Mastering Money

Improving Your FICO Score

You actually have three FICO scores, one for each of the three credit bureaus:  Experian, TransUnion and Equifax.  Each is based on information the credit bureau keeps in your file.  The score will change as the information in your file changes.  For a bureau to determine your FICO score, they must be aware of at least one account that has been open for at least six months with activity during the past six months.  These scores are called FICO scores because the credit bureaus use software developed by Fair Isaac Company.

Okay, so you don't think it's so important to improve your credit score?  You know your credit history isn't so hot, but so what?  Who cares? 

Lots of people care.

When you apply for a new credit card, or a car loan, or even a mortgage, lenders use your FICO score to assess the risk they are taking in loaning money to you.  Therefore, your FICO score will determine the rate you pay as well as how much a lender is willing to loan you.  It's rather like the rich get richer and the poor get poorer.  If you have bad credit, and your FICO score is low, you are considered a bad risk to those who are loaning you money.  If you loaned money to someone, wouldn't you check their payment history?  It's the old economic rule of risk / reward, which states the higher risk you take, the higher your reward should be, only the investor is not you; the investor is the mortgage company and they are investing in you.  They are making an investment in you by lending you money, and if you are a high risk, meaning there is a strong probability you will have problems paying the money back, they will charge you more to loan you the money.

It could be your FICO score is so low, they don't even want to take the risk at all.  You'll get rejected.  They figure, no matter what they charge you, it isn't worth the risk.  It isn't worth earning all that interest because they figure you'll never be able to pay the principal back.

Insurance companies also look at your FICO score.  If you have a low score, they'll charge you a higher premium.  Why?  Because they can.  Again, the rich get richer and...you know the rest.  They figure if your payment history is bad, then you are a higher risk, and that is what insurance companies know best; it is what they are in the business of doing:  estimating risk, whether that risk be if you home will burn down, if you will get into an accident, or if you will be able to pay your obligations.  They charge higher premiums to everyone who is a higher risk, no matter the risk.

Finally, suppose you are really fed up with your boss, hate your current job, start looking for a new job, find your dream job in the paper, and you apply for it.  Well guess what?  The Human Resources Department for that employer will probably check your FICO score, along with your criminal history and your drug use.  Why your FICO score?  Because they can.  Again, it gives the Human Resources Department and your prospective manager more insight into they type of person you are.  Do you pay your bills on time?  Sometimes they feel that's indicative of other behaviors in your life, such as, do you report to work on time?

Just some food for thought.  For ways to improve your FICO score, see my blog under Secret Sauce.

Credit Cards Are Good

Most people believe that credit cards are a bad thing.  They are, if one doesn't know how to use them properly.  My father always told me, "Only poor people use credit cards for credit."  I use credit cards for convenience only.  Any time I use my credit card, I have the money in the bank to cover the charge. 

So you ask, "Why not pay with a check or cash?"

Good question.  Using the credit card saves me from writing a bunch of checks all over town and saves me from carrying $100 into the grocery store when I want to buy Oreo's.  Plus the fact, my credit card is known as an affinity card; it gives me one mile for every dollar I charge which can go towards the purchase of an airline ticket.

As long as you are aware of your current credit card balance and you have the funds in the bank to pay the balance in full when the statement arrives, you are using your credit card very wisely.  Otherwise, you are paying a high rate of interest on your charges, and therefore, are paying for your purchases several times over.