Tuesday, January 2, 2007

My High FICO Score

So as part of our whole New Year planning kick, my wife and I looked up our FICO scores online yesterday and they were remarkably similar.

We started off by going to http://www.annualcreditreport.com/ to get our free once-a-year credit reports to make sure we had no errors on our reports, that our identities hadn't been stolen, and in general to make sure that all was well in credit land.

Then we decided to pay the $8 each to get our FICO scores because, as I have mentioned before, we are hoping to buy a house within the next couple of years and we wanted to get a better idea of the kind of interest rates we would be looking at.

To my chagrin, she beat me with an amazing score of 798. I wasn’t too far behind at 782, but that didn’t keep her from doing a victory dance around our livingroom.

We both received the same congratulatory paragraph from Equifax:

“Your score is excellent, and a wide array of loans and credit cards will likely be available to you, often at attractive rates. It is unlikely that your credit application would be denied based on this score alone. The fact that you have received such a high score implies that you scored the maximum (or very near the maximum) possible points for many of the aspects that are evaluated by the FICO score. As such, you should not consider the factors discussed later in this analysis to be any serious flaws with your credit history. They simply indicate the few factors on which you did not score the absolute maximum possible points. And while the guidelines associated with the first few reasons may help you improve your score by a few points over time, you should already have a wide array of credit products available to you.”

A quick lowdown on FICO scores for the uninitiated: a FICO score is a credit score provided by a company called Equifax, and it is used to judge how risky it would be for someone to lend you money. Scores range from 300 to 850, with 300 being the biggest risk and 850 being the smallest risk. Someone with a score of 300 is less likely to repay their debts than someone with a score of 850. Lenders use this score to determine whether or not they will lend you money, and if they do, the rate they will charge you.

Generally, if you have a score of 720 or more, you will be able to get the lowest rates a lender offers on things like car loans and mortgages. Once you get below that general level, lenders identify you as a higher risk, and they will charge you higher interest rates to compensate them for the additional risk they are taking on by lending you money.

So how did we get such high scores?

We never missed any payments, for one. My wife and I both have a few credit cards, and we have never carried a balance on any of them, paying them off in full every month. This is due to the fact that we only used credit cards to purchase things we had the money to pay for. The other main accounts that showed up on our credit cards were our car loans. Neither of us ever missed a payment on those loans, and in fact we both paid off our loans early. Our cars are very modest sedans. In addition, she had a student loan that she paid off shortly after she left college. I have never taken on any student loans.

For another, we have high credit limits and low current balances on our cards, so our ratio of debt to available credit is very low.

What kept us from getting perfect scores of 850? The credit reporting agencies never disclose exactly how their models work, but they gave us some general negatives on our accounts.
My wife got these four nuggets at the end of her report:

1) The time since your most recent account opening is very recent

2) You have a relatively high number of accounts with balances

3) The length of time your accounts have been established is relatively short

4) The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high

I can explain number one. We recently got a new charge card that pays us frequent flyer miles. That negative should go away in a year or two.

Number two is kind of weird to me. She has 3 credit cards and two have very low balances on them.

Number three is the kick in the face that most people under the age of 30 will get. I think they are looking for you to have had cards/accounts open for 10 years or so.

Number four is a mistake, in my opinion. One of her credit cards (the one she shares with me) shows up as having a credit limit of $0, and we have about $100 charged to that account. I think (but am not sure) this is the reason why she is getting that red flag. Otherwise, her proportion of balances to credit limits is like 3%.

I also had four explanations for my score at the end of my report. #1-3 were the same as hers, but my fourth was “the length of time your revolving/charge accounts have been established is too short.”

Since we are already in the highest credit category, I am not worried about these small black marks against our credit record, and most of them will go away over time. If I was on the borderline, I would definitely try to get her #4 fixed. I don’t know why her credit limit would show up as zero for that one account when I know it is much higher, but it is not something I feel I need to waste my time on at this point.

Anyway, when we do our computations regarding how much house we can afford, knowing our credit scores makes us confident we can use the lowest advertised rates we see out there to make a decision.

There are a plethora of debt reduction books/websites/flyers/podcasts/videos/1800 numbers/interpretive dance troupes/television programs/seminars/booklets/pamphlets/radio shows/bobbleheads etc… etc… They all promise you methods to “improve your credit score fast” and other jibberish like that, but you don’t need them.

I have relied on one secret to keep my credit score high: I only bought what I could afford to buy. Tape that above your desk… “Only Buy What You Can Afford to Buy.” You don't need a flashy new car, you don't need brand new leather furniture with a built-in refrigerator, and you don't need a giant TV. The cheap stuff works just as good. If you have the money to get the big stuff, by all means do it, but don't borrow that money from your credit card company if you don't have it. You'll enter the debt spiral if you do.


Anonymous said...

Credit limit of zero shows up if you have a card with no credit limit(unlimited credit).

MoneyMan said...

I don't think that's what it is. It is a department store issued credit card. I think they have some kind of a variable limit, but I'm not really sure. I only use the card once in a blue moon when I need to get a sale price on something, so I'm not really worried.

I doubt any company would ever issue a credit card with no limit (though based on some of the mortgages that were written in2004/2005/2006, I wouldn't put it past a mortgage lender to have done something like that to make a quick buck).

Anonymous said...

The store card is a charge card, not a credit card. They are not synonymous. Many charge cards have unlimited spending limits with balances due in full at the end of the month. If the credit limits shows as zero, the card is most certainly a charge card with no present spending limit.
You are incorrect in saying no companies would give unlimited credit lines. Traditional American Express cards (green, gold, platinum) have no spending limit.

Anonymous said...

Actually your charge card does not have an unlimited line of credit, but it does however have what is called a "no pre-set limit." This type of card is common among some department store charge accounts, Amex (green, gold platinum), and Visa Signature cards. Each purchase is approved based on your account history with that particular credit card company, and your overall creditworthiness.