a credit score measures the relative risk a potential borrower represents as ranked against all others whose profiles are stored within a particular credit bureau's files. And many businesses and creditors -- not just mortgage companies -- use them to determine not only what you'll be charged, but whether your business is wanted at all.

An understanding of credit scores has improved somewhat since the first CFA-Providian study in July 2004. But according to the latest poll, conducted in August on their behalf by the Opinion Research Corp., fewer than one in three people realize that a score measures their risk to the creditor, not their credit knowledge, amount or attitude.

To help consumers better understand credit scores, how they work and how they can be improved, here's a short quiz, based in part on one developed by the Consumer Federation and Los Angeles-based Providian. (The quiz is available online at www.consumerfed.org/score.)

True or false: A married couple has a combined credit score.

False. You cannot improve your credit by marrying someone with better credit than your own. Scores reflect your own credit history, no one else's. And when husband and wife apply for a mortgage, both their scores are checked by the lender. If one spouse's score is significantly lower than the other's, the rate quoted by the lender could be higher.

True or false: Individuals have only one credit score.

False again. There are many types of scores, some of which have been developed for particular businesses, including the insurance and automobile sectors. Even utilities and cell phone companies are using credit scoring.

While all of the various models were developed by Fair, Isaac Corp., each one produces a different score. Consequently, if you are applying for financing, you'll want the classic FICO (stands for Fair Issac) scoring model created exclusively for the mortgage market.

Which of the following factors influence your score: age, marital status, education, income, amount of debt related to income, whether you have maxed out your accounts?

Personal characteristics don't count, so if you picked any of the first three, you answered incorrectly. Mainly, your score reflects whether you pay on time and how well you use the credit granted to you.

The most effective step you can take to improve your score is to consistently make timely payments. If you've been late in the past, get current and stay current, and, eventually, those previously tardy payments will count less and less against you.

Another important step: Don't max out your credit cards. It is better to pay off debt than to move it around from one card to another. But it is better yet to pay your cards down to 30 percent of the credit available to you and keep them below that level.

If your score is below a certain level, either you'll be forced to pay a higher rate or you'll be denied altogether. What is that level?

Scores range from a high of 850 to a low of 300. Typically, borrowers with scores above 760 are charged the lowest rates, and those between 700 and 760 are charged a little more.

But the odds that someone is a "bad payer" -- a consumer with at least one payment that was 90 days late in his file -- increase markedly below 700, so people with scores below that benchmark usually pay higher, subprime rates, if they are approved at all.

People have the right to a free credit report once a year. Does that same privilege extend to credit scores?

Not necessarily. You have a right to see your score, as well as a list of reasons why your score was not as high as it could be, when you apply for a mortgage. Otherwise, you'll have to pay a small fee.

Even if you don't want or need to know your credit score now, it is wise to keep tabs on your credit file so you can make sure it is error-free when the time comes to apply for financing. It can take months to have mistakes removed from your records, so the sooner you act to expunge them, the better.

For information about obtaining a free copy of your credit report, visit www.annualcreditreport.com. If you have already obtained your free annual report, you can buy reports and scores from all three bureaus for $44.85 at www.myFICO.com. Or, you can go directly to each bureau: TransUnion (www.transunion.com), Experian (www.experian.com) and Equifax (www.equifax.com).

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You may write to Lew Sichelman c/o Chicago Tribune, Real Estate, 435 N. Michigan Ave., 4th floor, Chicago, IL 60611. Or e-mail him at realestate@tribune.com. Sorry, he cannot make personal replies.