WHAT IS YOUR CREDIT SCORE, AND WHY SHOULD YOU CARE?

By Jack Etzel

Recently, we’ve been hearing a lot about the phrase “credit score. ” You may have heard that it ranges from 350 to 850. But what does that mean? We thought it was time to find out what a credit score is, and how important it is to each of us. For the answers North Hills Monthly Magazine turned to Kevin C. Krul, a first vice-president and financial advisor in the Wexford office of the securities and brokerage firm of Hefren-Tillotson. He specializes in retirement planning, which includes 401(K) and lump sum distribution planning. Through Hefren-Tillotson’s MASTERPLAN he evaluates his clients’ goals and objectives before recommending an investment strategy specifically designed to their financial needs.

North Hills Monthly Magazine: Kevin, let’s start simply. What exactly is a credit score?

Kevin C. Krul: A credit score is the number that determines your credit risk at a particular point in time. This score is used by lenders to evaluate your credit risk: in other words, the probability of paying back a debt in a timely fashion. The most commonly used credit score is the Fair Issac Corporation, or FICO. Lenders receive your FICO score from three different agencies: Equifax, Experian and Trans Union. These scores are based on information in your consumer credit report. Although there are no concrete guidelines for lenders to offer credit, usually scores above 720 are considered above average.

NHMM: So, I understand that whether we were aware of it or not, we’ve had one all along. Just how important is a high score, or as you say, at least, one above average?

Krul: Your credit score influences all of the credit that is available to you, from purchasing a home, to buying a car, even to opening accounts through public utilities. Your credit score affects all of these decisions regarding you borrowing money or increasing your monthly payment. Most of the car manufacturers offer incentives to low risk borrowers. Many of the deals with zero percent financing will only apply when your FICO score is above 720. Did you know that if your credit score is below average, your public utility companies may require you to put up a security deposit? Also if you don’t own a home and are thinking of renting, many landlords or real estate agencies will run a credit score which will determine the amount of security deposit required for occupancy. Having a low credit score can even impact your car or homeowners insurance.

NHMM: What role do credit cards play? Is having a lot of them a good thing or a bad thing?

Krul: This can be a double-edged sword. Having a long history of satisfactory payments with lenders is a good thing, but having too many cards can lead to charging more and falling into the credit trap. Having credit accounts and owing money on them does not necessarily mean that you are a high-risk borrower. But, when a high percentage of your available credit has already been used, it may indicate that you have been overextended and are likely to make payments late or not at all. Should you close old accounts to raise your score? Actually, it may lower your FICO score.

NHMM: How’s that?

Krul: First, any late payments with old accounts do not go away because you close an account. Secondly, longer established accounts show you have a proven history of managing credit. Finally, having available credit that you do not use will not lower your score. There may be other reasons to close accounts, but don’t do it simply to attempt to raise your score. Consumer reporting agencies love to see a long history of paying your monthly payments on time. In some cases, having a small balance without missing a payment shows you are responsible and may have a slightly better impact on your score than carrying no balance at all. It is important to understand that all of your outstanding debt carries a finance charge, so each month a balance is not paid off in full, you are actually paying finance charges to carry the debt to the next month. So, a simple charge that you make today and pay off over the next twelve months could cost you upwards of 15% of the original amount. Many people get into a situation in which they can only afford to pay the minimum monthly payment. An item you charge today can end up taking four or five years to pay off.

NHMM: Ouch! Any last words?

Krul: Yes. Remember that credit is a privilege. We all start off with a perfect FICO score. It is up to us to keep our score as high as possible by being responsible, paying our obligations on time and never living above our means. FICO scores ignore race, color, religion, national origin, sex, marital status and age. It also ignores where you live and the job you have. It only measures the likelihood of you paying your debt obligations back and on time.

A good FICO score can help to get better offers, lower your current interest rates, speed up credit approval, and finally, save you money.