Bes Stocks To Buy 2014, Best Stocks For 2014: Credit Score Zealots Pursue Fool¡¯s Errand for Scores

Sunday, January 15, 2012

Credit Score Zealots Pursue Fool¡¯s Errand for Scores

Jeff Rose, a 33-year-old financialplanner, is trying to improve his credit score even though it��s780, which is 69 points above the median score.

Rose, who lives in Carbondale, Illinois, said he opened upa second credit card last year to establish another line ofcredit and help boost his score. He said he doesn��t know exactlywhat actions will help or hurt his score, so wants to get itabove 800 to ensure he gets the best rate if he refinances hismortgage.

Three years after the credit crisis when lenders abruptlyclosed accounts and cut limits, consumers, including those whohave excellent scores, have become more focused on getting thenumber above 800. Those efforts may be futile because onceconsumers have FICO credit scores of 760, a higher one doesn��tmean they��ll get better interest rates on mortgages and creditcards or more elite card offers, said Greg McBride, seniorfinancial analyst at Bankrate.com, a unit of Bankrate Inc.

��There��s very little incremental benefit to getting ascore above that,�� said McBride, who��s based in North PalmBeach, Florida. Once consumers are above 760, ��it��s a lot moredifficult to move the score up in any noticeable way, and littlereward.��

Mayank Maheshwari, 26, a business analyst who lives inJersey City, New Jersey, said his FICO (FICO) score is 780 and he��sstill trying to get it higher. He has a student loan that hehasn��t paid off in full, although he can afford to, because hethinks maintaining monthly payments on time will help increasehis score.

FICO Scores

The most common scores are based on models established byMinneapolis-based FICO, formerly known as Fair Isaac Corp.,which are used to gauge a consumer��s financial health. Thenumbers, which range from 300 to 850, affect the ability to getmortgages and credit cards, as well as the rates borrowers payfor them. The score is used by 90 of the 100 largest U.S.financial institutions, according to FICO��s website. There areother scores used by lenders, such as VantageSc! ore, whi ch has a501 to 990 range for measuring credit risk.

About 18 percent of 200 million consumers in the U.S. withcredit scores, or 36 million Americans, had credit scores of 800or higher in 2011, according to estimates from FICO. More than75 million had scores of at least 750 while the median creditscore last year was about 711, FICO said.

��Bragging Rights��

The percentage of consumers with scores of 750 or more hasfluctuated only slightly during the past five years, said BarryPaperno, consumer affairs manager for myFICO.com. That��s becauseconsumers with high credit scores tended to maintain their goodbehaviors during the credit crisis, such as paying down debt andcutting expenses, Paperno said.

The score that��s considered the cutoff to qualify for thebest rates, however, has changed. Before the recession, it wasgenerally 720 instead of at least 750, said Ben Woolsey,director of marketing and consumer research at CreditCards.com,a website for cardholders based in Austin, Texas.

FICO credit scores rank borrowers according to thelikelihood of default and there��s almost no difference in theprobability of default when a consumer has a 780 or an 820, saidKen Lin, chief executive officer and founder of San Francisco-based Credit Karma. That means lenders won��t price a consumerdifferently and extend different rates, since the risk isvirtually the same, Lin said.

��If you��re at 780 plus, it��s all bragging rights fromthere,�� Lin said.

Credit Decisions

The average rate for a 30-year fixed mortgage was 3.89percent in the week ended Jan. 12, according to Freddie Mac. Theaverage interest rate charged on credit-card balances was 12.8percent in November, according to Federal Reserve figuresreleased Jan. 9.

A FICO score of 760 or higher on a $300,000 30-year fixedmortgage may qualify a borrower for a 3.62 rate or $1,368monthly payment, compared with a 3.85 percent rate and monthlypayment of $1,406 for those with scores from 700 to 759,according to m! yFICO.co m. Having a credit score of at least 720means a consumer may get a 3.89 rate on a 36-month auto loan of$25,000 and pay $737 a month, compared with 5.31 percent and apayment of $753 for those with scores from 690 to 719.

The decision to offer a mortgage and the size and rate onthat loan is based on many factors about a borrower��s financialhistory, Tom Kelly, a spokesman for JPMorgan Chase & Co., thelargest U.S. bank by assets, said in an e-mail. JPMorgan��s riskmanagement approach is proprietary, and criteria that go intothe decisions on credit cards may be based on income and credithistory with other Chase products, said Paul Hartwick, aspokesman for the New York-based bank, also in an e-mail.

Elite Offers

While the type of mortgage product and region may impactrates, generally FICO scores above 720 receive the lowest rates,Terry Francisco, a spokesman for Bank of America Corp. inCharlotte, North Carolina, said in an e-mail. A FICO score isone of several considerations the bank uses in determiningcredit-card rates, Betty Riess, a spokeswoman for Bank ofAmerica, which is the second-biggest U.S. lender, said in an e-mail.

Elite card offers are more likely to be based on income andassets than solely on high credit scores, Bankrate��s McBridesaid. When making credit decisions, American Express Co. (AXP) looksat a cardmember��s credit profile, which includes total debtlevel, reported income, credit bureau score, credit report andpayment history, Melanie Backs, a spokeswoman for the New York-based firm, the biggest credit-card issuer by purchases, said inan e-mail.

Hiccups Happen

Revolving debt, which includes credit cards, climbed inNovember by $5.6 billion, the biggest advance since March 2008,according to Federal Reserve data.

��There are a lot of companies out there competing forcredit,�� said Linda Sherry, director of national priorities forConsumer Action in Washington. ��Once you��re there, your dancecard is going to be full,�� she said, referrin! g to a s core ofabout 770.

The benefit for consumers who have good scores and arestill trying to raise them is that they��ll have more of acushion in case they do something that negatively affects theirscores, said Woolsey of CreditCards.com. Borrowers should alsokeep in mind that each lender may vary on what they use as acutoff for qualifying for the best rates, although anythingabove 750 generally should be sufficient, he said.

��Some hiccups could happen and I get whacked and I��m a720, so you shouldn��t be too comfortable because you never knowwhat might happen,�� said Rose, the CEO and founder of AllianceWealth Management.

Timely Payments

Consumers with scores from 750 to 800 who want highernumbers should continue what they��re doing, just for a longerperiod of time, said FICO��s Paperno. That means continuing topay bills on time, keeping a low amount of debt relative toavailable credit and not opening accounts unless needed, hesaid.

Making a payment 30 or more days after the due date couldcut a score by as much as 110 points while applying for a newcard may result in a five point drop, said Liz Weston, author of��Your Credit Score.��

Borrowers should avoid using more than 30 percent of theiravailable credit, even if they pay their balances in full,because the balance owed may be reported to the credit bureausbefore the payment is due, according to McBride.

Credit Monitoring

Credit scores are usually a lagging economic indicator,since delayed payments on mortgages and subsequent foreclosuresmay take time to show up on reports, said Lin of Credit Karma.The average score will rise this year as a result of the economyrecovering, Lin said.

Some things consumers do to try to improve their scores,such as paying for a credit score monitoring service, aren��tworth it, said Ed Mierzwinski, consumer program director at theU.S. Public Interest Research Group in Washington. Monitoringdoesn��t prevent errors or identity theft and consumers may notundersta! nd the c ost of the service, Mierzwinski said.

Instead, borrowers may want to just stagger looking at eachone of the free credit reports they��re entitled to annually fromthe three major credit bureaus every four months, he said.

��Credit is there to save you money,�� said Lin, referringto how a high credit score can help consumers qualify for lowerinterest rates. ��You shouldn��t be using money to buildcredit.��

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