Many don't understand all-important credit scores

Foggy FICO

- Your FICO score refers to your credit rating. Though there are many credit scores, FICO is the most commonly known.

- They range from 300-850. The higher, the better.

- The median FICO score in the U.S. is 723.

- Most lenders base approval on them.

- Higher scores mean lower interest rates for borrowers.


FICO effect

Borrowers can get lower interest rates if they have high FICO scores. For example, with a $300,000, 30-year fixed-rate mortgage loan:

FICO score APR* Monthly payment

760-850 4.523% $1,524

700-759 4.745% $1,564

680-699 4.922% $1,596

660-679 5.136% $1,635

640-659 5.566% $1,716

620-639 6.112% $1,820

* Annual percentage rate

Source: Informa Research Services;

Tips for correcting mistakes

- Obtain a credit report. You can do this once a year for free from each of the credit bureaus. Go to

- To ensure mistakes get corrected as quickly as possible, contact both the credit bureau and organization that provided the information to the bureau. Both of these parties are responsible for correcting inaccurate or incomplete information in your report under the Fair Credit Reporting Act.

- First, tell the credit bureau in writing what information you believe is inaccurate. The credit bureau must investigate the item in question — usually within 30 days — unless it considers your dispute frivolous. Include copies (not originals) of documents that support your position. In addition to providing your complete name and address, your letter should: Clearly identify each item in your report you dispute; state the facts and explain why you dispute the information; and request deletion or correction.




In many states, you will be eligible to receive a free credit report directly from the credit bureau once a dispute has been registered in order to verify the updated information. Contact the appropriate credit bureau to see if you qualify for this service.


There may be more to you than your credit score, but that's where lenders typically start when deciding if they want to loan you money.

Credit scores are used in a variety of ways to see if borrowers are a good risk and to determine what type of interest rates they receive. That includes credit cards, car loans, mortgages and even renting an apartment.

There are dozens of credit scores used by different companies and lenders.

However, all those calculations start at the same point — with your credit history from a credit reporting agency.

A lot of the basics for how people damage or improve their credit ratings remain the same.

Knowing your score is increasingly important. The most commonly known score is FICO, which was developed by Fair Isaac Corp. The company, now known simply as FICO as of March 10, has a Web site where people can check their scores, which range from 300 to 850.

Traditionally, people visit the site to review their scores when they are about to make a major purchase, such as a home or car, said Barry Paperno, consumer operations manager. That has died down, though there is a lot of activity when people refinance a mortgage.

Also in the past, people with credit problems were buying scores and reports as they tried to rebuild credit, he said.

Now, more people with good credit are concerned about maintaining their credit.

"There's more of a need now to be conscious of your score and what it takes to maintain it for folks with good credit," Paperno said.

Camarillo-based SurePath Financial Solutions, formerly Consumer Credit Counseling Service, helps people concerned about their credit, said Patty Guertler, public relations and education manager and counselor.

"A great number of the consumers we assist ... are consumers who are struggling keeping up with credit card payments or mortgage payments," she said.

Some are worried they might fall behind on their home payments, affecting their credit scores. Others — even those with good scores — have seen their credit limits reduced drastically, which affects their FICO as well.

People are more savvy about credit scores, Guertler said. At the same time, many need to be aware of scams and dishonest companies out there making undeliverable promises to boost credit scores.

Guertler said people need to consider paying off debt while also thinking about savings — creating an emergency fund for tough times.

At Guild Mortgage in Camarillo, branch manager Bryan Peck said homebuyers with good credit are entering the market now that it's affordable.

But some clients have been caught off guard by credit card companies lowering limits.

A $2,500 balance on a card with a $10,000 limit is conservative, which helps boost a person's credit score. But if the bank lowers that limit to $5,000, suddenly the card holder appears more risky.

"Your score is dropping because of nothing you did wrong," Peck said.

Some advisers suggest that people with good credit who get their limit reduced should switch to a new credit card and cancel the existing one.

Another challenge has been the rising minimum score for FHA loans. Peck said he has clients who qualified for loans when the score was 580, but now miss out because the cutoff has been raised to 600.

He runs credit simulations to see how they can edge up from 590 to 600.

He encourages clients to pay down balances when faced with reduced credit limits. Peck has encouraged others to open another account and establish more credit. For those who don't have credit cards and don't have a credit history, he encourages them to open accounts that they can pay off each month.

People can do simulations on their own, too, using sites like, where users can find out a credit score and monitor it for free.

Founder Ken Lin said he started the site after paying for monthly monitoring of his own score a few years ago.

"I didn't know what my credit score was 10 years ago. I think most consumers didn't," Lin said. "Now I think they do."

The scores on the site are developed from TransUnion, one of the three reporting bureaus. Lin said there are more than 100 credit scores in use. Consumers don't always know what credit score a lender uses — which is why it is important to ask.

Lin said credit scores are highly correlated. If you're paying your bills on time, that will help all your scores improve, he said. So tracking over time is important.

Paperno said it is not only important to know the score, but also the reasons behind it.

A credit score does not look at your income, your bank balances or whether you rent or own your home. Those are things a lender might consider, but they aren't a part of the score, he said.

The two biggest factors are payment history and the amount owed.

Recency is important, he said. Someone who had stellar credit in the past but has been late on recent payments could have a lower score than someone who declared bankruptcy five years ago but has done everything right since then, he said.

That may go against common assumptions, but it indicates who is the better risk at the time of a loan.

With amounts owed, a lot hangs on balances. If someone is maxed out on their credit cards, even if they make all their payments on time, they could have a low score. That one is quick to fix — pay off the balances and the score will reflect the improvement.

How to establish credit

- Maintain a checking account in good standing. This also indicates stability. Also, choose a financial institution that offers credit cards.

- Make regular deposits into a savings account. If the institution allows it, use your savings as collateral to secure a small loan. Repaying the loan promptly will build your credit history.

- Apply for a credit card at a department store or other retailer. Build your creditworthiness by repaying the account as required.

- Join a credit union. All credit unions offer savings accounts and most offer interest-bearing checking accounts. Many have full-service loan departments offering credit cards. With very competitive interest rates, these cards are designed to assist members in establishing credit. But while a credit union will normally offer lower lending rates, it may not report to local credit bureaus.

Reasons you may be denied credit

- You may have little experience using credit or have only worked a short time.

- Lack of credit references.

- Insufficient income.

- Irregular or temporary employment.

- Too short a period of residency or employment.

- A bad credit history.

With the exception of a bad credit record, you can generally handle the other concerns within six months or a year. By law, you have a right to know why you were denied credit.

Recovering from a poor credit history

- Develop a budget to repay and reduce your debts. Determine how much you can repay each month until you have paid off what you owe. Then, pay your bills on time.

- Design a plan to manage your money. In order to reduce the likelihood that you will have trouble paying your bills again and to help you reduce debt, you must analyze your spending habits, create financial goals, and set spending priorities.

- Pay with cash. Even if you have credit available, you are more likely to change your spending habits by not using it. When you pay with cash or even a check, it forces you to recognize the money you can spend is limited to the amount of funds you have in your checking account.

- Apply for unsecured credit. A local department store may be more likely to issue you a credit card than a national creditor. However, if you cannot get a department store card, you can begin by purchasing an item on a layaway plan. When you show you are a reliable customer, the store will be more inclined to provide you with a credit card.

For more information, go to

Source: SurePath Financial Solutions, Get Smart About Credit brochure