Credit Scores

Cass Gets Good News and, Er, Her FICO Score

Personal Finance Journal
May 26, 2010 by Cassandra Nye

A couple weekends ago as I was sifting through a stack of mail I came across an envelope from American Express. I could barely contain myself as I read and reread the enclosed letter that said I had a balance of zero! Five years ago I owed American Express $8,000. (Because of a confusing debt management program I had not known exactly how close I was to paying this off.)

I wanted to celebrate. After several squeals, an excited text message or two (and, okay, an overly-exuberant leap off my bed), I made myself a celebratory omelet and, believe it or not, decided to find out my credit score. I had checked credit reports over the years, but not with any sort of consistency, and I had never looked into my credit score. With the news from American Express, I thought maybe the number wouldn’t be as bad as I had earlier feared.

I wasn’t sure how to find my credit score at first but it occurred to me to read up on the subject on this site because I work with the team that helped create it. I checked under the “Borrow” tab of the “Financial FAQ” section on nysemoneysense.com. There the editors recommend visiting myFICO.com. So I logged on, paid $15 on my debit card and… voila! my score appeared on the screen, along with a detailed report.

I wasn’t thrilled with the number, to be honest—let’s just say it makes me a less-than-prime lending candidate—but, importantly, I discovered the report has half a dozen inaccuracies. For instance, I never worked for Citigroup! To my delight, myFICO.com makes the dispute process very easy. You can simply click on any details you’d like to challenge and the site generates a form letter explaining the incorrect facts.

I printed out the letter, mailed it off and am now anxiously awaiting a reply. I wonder if my score could just go up in response to my letter or if it could prompt follow-up requiring more proof. That’s the kind of thing that typically takes me months to get around to.

I also keep coming up with more questions about my finances. Now that I’ve rid myself of a big chunk of my debt, should I try to start saving? Is an emergency fund more important than longer-term savings? And, if so, how much should I contribute to one? Or should I just continue chipping away at the $10,000 I still owe and channel all the money I can there? (I got the news from American Express before I wrote my first journal entry so my total outstanding debt remains the same as last week.) I’ll update you as soon as I find out some answers – or any news about my credit report. Talk soon!

Paul Seago
Apopka, Fla.

Credit score before: Less than 500
Credit score after: 785

• Rock bottom: "I got out of graduate school in 1998. By 1999 and 2000,     paying bills on time wasn't that important to me, so they'd pile up," said Seago. "And I'd be 30 days late or 60, sometimes 90. A couple of those piled up. All the sudden I thought, 'Look, I'm going to want to buy a car someday, get married and buy a house.' I couldn't do those kinds of things with the score I had."
• Turning point: "One of the first things I did was start paying everything on time," said Seago, president of the Apopka Area Chamber of Commerce. "I set up a auto bill pay so I'd never be late again. The easiest thing to do is start paying your bills on time. The late payments came off eventually. Then I'd pay extra on my bills—more than the minimum—so my debt ratio would go down. I got rid of all my store cards and kept all my major credit cards."
• His motivation: "I just buckled down and wanted to get [my score] turned around," he said. "At some point, I'd be married and looking at a house, and I could just see that played out someday, sitting down with a mortgage broker looking at my credit and [the broker] saying, 'Yeah, you can't have a house.' I probably looked at my score every four months, and I'd see it go up. It's like when you're dieting and you see yourself losing a bit of weight." Seago is now married and in the process of looking for a house.
• Lessons learned: Seago researched credit score advice online and in magazines. His major focus was on making payments on time. "If you find yourself in trouble and you've got a low score, you can't spend your way out of it," he said.
• His best advice: "No. 1, as simple as it sounds, is just pay on time. Pay a little bit extra every month to get that balance down. And don't get any more cards. Do whatever you've got to do to pay them off and keep your balances down.“

Improve Your Credit Score

• Obtain your credit score for free from TransUnion, Equifax or Experian or pay approximately $20 to get a FICO credit score once a year.
• The score range is 300 – 850.  The higher your credit score, the less you will have to pay to get a loan.
• It is worthwhile improving your credit score if it is lower than 690.  Obviously, the lower your credit score, the more you will need to do to improve it. There are five things you can do to improve your credit score.  The pie chart to the right indicates paying your bills on time is the more effective way to improve your score. The second most effective way to improve your credit score is to keep your credit card balance as low as possible.
• If you are having trouble making ends meet, check the National Foundation for Credit Counseling to reach a legitimate certified credit counselor. This will not improve your score immediately, but your score will improve over time if you can learn how to better manage your credit and pay your bills on time.
• Do not get new loans or credit cards.   
• There are several websites that provide more detailed information on how your score is calculated or how to improve your credit score (e.g., myfico.com)
• Check your credit score every year (e.g., on the day you file your taxes)

Click here to go to the next topic, Supplement Your Retirement, and see what you can do to plan for your future.