Book Review: Your Credit Score
MSN Money columnist Liz Pulliam Weston’s book, Your Credit Score, is a great overview of anything and everything you ever wanted to know about credit scoring.
For those who don’t believe that your credit score is important, the first chapter outlines what poor and mediocre credit costs you over a lifetime using realistic examples of credit cards, car loans and mortgages. The difference comes down to interest rates. It may go without saying, but good credit gets you good rates. Bad or mediocre credit does not.
If you find someone to lend you money, you’ll pay high rates and fat fees for the privilege. A bad or mediocre credit score easily can cost you tens of thousands and even hundreds of thousands of dollars in your lifetime. You don’t even have to have tons of credit problems to pay a price. Sometimes, all it takes is a single missed payment to knock more than 100 points off your credit score and put you in a lender’s high-risk category.
The book then continues on to review the history of credit scoring and how most major lenders were using some sort of scoring system by the end of the 1970s, but they mainly took into account their own history with the customer, the applicant’s income, length of time with employer, etc. Bill Fair and Earl Isaac, pioneers of scoring and founders of Fair Isaac, developed the first credit bureau-based scoring system in the mid-1980s, basing their model around patterns to predict borrower behavior and assumed credit risk to lenders.
With lenders getting a firmer grasp on their risk and finding more comfortable boundaries in which they are willing to loan money, lending has skyrocketed ever since. This increase has meant the credit reporting agencies have a lot of information passing into their possession for posting to credit reports and has resulted in mistakes. Lots of them.
Liz Pulliam Weston attempts to give a break down of approximately what your credit score is comprised of and what factors increase or decrease your score.
The recency, frequency and severity (30, 60, 90 days, etc) of late payments are the focus.
The total amount owed and the types of accounts are looked at. This is the category where you will feel a big hit on your credit score if the difference between your credit limits and your balances is slim. The bigger the difference, the better.
The longer you’ve had credit, the better. The average American’s oldest account is about 14 years.
Opening new accounts can lower your score. If you open a few accounts in a short period of time, it’ll affect your score even more.
Revolving debt, installment loans, etc.
For those of you looking at this book to tell you how to figure out your score or how much your score will increase or decrease based on certain actions, don’t bother. You won’t find that here or anywhere. An important thing that Ms. Weston makes sure to mention is that not only are there three major credit reporting agencies (Equifax, Experian and TransUnion), they all have their own proprietary scoring models so, although they’re usually similar, they most likely will have three different scores for the same person. To further complicate this, there are different revisions to those models and if a company is using an older formula, it can be different than if they were using the most current version of the formula.
Just as not everyone updates to the latest computer operating systems when they’re released, not every lender uses the latest versions of credit-scoring formulas. Older versions of the FICO formula, for example, counted participation in a credit-counseling program as a negative factor; newer versions view it as a neutral factor. So, if you’re currently in a debt management program, you might be viewed more negatively by some lenders (using the older version of the formula) than by others.
Ms. Weston offers a chapter on improving your credit score the right way which starts out with obtaining and reviewing your credit reports. Below are methods of obtaining your report.
After reviewing your report, the goal is to update out-of-date information, dispute inaccurate negative information and accounts that aren’t yours. To raise your score, focus on the five factors that influence your credit listed above in this article.
One of the things I really like about this book is that Ms. Weston approaches your credit score from the right perspective. From a personal finance perspective, you want to pay down highest-interest debt first. To improve your credit score the fastest, however, you want to pay down credit that is closest to its limits first. This is exactly what she advises and I’m really glad to see her make the distinction.
Ms. Weston continues on by debunking myths, such as asking your credit card company to lower your limits can boost your score and you have to pay interest to have a good credit score. Also discussed is my personal favorite, closing credit accounts will help your score. She mentions that closing older accounts can ding your score and that it reduces the total available credit so your debt utilization ratio can increase. She also mentions, though, that this doesn’t mean you should never close a revolving account. For example, if you have an annual fee, wish to shut down a few unused accounts to reduce the chances of them being hijacked by identity thieves, or have a spending problem where canceling the card is the only way to keep you from using it, those are perfectly valid reasons. Closing accounts can never help your score, it could possibly hurt it, but it doesn’t mean that from time to time, you shouldn’t do it.
Since people generally don’t pick up books on credit scoring unless there’s a serious problem, Coping with a Credit Crisis and Rebuilding Your Score After a Credit Disaster will probably be popular chapters among her readers. These chapters cover repayment plans, when you should consider bankruptcy, knowing your rights, the statute of limitations and if you should pay old debts.
The chapter Identity Theft and Your Credit will particularly interest the 27.3 million Americans who have been victimized in the past 5 years. Ms. Weston goes over ways to reduce your exposure to identity theft as well as some measures you might need to recover from it. She is recommending checking your credit report at least twice a year, if not more often, because of the escalating rates of identity theft.
