Secrets of the FICO Credit Score

As a financial planner, I know too well how important good credit is to the financial health of my clients. Excellent credit is a financial asset that can pay huge dividends across all areas of your financial life. But the world of credit bureaus and credit reports can be a little confusing to many people. Maybe even a lot confusing.

If you weren’t already aware, whenever you apply for credit, whether for a mortgage, an auto loan or a home equity loan, the lender is going to “pull your credit” and take a look at your FICO score. That score is a hugely important metric. Virtually every lender depends on the FICO score to measure your creditworthiness. A “great” score means you’re eligible for the best possible interest rates. A “good” score means you can get a decent, but not “lowest possible” interest rate and so on. But what is “great” and what is “good” and who decides?

The good news is, it’s possible to improve your score. The not so good news is that banks and other lenders, frequently adjust what a “best score” is depending on overall economic conditions.

Jeanne Kelly is founder and CEO of The Kelly Group, based in Danbury, CT. The Kelly Group is a credit repair firm that specifically works with their clients to improve their FICO scores. The company works with individuals directly and with mortgage brokers. Jeanne was kind enough to spend a few minutes discussing the nuts and bolts of FICO scores.

Q: So what exactly is a FICO score? What does it measure exactly?

Jeanne Kelly: It works like this. Thirty five per cent of your FICO score is derived from your payment history. Thirty per cent comes from amounts owed on revolving balances. That’s a huge number – and people should know that by lowering balances owed, that could really help your score. Length of credit history is 15%, new credit is 10% and types of credit used is 10%.

Q: So there are five categories that go into your FICO score?

Jeanne Kelly: Right. If you understand this, you can work with your FICO score and stay on top of it and hopefully improve on it.

Q. Where does FICO get the information?

Jeanne Kelly: From all three credit bureaus – Experian, Equifax and Trans Union. A simple way to think about this is that FICO looks at your credit report and gives it a grade. So in order for the grade to change, you are really dealing with the credit bureaus, not FICO.

Q: How often is the information updated?

Jeanne Kelly: It could be updated every day. It depends on when your creditors decide to report your balances.

Q: Where does a person get their FICO score?

Jeanne Kelly: The thing to watch for are those offers where someone will give you your “credit score”. I’d stay away from that. Since most lenders are using FICO scores, then that’s what you want. Go to www.myfico.com — that’s exactly where you want to go.

Q: If a young person is just getting out of college, do they have a FICO score?

Jeanne Kelly: Well, you have a score if you’re using credit. You have to have two to three accounts to get a score. So whether it’s an automobile, a major credit card, a store card, a student loan – as long as you have three things reporting, you’ll get a score.

Q: How do you feel about young people and credit?

Jeanne Kelly: I suggest using credit in a healthy way and I also suggest trying to start young. I know people get afraid because college kids get these credit card offers and some of them go wild. But if you start young, by the time you’re 25, you will have learned how to use credit correctly and you’ll have a great score and get better interest rates.

Q. What’s a good score?

Jeanne Kelly: You know things change all the time; if you asked me that question last year I would have told you 680 was “A” credit. Now it’s 740.

Q. What changed?

Jeanne Kelly: Well, look around you. The banks have tightened credit, they’re being more cautious. People are talking more than ever about credit because of what’s going on in the economy and I’m glad — being aware is a good thing. If people are informed, then they can figure things out and improve their scores. But right now this is what banks are doing and people should be cognizant of that.

Q. Should people continue to use credit?

Jeanne Kelly: I do see people being afraid of it now. I’ve heard people say, “I’m going to use my debit card.” That’s a mistake. It’s perfectly okay to use credit, just do it in a healthy manner.

Q: Is it possible that your score is one point below what the lender needs to give you the best possible rate?

Jeanne Kelly: That does happen, sure. It’s like being in school – you might have to get a 90 or above to get an A. If you get an 89, you’re getting a B+. In that situation, you wait a little bit, you pay down some balances and try to move your score a bit.

Q. Is the FICO score a fair measure of a person creditworthiness?

Jeanne Kelly: I think it is. For the banks that are issuing credit, it simplifies the process quite a bit. Rather than trying to evaluate all the information in a credit report, or three credit reports, they have a grade. I think it’s a fair system.

Q. If someone believes that their score is inaccurate or isn’t a fair representation of creditworthiness, what should they do?

Jeanne Kelly: I would look at whether all your bills are being paid on time. And look at your balances. Remember earlier I said that 30% of the FICO score comes from revolving balances? Well here’s a great tip. If you keep your available balance to 20% or less of your credit limit, you’ll maximize your score for that particular portion of the FICO score.

Q: How long does it take for your FICO score to change?

Jeanne Kelly: It could take up to 90 days. So if you’re planning to go house hunting, be aware. You should start looking at your score months and months in advance.

Q: How does the Kelly Group help its clients improve their score?

Jeanne Kelly: We work directly with the creditors reporting the derogatory information on our clients’ credit reports. We’re the middle person. We know who to talk with to get the best, fastest results. We’re going to make sure that your creditors report accurately and we’re going to educate you at the same time. We’ll suggest what accounts to pay down, we might suggest opening a different account or closing an account.

Q: How much improvement can you achieve?

Jeanne Kelly: Well, every case is different. Some people might get a ten-point spike; others might see a 100-point gain. On average, our clients see a 50-point increase.

Q: That’s a big jump.

Jeanne Kelly: When you’re talking about a 30-year mortgage, it’s very dramatic.

There’s so much money riding on your FICO score. If you look at the interest on a thirty-year mortgage and the difference a better score could make, it’s just incredible. Think about it – when we do our taxes, we hire an accountant, when we go into a court of law, we hire a lawyer to protect our interests. With something as big as this, we really need someplace to go. That’s what we’re doing – we’re a small company trying to do the right thing.

Q: This has been fantastic. Really very helpful and informative, thanks so much.

Jeanne Kelly: I loved it! Thank you!

About the author

Cathy Curtis, CFP®

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