"Your FICO score has changed" is not what you want to see in the subject line of an incoming email.
A FICO score (which gets its acronym from Fair, Isaac and Company, a data analytics company that created an industry standard for scoring creditworthiness some 30 years ago) is a three-digit number, based on information in credit reports, that helps lenders determine how likely you are to repay a loan.
It affects how much you can borrow, how many months you have to repay, and what the loan's interest rate will be.
Used by over 90 percent of lenders (according to myFICO.com), the score measures how much credit you have, how long you've had credit, how much of your available credit is being used, and if you've paid on time.
Despite having a decent credit rating for most of my adult life (when I was in college and got my first credit card, my parents would have been horrified if I didn't pay the entire bill in full every month), mine was disrupted a few months ago when I neglected to change an address after moving, resulting in a failure to receive and pay a seemingly minor insurance bill.
My bad, I know. The insurance company took umbrage, kicked me off its coverage, and refused to reinstate me. Fine, I thought. Who needs you anyway? And promptly forgot about it.
About 60 days later--for the first time ever--a FICO score change notice appeared. My credit rating had dropped by 45 points. And the email informing me of this provided zero information on what caused the drop.
After fretting about what poor choices I must have made, my husband offhandedly reminded me about the insurance company telling me to shove off. It's wondrous that neglecting to pay a couple of monthly charges of something like $15 could have such a noticeable effect. But there it was. Just think how precipitously my FICO score would have dropped if I'd had my car repossessed.
You should always know your credit score before trying to borrow money. According to Internet sources, here's how FICO scores are defined:
• Below 580 demonstrates to lenders that you are a risky borrower.
• From 580-669 gets you a "fair" designation; you are below the average score of U.S. consumers, although many lenders will work with you.
• From 670-739 stamps you as "good;" your score is near or slightly above average.
• From 740-799 is "very good," branding you as a very dependable borrower.
• And then there's 800-plus, demonstrating you are an exceptional borrower.
A low rating makes life more expensive. Poor credit makes it harder to get car and home loans and to qualify for credit card accounts. If you are offered a loan, chances are it will be at a higher interest rate. And you generally will pay more for automobile, renter's and homeowner's insurance.
To buy a house with a conventional loan, you'll need a FICO of at least 620. Borrowers can sometimes get an FHA mortgage with scores as low as 580 to qualify for a low down payment advantage, which is currently at around 3.5 percent. If your credit score is below 580, however, you aren't necessarily excluded from FHA loan eligibility.
Renters will discover that landlords typically obtain your credit report as part of the application process to check on your ability to pay on time, which might result in them charging you a higher security deposit or requiring a co-signer on a lease.
Employers may run a credit check before offering you a job, especially if you're applying for a management position or one that involves handling money.
Customers with lower credit scores may have to pay a deposit before signing up with a utility, cellphone provider, or Internet company, which acts as insurance should you fail to pay your bill.
Here's how to fix a bad credit score, according to lexingtonlaw.com:
- Get your credit report to discover and repair errors and omissions on your report. This is a huge pain but can save you a lot of money in the long run.
Each of the three major credit bureaus--TransUnion, Experian, and Equifax--is required by law to give you one free credit report per year. Request yours from the Annual Credit Report Request Service at annualcreditreport.com.
Errors can include incorrect personal information, accounts that don't belong to you, missing accounts, incorrect public records, accounts that have been closed, duplicate accounts, and fraudulent activity.
- Dispute errors. The credit bureaus are legally obligated to try and resolve mistakes. You can request a correction online, by mail or by phone. Documentation is required.
- Pay late or past-due accounts. You're OK up to 30 days. After that, your payment is considered late, and creditors and lenders can report your account to the credit bureaus--which ultimately impacts your score.
- Increasing your credit limit could improve your credit score.
- Pay off high-interest credit accounts first.
- Pay remaining balances on time.
Yeah, I know; easier said than done. But still worth doing.
I recently received another "your FICO score has changed" email. I dreaded opening the message, since the last time I heard from this bunch I was totally blindsided.
Whew! This time it told me I had regained the points I had lost. I hope to never hear from them again. Their correspondence is as unwelcome is the monthly notice--especially in the summer--that your electric bill is ready and waiting.
Karen Martin is senior editor of Perspective.
kmartin@arkansasonline.com