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Do You Know Yours?
By: Anthony B. Polito, C.L.P.
Ever wonder how lenders decide to whom they will grant credit, or how they decide what interest rate to charge? Most lenders use a credit scoring system to determine credit risk. The reason that lenders use these systems is very simple — they work.
A credit scoring system can help make the credit decision faster and more impartial, thus more accurate. If you are looking to borrow money, or if you are selling a product that will require financing, you need to know a little about how credit scoring systems work, and how they can affect your interest rate or your customer’s ability to buy your product.
Some of the factors that credit scores are based on are as follows:
- How you pay your bills.
- Whether you pay your bills on time.
- Your outstanding debt (how much you owe others).
- How much available credit that you have (this is the amount between your credit limit and how much you currently owe).
- The amount of years back your credit history extends.
- The amount of times in the past year you have applied for credit (many lender’s scoring systems will deduct points from your score if you have recently applied for multiple new accounts).
- Public records (such as bankruptcies, foreclosures, suits, wage attachments, liens and judgments).
Under the Equal Credit Opportunity Act, a credit score cannot use certain characteristics — such as marital status, race, religion or sex — to determine credit worthiness. Although age can be a factor, equal treatment to elderly must be given.
There are three major credit scoring systems that most lenders use: FICO, a trademark of The Fair Isaac Corporation; BEACON, a registered trademark of Equifax; and EMPIRICA, a registered trademark of TransUnion LLC. For our discussion, we will focus on FICO. Using FICO as an example, a 650 or higher score is considered acceptable by some lenders, although a better interest rate may be given if the score is 700 or above. To check your FICO score, go through the Fair Isaac’s Web site (www.myfico.com). Through this Web site you can obtain in-depth information on your FICO score and how it is determined. It is okay to check your own credit report and FICO score. This will not negatively affect your score as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers, such as myFICO.com.
Improving Your Score
To improve your score, review your credit report for inaccuracies. It is not unusual to have your credit history mixed with someone else’s from your own family or even a complete stranger with a similar name. Contact the reporting agency in writing and in detail about the inaccuracies, and ask them to verify that the information is inaccurate and remove it from your credit report. If you have missed payments, get current and stay current. Settle any outstanding suits, liens or judgments that appear on your credit report. When possible, pay down your credit card bills, but do not pay them off completely. Remember, available credit and length of time open are positive factors in determining your score. Closing an account may lower your available credit especially if the account is one that you have had for a period of two years or more.
Other practices to avoid because they can lower your credit score include the following:
- Opening new credit card accounts that you do not need — no matter how low of a rate.
- Paying your bills slowly. (The argument that, “ I paid them late, but I did pay them,” will not make any difference to the scoring system.)
- Applying to multiple lenders just to see if you can qualify for a better rate on a particular loan. (Do not apply for a credit card account to receive a hat, pen, toaster or anything else just to receive a gift or small discount on your purchase. Most scoring systems will lower your score for these inquiries.)
Your credit score is a very impotent component in your financial future. All of us will call on a bank, leasing or finance company to advance funds for a purchase of a home, car, equipment for our business or something for our personal use. Your credit score will determine if you qualify and what interest rate you will be given. The more you know about your score the better able you will be to negotiate. In the long run, knowing “the score” may help you be a better consumer and businessperson.
Anthony B. Polito, C.L.P., heads the Green Team for 1 St Priority Acceptance LLC, where he is president. The Green Team has more than 15 years experience serving the Green Industry’s equipment finance needs. You can contact him or Pam Seeker at 330-475-1898.