2010-07-16 / Columnists

Notes On Consumer Affairs

Commentary By Assemblywoman Audrey Pheffer

AUDREY PHEFFER AUDREY PHEFFER Financial experts and the media routinely remind us of the importance of maintaining a high credit score. In general, the higher an individual’s credit score, the easier it is to obtain loans and good repayment terms. Have you ever wondered, though, what constitutes a good credit score and how you can achieve one?

A credit score is a number that lenders assign to potential borrowers in order to easily represent an individual’s creditworthiness. There are numerous credit-scoring models. In the United States, the most widely used is the FICO score developed by the Fair Isaac Corporation. FICO scores range from 300 to 850. The higher the number, the better your credit score is.

Your credit score is derived from information maintained in your credit reports. Numerous factors go into computing a credit score. While each scoring model is different, they usually have several factors in common. All the factors are considered; no one piece of information will determine a credit score. In addition, in most scoring models, the importance of any one factor varies from individual to individual and can change as a person’s credit report changes.

One key factor is your payment history, which includes information about the types of accounts you may have, including revolving debt, such as credit cards, and installment loans, such as mortgages and auto loans. Late payments will lower your score, so it is important to make sure your bills are paid in a timely fashion. If you are behind on making payments, you should try to pay off any outstanding balance as soon as possible, as becoming current on your payments can increase your credit score over time.

The total amount you currently owe will also impact your credit score. Credit score models look at your current debt in relation to the total amount of credit available to you. Financial experts recommend that you keep your debt under thirty percent of your total available credit. For example, if you have three credit cards, each with a $5,000 limit, the amount of available credit is $15,000, but at any given time, the total amount of debt from all your loans should be no more than $5,000. Experts also advise against closing too many unused accounts at once, as this will lower your credit limit without decreasing your debt.

The length of your credit history is also important. Related to this are two other factors, specifically how many different types of accounts and any new accounts you have. Lenders prefer consumers who have shown over a period of several years that they can responsibly manage a mix of revolving debt and installment loans. Be careful about opening new accounts. New accounts can lower your credit score in the short term, but if you make timely payments of these accounts that fact can increase your score in the long term.

You should avoid switching credit cards excessively or applying for several new accounts and loans within a short time period. Before issuing loans, lenders will check your credit score, and too many inquiries within a short time can lower your score. This can make it difficult to comparison shop for mortgage and auto loans. In order to address this issue, I support, and the Committee recently reported, A.9383. This bill would incorporate an industry standard that restricts how mortgage and auto lenders may consider multiple inquiries resulting from the consumer shopping around for the best rate.

Because your credit score is based on the information in your credit reports, it is important to make sure those reports are accurate. Under federal law, you are entitled to a free copy of your credit report from each of the three major national credit reporting agencies (Experian, Equifax, and TransUnion) once a year. To obtain your copies, visit www.annualcreditreport. com or call toll-free 1-877-322- 8228. For more information on credit scores and strategies to improve your score, you can contact the Federal Trade Commission by visiting www.ftc.gov or calling 1-800-FTCHELP.

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