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PensionsPlus Spring 2009

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What’s in a Number?

The Health of Your Credit Score

Money in a Blood Pressure CuffDo you know your score?
If you’ve seen the ads on TV asking if you know your credit score, chances are it is referring to your FICO score. This scoring system was developed by the Fair Isaac Corporation (FICO) in 1989 as a way to help lenders objectively estimate your future credit risk. The score is a number ranging from 300-850, with the higher numbers representing a lower risk of default on a loan.

The Fair and Accurate Credit Transaction Act, allows you to request a free credit report each year. However, if you want your score, it can be purchased through the FICO website, www.myfico.com. In certain mortgage transactions, your lender may provide you with your credit score. Theoretically, your FICO score should be fairly constant among all three major credit bureaus (Equifax, Experian, and TransUnion), but you could have different information on each of your reports. This is why it is important to request copies of all three reports (one of each per year is free) and correct any errors immediately. The credit bureaus usually package your score along with purchase of a credit report or credit watch service.

How they calculate your score
According to Fair Isaac Corporation’s brochure, “Understanding Your FICO Score,” your score takes into account different categories of information. How much each of these factors is weighed depends on each individual and how long they have had credit. For the general population, an average breakdown is:

 Payment History  35%
 Amounts Owed  30%
 Length of Credit History  15%
 Types of Credit in Use  10%
 New Credit  10%

In a Market Watch article, “Not All Credit Scores are Created Equal,” Marty Orgel reports that, even within FICO scores, there are four (and possibly even more) different industry methods for tallying a score, depending on whether it is for a car loan, a credit card, home loan, or personal loan. If you are not sure what method your credit bureau used to figure your score, ask them.

What Your Score Means to Lenders
When you apply for a loan, your lender will probably request a credit report from one of the three credit bureaus. They can also request your FICO credit score to help them make a lending decision. There is no standard cut-off number for lenders to determine whether to approve you for a loan or not. They may use additional factors such as employment history or income, which are not factored into your FICO score. But, if you know your own score, you will have a baseline to go by; the My FICO website even shows an approximation of home and auto loan interest rates that correlate to your score range.

FICO or “FAKO”?
What about the other scores offered by the credit bureaus? So-called “educational scores” are also called “FAKOs.” To compete with Fair Isaac, they started using their own systems, but the scoring may not match FICO’s. On Experian’s website, they will sell you your “PLUS Score” plus a credit report for $15. TransUnion has a “TransRisk” score for sale along with a credit monitoring package for $14.95.

The newest method developed jointly by all 3 credit bureaus, “VantageScore,” has a different range (501-990) and equates numbers with letter grades. But, a number that would be favorable in FICO’s system may only be a “C” with VantageScore. Liz Pulliam Weston, on MSN Money, explains that VantageScore “aims to create comparable scores from three dissimilar databases” from the credit bureaus. This system hasn’t been tested against the FICO method yet. Currently, your VantageScore can be purchased from Experian’s website for $5.95.

 Vantage Score Explanation
 901-990  “A” credit
 801-900  “B” credit
 701-800  “C” credit
 601-700  “D” credit
 501-600  “F” credit

In fact, Fair Isaac filed a lawsuit in October 2006 against the Big Three credit bureaus because of the VantageScore system. A press release on www.fairisaac.com explains,

“Citing anti-trust concerns, Fair Isaac believes that this situation allows the agencies to unfairly manipulate the credit score price, sales, and distribution process to promote adoption of their VantageScore product at the expense of fair competition from the FICO score or other credit scoring products.”

In June 2008, Fair Isaac announced a partnership with Equifax and dropped them from the suit:

“On the consumer side, Equifax and Fair Isaac have a long history of providing products that combine the Equifax credit report with the FICO Score, including the delivery of ScorePower™ and ScoreWatch™ through Equifax’s Personal Information Solutions business at Equifax.com, as well as through Fair Isaac’s myFICO website.”

For the time being, FICO scores are the industry standard that most lenders use in their decision-making process. VantageScores are still in the testing phase with some lenders.

