BankerGirl

Posted by Heidi on December 2nd, 2007 in About BankerGirl, credit cards, debt

I am periodically asked to speak at seminars on personal cash and credit management.  The most popular section of my presentation is always the piece on credit scores.  The two questions I get most often are:

1. How do I get perfect credit?
2. What impacts my credit score and how do I improve it?

Before I begin, a few disclaimers: The actuarial rules that drive credit scores are constantly being reviewed and revised, and I do not know the exact formula for perfect credit.  Also, this post is in reference to FICO scores only, not the proprietary in-house credit reporting scoring most banks, insurance firms, and phone companies utilize to determine credit worthiness.

How do I get perfect credit?

For those in this camp, I have little advice.  In my experience, those striving for ”perfect credit” are remarkably disciplined individuals who have very little, if any, debt and FICO scores near or over 800 - there really isn’t a need to shoot for an 850.  The highest FICO score I’ve seen is a 842.  Here, in my experience, are the characteristics that those with the highest scores share:

• Married (don’t know why this is)
• Over age 40
• Have fewer than four credit cards
• Use credit cards regularly and payoff balances monthly
• Own a home and have been in it for more than 7 years

This is in no way an exhaustive list and I’m sure that there are people out there with scores over 800 that do not have any of these characteristics; this is simply a list of trends I’ve noticed from the applications that have crossed my desk in my banking career.

How do I improve my FICO score?

Here I speak from experience. When I moved back from Chicago in 1999 my credit was in shambles.  I had a semester of tuition in collections, my student loans were in deferment, and I was late paying my two credit cards.  When I pulled my credit report (as a lender I had access to the tools to do this), it was at 572, which is pretty darn crappy (the lowest score possible is 400).  I buckled down and paid off the outstanding u-bill and set up automatic payments on my student loans.  A few months later, I took out a term loan to buy a car (for which I needed a parent to co-sign) and prepaid on that whenever I could.  Within two years, my FICO score was up to 640 - not great, but out of the lowest tier. 

I have tracked my FICO religiously ever since.  It’s kind of a game to me - trying to beat my high score (728, just before I purchased my house).  Today I’m at 705. 

Here are my tips for improving your FICO score:

• Pay off your credit card balances monthly.
• If you must keep a balance on a revolving account, use less than 50% of your available credit line (25% or less is ideal).
• Pay on time every month
• Don’t let items go into collections
• Pay your taxes on time (a tax lien looks nearly as bad as a bankruptcy to a lender)
• Don’t co-sign for debt that you cannot pay on your own. This goes for parents, children, siblings, and friends. If you co-sign, be prepared to be 100% responsible for the debt.
• Review your credit report at least once a year for accuracy and dispute any item that doesn’t look right. Click here to get a free copy of your credit report from each of the three major credit bureaus (you will be charged only if you want to see your scores).
• Don’t close multiple credit lines all at once (creditors take that to mean you cannot manage credit).
• Keep in mind a loan in deferment can have a negative impact on your credit score.
• If you have a business as a sole proprietor and utilize an unsecured credit line, consider forming a LLC or corporation and putting the line in your business name.

Bankruptcy

Whenever I talk about credit, bankruptcy inevitably comes up.  Since I am not a bankruptcy attorney, I cannot speak about it with any degree of expertise.  As far as credit goes, I have seen bankruptcy work for and against people - only you and your accountant and attorney can determine if bankruptcy is the best solution for you.  I haven’t been an active lender since the bankruptcy rules changed, but I know that it’s more difficult to file today than it was a few years ago. 

If you do decide to declare bankruptcy and want to reestablish credit quickly, I recommend getting a secured credit card immediately (a secured card is exactly what it sounds like - a credit card secured with a savings account or CD at the bank issuing the card).  Keep in mind that a bankruptcy will stay on your credit report for 10 years (3 years longer than derogatory payment information), but for people that are perpetually behind on all of their bills, it can be a life-saver.   

For more information on FICO scores check out myFICO.com or calculate your estimated FICO score here.

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