Ms. Weston finishes up her book talking about the fastest ways to improve your score, ways to help with your score’s impact on your insurance rates and keeping your score healthy.
I’m an avid reader of Liz Pulliam Weston’s MSN columns on money and credit. I’m glad to see that her book even surpasses the high bar that she has set for herself with the informative articles she writes for MSN. There’s something for everyone to learn in this book. If you’re looking for some guidance in fixing, improving and protecting your credit score, I’d highly recommend you pick up a copy or borrow it from your local library.
Related Posts:
August 15th, 2005 at 8:46 am
This gels with Suze Orman in The Money Book for the Young, Fabulous & Broke. She is very adamant you should not close old credit card accounts because you’re closing your credit history. This is important. If you feel you’ll get in trouble by simply having the card, cut it up. The company will happily issue you a new one if you need it, and the time it takes for you to get it will help you think the purchase through.
Of course, you shouldn’t cut up all your credit cards. Keep one around for emergencies in a spot where it’s not easy to get to (locked box in the attic?). Also, if you’ve memorized any credit card numbers because you’ve entered them on the Internet one too many times, it’s time to call the credit card company and get a new number.
In terms of keeping an eye on your score. If you’re applying for a major loan, it’s a good idea to pay for all three scores. Some loan companies will take the lowest, some will take the middle score, and some will take the average of all three, so it’s good to know the lowest score. Otherwise, you should pick a service and pull your score to check it once every six months or so. If you’re lucky, and happen to have a Providian card, you can get your Transunion score for free online monthly. Remember, this is a good tentative measure of your score and shouldn’t be used as the only indication prior to taking out a major loan or you might be surprised by that higher interest rate.
August 15th, 2005 at 9:41 am
Serious spending problems are an addiction. I can’t even begin to understand them, but if it’s a real problem, then I’m not sure cutting up the card or keeping it in the attic is good enough. Annual fees and divorce are other common reasons to close.
With all of the instances of identity theft out there, though, I don’t subscribe to the “never close a card” crowd. I have my oldest two that I keep open and the rest are expendable. I have lots of accounts on my credit report that are listed as closed. They’re still showing as ‘paying as agreed’ with my limit and most used amounts shown. They will be there for a few more years.
Some people can be totally responsible with their credit cards, keep them all open and remember to update the addresses as well as know when to expect renewal cards, etc, in the mail. Many cannot. These are the ones that should seriously be worrying about identity theft.
As for pulling reports and scores, the suggestion previously was always once a year, pull all three. Now that seems to be changing. Who is responsible for the change (credit monitoring services? more instances of identity theft?) I’m not sure. I’ve heard they should be checked as often as every 3 months. I’m not quite at that level of paranoia yet.
You definitely want to pull all three before a necessary loan, like a mortgage or maybe a car loan, just to know where you stand. I recommend to people to do at least 2-3 months prior (more if you’re anticipating some bad things) because if anything needs to be updated or fixed, you need minimally that much time.
If Providian would offer any good deals, I would sign up for them. Other than the TransUnion score, though, I haven’t seen anything at all about them lately.
August 15th, 2005 at 1:53 pm
Carl’s been getting all sorts of mail from Providian lately. Although, my one card with them has a 7.99% APR for purchases, which is why I keep it. It’s definitely my lowest purchase rate.
Pulling your credit report should be enough to combat identity theft, you shouldn’t need to pay to pull your scores as well. This is a myth perpetuated by the scoring companies, who want your money.
August 15th, 2005 at 2:05 pm
If you’re trying to keep the report accurate and keep an eye out for identity theft, pulling the reports is sufficient. Just doing that and following most of the generally accepted rules for raising your score will work. If you want to see the actual numerical progress, the scores themselves are helpful. I certainly wouldn’t waste my money to pull them more than once a year, but for someone that’s working towards a goal, it certainly can’t hurt.
There aren’t many non-promotional offers to be had much lower than that. My Chase is 7.24% right now and variable. All of my fixed rate cards went variable.
I don’t think Providian has sent me anything in a long time. I had a 5.99% fixed-rate card with them for *years*, then they sold off all of their low-rate cards to Chase (above mentioned card) a few years ago and took all of their high-risk cards and jumped them to about ~29.99%. They went through some major restructuring and now they seem much more stable. I wish they’d send me a good offer in the mail. I’d love to micromanage one credit score monthly.
I wonder what they do for joint accounts, as far as showing the TransUnion scores.
May 1st, 2006 at 9:52 am
[...] Credit Offers in the MailBook Review: Your Credit ScoreBook Review: Young, Fabulous & BrokeCredit Reports - Free At Last!Is Unclaimed Property Waiting for You? [...]