Ask the expert: Is your credit score costing you money?
In these uncertain financial times, even those with excellent credit histories may have trouble getting a mortgage or other type of loan. That's why it's important to know your credit score and the effect it may have on your checkbook, according to the Minnesota Society of CPAs.
Why it matters
Your credit score is based on your financial situation and your past history of managing your credit. Companies use it to decide whether or not to extend you credit or a loan.
Many people understand that lenders check credit scores when an individual applies for a mortgage, credit card, car loan or student loan.
You may not be aware, however, that your score also can be important when you try to rent an apartment, since more and more landlords want access to this information to help gauge whether tenants will keep up with the rent. A bad credit score could mean higher car insurance premiums and an inability to sign up for certain cell phone plans. And you may be surprised to learn that some employers may check your credit report to get a better sense of the character and reliability of the person they're planning to hire.
The facts behind the score
There are three national credit bureaus: Equifax, Experian and TransUnion. Each one has its own scoring method, but they all typically are based on one model, often known as FICO. Your credit score generally can range from 300 at the low end to 850 at the high end.
It is calculated based on a number of factors. The most important is your payment history, including late payments and bankruptcies. The score takes into account how recently any problems have happened, so a payment problem several years ago should carry less weight than a recent one. Another factor is your current debt situation, including how much debt and how many credit cards you have. The credit bureaus also consider the length of your credit history and whether you have long-term loans or short-term installment debt.
In dollars and cents
What's the actual impact that a weak credit score will have on your finances? The FICO Web site (www.myfico.com) provides some answers based on recent interest rates.
The monthly payment on a $25,000, 36-month auto loan might be about $763 for someone with a high credit score in the 720 to 850 range. They would be charged a low interest rate because they are considered a good credit risk. Conversely, a borrower in the 620 to 659 range would pay about $814 per month, and someone with a low score between 500 and 589 could end up paying about $868. That's $100 more per month than someone with the best credit score.
Borrowers with a low credit score seeking to take out a 15-year home equity loan or a 30-year mortgage could pay several percentage points more in interest on the loan, which could translate to hundreds of dollars a year, depending on the size of the debt.
Check your score
What's your credit score? Everyone is eligible to receive a free credit report annually from each of the three major credit rating bureaus. To learn more, go to www.annualcreditreport.com or call (877) 322-8228. It's a good idea to check your report regularly to monitor your score and to ensure you haven't been the victim of identity theft. Fraudulent use of your credit cards or identity also can lower your credit score.
Money Management is a series provided by the Minnesota Society of Certified Public Accountants. For personal and small business information, go to www.mncpa.org or call (800) 331-4288.