The world of credit: From conforming to preferred: Getting a credit score from 620 to 720John J. HudockJohn Hudock, Credit repair, credit restoration Although maintaining records on credit has been around for more than 100 years, it was not until Fair Isaac and Company (FICO) began offering their scoring models to the repositories that credit scores gained the importance they have today. In 1989, FICO installed the first general-purpose FICO scoring system at Equifax named Beacon. Then in 1991, FICO began a risk scoring system at all three national credit bureausBeacon at Equifax, Empirica at TransUnion and the Experian/Fair Isaac model at Experian. FICO uses a segmented scoring systema closely guarded proprietary factoring method for scoring credit reports. Very few individuals, even key employees at FICO, understand the exact method for deductions. The most accepted credit scoring range is between a low of 350 and a high of 850. I guess there must be some reason why we dont go from 1-100, 1-1000 or even 100-1000, but I havent been able to figure that out. One example that I use is to compare your credit score to a grade that you would receive in school. There are many factors that are taken into consideration when determining your grade. Then, at the end of each year, you receive a composite grade relating to all of your school habits. This is the same thing with your credit score. It is a grade relating to your credit habits. It is a number that compares you to a scoring model. It is supposed to indicate your credit risk, your ability to repay a loan. This number helps the creditor identify the level of risk they may be taking if they agree to extend you the credit. While the same end result can come through reviewing the actual credit report, which some lenders still do, the credit score is quicker and less subjective. The system generally removes points based on risk factors established by FICO, and the resulting score is compared to a model with similar profiles. This is your creditworthinesshow lenders determine the likelihood that someone will repay a loan and make payments on time. It is this three-digit number that makes it possible to get an instant review of your credit habits. Until recently, credit scores were not available to consumers. Only lenders and other businesses that used the score had access to them. FICO had determined that the scores would confuse consumers and did not want to share the scoring method because of the possibility of individuals manipulating their credit score. In 2001, two court cases in California, pressure from the U.S. Congress, industry and consumer groups made your credit scores available to you. A lender is now required to give you access to your score when you apply for a loan. A credit score below 620 is usually considered sub-prime, where the risk factors add points to the interest rate. You cannot get unsecured credit cards with scores below 640. Most conforming banks will not be able to extend you any type of credit. You would have to go to a sub-prime lender for any mortgage or auto loan, or to a secured credit card bank for a credit card. Another consideration for credit scores of 620 or less is that your loan to value (LTV) on a mortgage would be around 80 percent (a 20 percent down payment) for you to receive a decent interest rate. Generally, lenders require private mortgage insurance on all mortgages over the 80 percent LTV. This adds continual monthly costs to a mortgage until the mortgage balance drops below the 80 percent LTV. Credit scores between 620-640 are considered conforming credit scores. This is the beginning score range that will allow you to get basic credit. If the credit score is 620 or above, you probably do not need any additional trade lines, but you may have to learn to better manage the credit you do have. For example, credit card balances should be kept below 25 percent of the high limit and if you need any capital, dont use your credit card; use a home equity loan. You should also keep an eye on the debt ratio on any revolving accountyou have two choices for improving this ratio: You can pay down your balance, or you can increase your high limit; either of these actions will improve your credit score. There is only about an 80-100 point difference between the 620-640 credit score and the 720 credit score. Balances in excess of 75 percent on one or two of your revolving accounts can be the cause of that difference. Scores of 720 and above are considered the preferred rate by most banks. This range of score, all things being equal, should give you the lowest interest rate that the lender has available. Unless you are purchasing income-producing propertiesmore than one every six monthsa credit score above 720 is not essential. Depending on the makeup of your credit report, you could lose 30 to 40 points with each purchase. If the bank or lending institution offers you the lowest Internet interest rate when your credit score is 720 or above, why should we be concerned with a higher score? There would probably be less documentation required for the mortgage. Also, if someone is buying investment properties, you must realize the credit score decreases for a period of 90-180 days with each purchase. Therefore, if the score goes down 30 points and you are at 750, it will only go down to 720, which is still high enough to do another purchase. Remember also, that there is 130-point difference between a 720 score and 850 score. This is where derogatory and other blemishes on someones credit will remain until it is taken care of by statutory time limits. Paying off any balances without negotiated settlements does not appear to be a wise suggestion. If the derogatory on any revolving type account is more than two or three years old, remember that paying this account will not remove the derogatory unless the creditor agrees in writing (I suggest you use a fax for the agreement) to remove the derogatory. If they care to make a notation, they could include paid as agreed, because they have a new agreement with you to accept payment for removal of the derogatory. If the creditor will not agree to a settlement negotiation, paying off the balance will change your date of last activity to todays date in lieu of the two- to three-year-old date. It will take that much longer to reach the time statute for removal of the derogatory. Another area of point deduction is months reviewed. There is a high deduction in the early months of an account that only time will take care of. You will get these deductions for 24 months and then a low deduction for up to 60 months. Only time will improve this risk consideration. You must also consider the credit mix. I consider the perfect credit report to consist of three to four bank credit cards, two to three store revolving accounts, a mortgage and an auto loan. You should attempt to conform as nearly as possible to this mix. The next concern would be the number of credit inquiries. I suggest that all my clients exercise their right to opt out. They can call (888) 555-OPTOUT, which will connect them to one location that will stop anyone from accessing their credit reports for unsolicited offers. I further give them their credit scores and suggest they do not give their Social Security number to anyone unless that is the last determination in getting the credit that they wish. During the mortgage process, FICO states that credit inquiries for the proceeding 14 days do not appear on your credit report and that any inquiries for the same type of credit within any 30-day period will only appear as only one inquiry. Although, what I see on credit reports does not bear this out. I personally believe that all legitimate debts should be paid in full to the amount any creditor has extended credit to you. However, it is not fair to pay fees that are not your responsibility. Many times a single 30-day late notation over a three- to five-year period harms your creditworthiness. It could have been any type of error and not a potential reflection of your credit habits. I feel the creditor should take this into consideration and make adjustments to the credit report, especially when there isnt a good reason for you to continue that trade line if re-establishing another revolving credit line will increase your credit score to a higher degree. Since 1999, I have personally viewed more than 10,000 credit reports, and I am still amazed by the intricacies of FICOs scoring system. Since a majority of credit reports that I view are with the intent of improving the credit score, the average credit score that I have seen is 607, and the average number of trade lines is 22. I have never seen a tri-merged credit report that did not have an error. The majority of data is now saying 78 percent of all credit reports have errors. I still would like to see one of the other 22 percent. If you want additional free information on credit, please try my Automatic Response System by sending an e-mail with the word menu in the subject heading to [email protected]. Once you receive the menu, you can choose from the available topics by simply placing the number relative to the topic in the subject field of your e-mail (remember to list only the number and no other wording or quotation marks). John Hudock is president of The International Credit Club and The World of Credit, two companies specializing in credit report problems and scores. He can be reached at (570) 829-5696 or e-mail [email protected]. John invites e-mails on any credit topic. He will answer each one and publish any that will benefit his readers. Please be specific with your questions.