Need for “Greater Transparency”
In July 2008, the Financial Services Subcommittee on Oversight and Investigations held a hearing on “What Borrowers Need to Know About Credit Scoring Models and Credit Scores.” It included testimony from Thomas J. Quinn, vice president of Fair Isaac, representatives from the Big Three credit bureaus and other experts in the financial field. The consensus was that more financial education is needed for the general public so they know their rights when it comes to credit.

Evan Hendricks, editor/publisher of Privacy Times and author of Credit Scores & Credit Reports: How The System Really Works, What You Can Do, testified that we still have a long way to go:

“Moreover, the proliferation and sale of credit scores not used by lenders can cause confusion and even mislead consumers in a manner that is patently unfair. At a minimum, Congress can and should provide for greater transparency and fairness. Accordingly, Congress needs to act to bring the appropriate level of transparency and fairness.”

For example, on January 15, 2009, Fair Isaac announced a partnership with the Pennsylvania State Employees Credit Union to include free FICO scores for their online checking customers each month, along with educational information on responsible credit practices. The Scores on Statements program is now available to 1.5 million people nationwide and this new agreement will allow approximately 200,000 more to access their scores for free, according to the press release from Fair Isaac.

What Does This Mean for Me?
Once you have ordered your free credit reports from www.annualcreditreport.com, and checked them thoroughly for errors, the next step is to order your score. The only places you can be sure you will get your official FICO score are
www.myfico.com or www.equifax.com. With other sites, you may get another type of score or have to sign up for their subscription service after a free trial period.

If your score is in the lower range, there are things you can to do build it up over time. In “Build a Killer Credit Score for 2008,” Weston has some tips. She explains that, under the latest scoring system, called FICO 08, “some behaviors that may not have hurt your score much in the past could cause your numbers to plunge, while other actions could help you boost your score more than in the past.” Now, you may be penalized less for opening new credit accounts and your ability to juggle a mix of different kinds of credit may help you more. Also, she suggests:

  • Pay your bills on time.
  • Don’t let your credit card balances get too high.
  • Don’t close accounts that are in good standing, keep them active.

Rather than getting bogged down with the different scoring methods, ask yourself this question: Which is more important to me in my overall financial planning, raising my credit score or living debt-free? It is not advisable to take on a short term payday loan or new high interest credit card to manipulate your credit score in the short term; these strategies will become an endless cycle of debt that will hurt your credit in the long term. Getting out of debt and sticking to a budget will build good credit and give you more options with banks and creditors when you need to make a major purchase or are faced with a financial emergency.

For more helpful tips on managing your credit, make it part of your 2009 financial plan to attend a Money Matters workshop. Registration is free and it’s easy—just go to MOSERS’ website and login to see dates in your area.


 Sources

Acohido, Bryon & Jon Swartz, “’Free’ Credit Reports Sometimes Aren’t Free,” USA Today, November 28, 2007Dickler, Jessica, “Settling the Credit Score,” CNN Money, August 7, 2008, http://money.cnn.com/2008/08/06/pf/credit_score_availability/index.htm

Experian’s Vantage Score Service,
www.vantagescore.experian.com

Fair Isaac Corporation, www.fairisaac.com

Federal Trade Commission, “Need Credit or Insurance? Your Credit Score Helps Determine What You’ll Pay.” www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm

Financial Services Subcommittee on Oversight and Investigations Hearing “What Borrowers Need to Know About Credit Scoring Models and Credit Scores” www.house.gov/apps/list/hearing/financialsvcs_dem/hr072908.shtml

Orgel, Marty, “Not all Credit Scores are Created Equal,” Market Watch, April 13, 2008, http://www.marketwatch.com/news/story/your-credit-score-may-rise/story.aspx?guid=%7bC939A6A2-2445-487C-965A-F2551FADADFC%7d&dist=msr_9

“Understanding Your FICO Score,” Fair Isaac Corporation brochure. www.myfico.com

Vantage Score Information
www.vantagescore.com

Weston, Liz Pulliam, “Build a Killer Credit Score in 2008,” MSN Money, Jan. 3, 2008, http://articles.moneycentral.msn.com/Banking/YourCreditRating/BuildAKillerCreditScoreIn2008.aspx

Weston, Liz Pulliam, “What the New Credit Score Means to You,” MSN Money, http://articles.moneycentral.msn.com/Banking/YourCreditRating/WhatTheNewCreditScoreMeansToYou.aspx

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