Jeanette A. Tucker, Claesgens, Mark A. | 10/24/2006 12:06:16 AM
News You Can Use Distributed 10/23/06
Many consumers are under the impression that federal legislation allows them to learn their credit scores. This is one of the myths circulating among the public about obtaining credit histories, according to LSU AgCenter family economics professor Dr. Jeanette Tucker.
What the Fair and Accurate Credit Transactions Act (FACTA) of 2003 does allow is consumers to obtain their credit reports, but not the FICO score that determines whether they are creditworthy to begin with, Tucker explains.
FACTA allows consumers to obtain one free copy of their credit report annually from each of the three major credit reporting agencies. These credit reports may be requested online at http://www.annualcreditreport.com, by phone at 1-877-322-8228 or by mail to the Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Ga. 30348-5281.
FICO credit scores, on the other hand, must be purchased by consumers. They may be ordered online from My FiCO (myfico.com) or any of the three nationwide credit reporting agencies – Equifax (www.Equifax.com), Experian (www.Experian.com) or TransUnion (www.transunion.com). Fees range from $15.00 to $29.95.
The FICO credit score condenses a borrower’s credit history into a single number. It is used by lenders to determine the likelihood that credit users will pay their bills. In addition, it helps determine the interest rate they charge for approved loans.
FICO scores were developed by their namesake, Fair Isaac & Co., which originated credit scoring systems in the 1950s.
Tucker says your FICO score is determined by a complex mathematical formula based on your repayment history (35 percent), amount of credit owed (30 percent), length of credit history (15 percent), number of new accounts (10 percent) and type of accounts you own (10 percent).
"The mystifying world of FICO scores is surrounded by myths and realities regarding the determining factors," Tucker says. She examines some other myths.
Myth: The fewer credit accounts, the better. The ideal number of accounts is seven or eight open accounts. Persons with no credit accounts or history cannot be scored. The more important factor is the amount of debt on each credit line.
Myth: Put all of your debt on one account and have other unused accounts. The ratio of outstanding debt to the maximum available on each account is a key determinant. You are actually better off spreading your debt among your accounts.
Myth: Close unused accounts. Maybe so, maybe not. Individuals often close older accounts and use newer accounts with low-interest teaser rates. The length of your credit history, however, is important, and closing older accounts could reduce your credit score.
Myth: Take advantage of new lower-rate debt. It’s tempting to pursue low-rate offers. Your FICO score, however, will decrease each time an authorized credit inquiry is made. Some entries, such as those made by credit card companies attempting to "pre-approve" you for credit do not affect your score – neither does checking your own score. However, lender inquiries made because of your legitimate requests for credit do lower your score. Requests will stay on your record for two years.
Myth: Income matters. Income may matter to lenders, but it does not affect your credit score. Research suggests that your actions bear more weight than your income on the likelihood that you’ll repay your debt.
Tucker says you can increase your FICO credit score over time by making payments on time, reducing outstanding debt on each account, not applying for too much credit and closing newer, unused accounts.
"Adopt these actions, and watch your credit score improve," the family economist advises.
For related family economics and consumer topics, click on the Family and Home link on the LSU AgCenter homepage at www.lsuagcenter.com. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.