Two Keys to a Great Credit Score

Money magazine's August issue had a piece on how credit scores can impact your car and homeowner's insurance rates. A chart accompanying the article showed what percent Fair Isaac (the organization that sets credit scores) attributes to various data they collect on each of us to get a credit score. These really boil down to two key measures that we all need to do well on to get at least a decent score:

• Payment history (40% of what calculates credit scores)
• Outstanding debt (30% of what calculates credit scores)

The others are length of credit history (15%), pursuit of new credit (10%), and credit mix (5%) and while we all would like to do well on all of these measures, payment history and outstanding debt are the two keys to a good credit score. A good credit score, in turn, can save you a boatload of money -- maybe even up to $1 million.

I haven't checked my credit score lately (on my list) but since I haven't missed a payment of any kind in years and I have no outstanding debt, I should be good, right?

Comments

[Minimum Wage]

What if you have old credit problems that won't go away and which you can't resolve on a minimum wage income?

Should a person be condemned to a low credit score indefinitely?

[Anitra]

MW: If you can't reliably pay your outstanding debt, then you should have a low credit score. That's what a low credit score means - that you're a bad risk for additional debt.

[Carl Heldmann]

Wrong! When you have no outstanding debt, credit issuers don't no how you will handle outstanding debt. You have no history, or very little history. Credit scoring is set up to recognize this lack of credit history and subsequently, the credit bureaus will lower your scores.
When people tell me they pay cash for every thing, I know that they will probably have trouble getting a mortgage or a construction loan.
Carl Heldmann

[Ms. M&P]

Thanks for the post. I'm very interested in credit scores because I'm constantly trying to repair my credit due to relative's accounts often showing up on my report (we have similar names). Anyway, is there any information on whether or not credit history can be student loans? I'd like to close a credit card I've had for five years, but I'm worried it will lower my score.

[FMF]

Carl --

So you're saying someone with no debt who's saved up a good downpayment (which they've been able to do because they have no debt) will have trouble finding someone to give them a mortgage? That hasn't been my experience.

I started out with student loan debt - and a dead-end minimum wage job. I couldn't keep up with the student loan payments when rents soared five years in a row but my income stayed stagnant. Then I tried to start a business which was making progress until an extended illness (in hospital, couldn't work, no income) caved in my finances. Oh, and honestly reported my income and for my honesty I got a tax lien when I couldn't pay the tax. (I'd have better credit if I had been dishonest - is that the right message to send?)

How am I a bad risk for additional debt? I pay my current bills on time, every time, and I now have health insurance, so a new health collapse is unlikely, i.e. even if my income is not increasing, it should be stable and uninterrupted now. My credit collapsed when my health did, and that's not likely to happen in the forseeable future.

Normally, adverse credit problems go away after seven years. Some of mine won't. Being honest makes me a greater risk???

Wow, I guess I should never file an honest tax return again.

[Carl Heldmann]

Good down payments = low "Loan to Value" (LTV) which lowers the lenders risk. Different ballgame. Most Americans are not in your ballgame. They're not even in the same ballpark. You may still end up with a higher rate of interest. If lenders don't know how you handle credit, they compensate.I see this every day.
Of course, you probably have a personal relationship with a local bank that also does mortgages. Again, different ballgame.
Borrowers are like snowflakes, no two are alike.
Carl

[FMF]

Carl --

Yes, I have some of the advantages you talk about and some others:

*Good downpayment
*Personal relationship with bank (actually a couple)
*Paid off mortgage on my current home

My plan (if we ever decide to move) is to bid out the mortgage and see what the rates come back as. I think one bank at least will be very aggressive, but even if none are, I plan to have the house paid off in a few years.

Now why would I want new debt? I'd like to start up that business again - I actually have acquired new inventory (found a great liquidation deal online) so I have something to sell. Once it's up and running, it should be profitable. But if I can't start it up, I'm not going to be able to make any money with it. Is that part of the $1 million my bad credit is costing me? It's sure expensive to be poor!

Um... Taxes - you pay them out of every check you get from the business if you need to. Just figure 30% of every revenue you make from the business is not yours. Period. You can actually pay the IRS electronically every day if you need to. Now, that is not the best financial advice for people who regularly pay their taxes as it is, but if you are having problems, then better to pay it up front daily than to have the surprise in April. Better to lose a little interest and get money back from Uncle Sam than to have them breathe down your neck later. As long as you pay your current bills on time, have savings, and keep trying to get everything straight, your credit should do better over time. And above all, don't spend more than you have.... Period. I have had to work two full time jobs sometimes to keep it together, (and I suffer from illness) but you do what you gotta do to live honestly.

[EMF]

While "*Paid off mortgage on my current home" may be a positive to a lender, it's a negative for your FICO score. Mine went from over 800 to the upper 700's after I paid off my mortgage.

Do I get any FICO points for paying my rent on time?

[Raj]

How often credit score is calculated and updated by the credit scoring company?