FICO Scores & Credit Reports

Derek's RANT OF THE MONTH, for September 2007 

I suspect this is how most people feel about dealing with their financial affairs: 

 

You do not have to feel that way.  This past Thursday, I pulled my Credit Report and FICO score.  Here’s what I’ve learned from Suze Orman and Clark Howard, my two favorite financial gurus.  The Fair Credit Reporting Act [Fair and Accurate Credit Transactions Act (FACTA) and the Fair Credit Reporting Act (FCRA)] allows credit holders the right to view their credit report for no charge once per calendar year for each of the three credit reporting agencies: Equifax, Experian, and TransUnion.  Rather than get all three reports at the same time each year, a better alternative is to pull one report from a different agency every four months.  Just cycle through the agencies in the same order every four months.  Each agency is similar, yet different; so all three need to be checked.  This will allow less time to lapse between inspections, and allow you to spot a potential problem sooner.  In this day of rampant identity theft, (it has happened to both me and my roommate), one can’t be too careful.  Worth noting is that the correct site to go to is annualcreditreport.com.  There’s a site advertised often on TV called freecreditreport.com.  Right on their homepage is the statement “Consumerinfo.com and Freecreditreport.com are not affiliated with the annual free credit report program.”  They’re snarky, maybe, but I have to commend them for fully disclosing their deception right on the front page, in not-tiny typeface.

So you’ve gone to annualcreditreport.com, now what?  First thing, go to whatever calendar you use, (I like the one on the wall in my office with pictures of kittens), and enter a reminder, four months from now, to check your report and which agency to use.  Back to the report.  You’ll have to answer some personal questions, be sure to use a secure browser and clear your history when you’re done, and I wouldn’t use a public computer for this.  You’ll also be asked some questions about your past credit experiences to prove your identity.  Be aware, some are trick questions for your safety.  I was asked about a loan I had paid off with a company I’d never heard of—the correct answer was “none of the above.”
I won’t go into full in-depth analysis of the credit report.  Just read the entire document, and highlight anything that doesn’t seem correct to you.  If there’s a totally un-recognizable entry, contact the credit-issuer for more information.  Don’t be surprised if there are things you’ve forgotten about.  You may forget, they never do, at least for 81 months in my case.  By law, you are entitled to attach a Consumer Statement to your report, explaining or challenging a negative item.  Contact whichever of the three agencies issued the report for more information on that.

FICO [Fair Isaac Corporation] scores.  Seeing your score is NOT free.  The most frugal price I have found is $7.95 for a one-time look.  Some places will sell you a package allowing you to view your credit report and FICO score unlimitedly for $75/year.  Every person who has credit has one FICO score from each of the three credit reporting agencies.  Each agency has its own criteria and methodology for determining the score, which ranges from a low of 300 to a high of 850.  Who knows why they choose that range?  Your three scores will never be identical, but should be fairly close to each other.  Why is your FICO score important?  It isn’t really, except that  

Your FICO score determines your financial future and success!  

When you apply for a loan, the rate you receive is largely based on your FICO score, likewise with your home, auto, and health insurance premiums.  It is even legal for a company to deny you employment based on your FICO score and credit report!  So PAY YOUR BILLS ON TIME.  Note that income is not a major factor, so don’t use the excuse of being poor to procrastinate checking your score.  Go to myfico.com to find out what positively and negatively impacts your score.

Now back to the juicy stuff.  I paid the $7.95 and my score was near perfect, but not 850.  Being the natural pessimist and over-achiever that I am, I chose to focus on the negative, which I’ll document now.  Here are the three items given for why I didn’t attain a perfect score, and my comments on them:

1) You have recently been seeking credit or other services, as reflected by the number of inquiries posted on your credit file in the last 12 months. 
There is only ONE inquiry on my report.  Last February, I finally got tired of earning >1% on my savings, and opened an account earning 5.36% with an internet-based bank.   Seems wrong to me that opening a Savings Account would impact me negatively, but it is what it is.   This will drop off my report 02/08, so it’s something I need to check on in eight months.  I'll put a note on my kitty calendar.

2) The amount owed on your revolving/charge accounts is too high. 
I have no valid defense for this one.  Yes I bought a MacBook and other “toys” recently.  That’s my pattern.  When I’m working 14 days straight of 12-18 hour days I don’t have time to spend money.  Then when I’m off, I spend it, after expenses and savings of course.  I never spend more than I’ve earned and NEVER carry-over a balance on any credit card, even ones with 0% interest.  Nowhere on my credit report is any mention of my income, so I’m not sure whether or not they know how much I earn.  I suspect they do, but the “Last Reported Employment” they list for me is a job I left in 1998.  My roommate’s report showed only a job he left in 1977!

3) The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high. 
That calculation in my case works out to 6.44%.  I don’t think that’s high.  After I’ve paid my credit card bills, (Macbook, printer, MP3 player, Lightwright4, etc.,) next month, it should be about 1.65%.  Some months, if I’m working a lot, I don’t charge anything, so it would be zero.  Another way I could lower this ratio would be to open more credit card accounts, but the credit inquiries would negatively impact me, so that’s not a viable option, refer to point #1 .  I’ve decided it’s a conspiracy by the financial services industry to ensure no one receives a perfect FICO score of 850.  When YOU check YOUR report YOURSELF, you are creating an inquiry, which should not ding you, but it may.  My report shows this type of inquiry under the heading of “Inquiries that do not display to companies and do not impact your credit score.” 

I hope you’ve found the above at least informative, if not entertaining.  I’ve set my iCal to remind me to check my report again toward the end of  January 2008.  Maybe I’ll post a follow-up to this then, especially if any circumstances change dramatically.

Now go back and start visiting all the sites I’ve hot-linked.  Have a nice day.