Sunday, October 16, 2011

Myths, misperceptions about credit scores rampant

NEW YORK - A poor creditscore can make it hard to get a mortgage, a new car or a decent interest rate on a credit card.

Yet 42 percent of those polled in a recent Visa Inc. survey never bother to check their score.

By ignoring this vital measure of credit worthiness, consumers may be missing an opportunity to improve their score. And for many, failure to take any action could cost them thousands in higher interest payments.

One reason for neglecting this issue is that scores usually come with a price tag.

Anyone who wants to check their scores before applying for a loan will have to pay.

FICO Inc., the company that created creditscoring, sells its scores for $19.95 on its website, . The company also offers periodic score monitoring services starting at $4.95 per month.

The three main reporting companies, Equifax, TransUnion, and Experian, most commonly provide FICO scores to lenders; but FICO scores aren't the only one's out there. The credit agencies also calculate their own scores that they sell to consumers

Equifax and TransUnion sell VantageScores, which range from 501 to 990. VantageScores are used by some lenders but have a far smaller piece of the market than FICO scores. Some Equifax products also include FICO scores.

Experian offers both VantageScores and its own calculation, called a PLUS score, which ranges from 330 to 830. PLUS scores are "educational" scores that are not used by lenders.

Lenders are now required to provide the scores they considered to applicants who are denied credit or given a higher interest rate. But even the FICO scores provided to lenders by the three agencies won't likely be identical, either because the details on credit reports can vary or because they use different formulas created by FICO.

Watch out for promises of free credit scores. These offers usually require you to sign up for a score monitoring service that charges a monthly fee. The website is genuinely free, but offers only an approximation of a score, not an actual score that is used by a lender.

It helps to know what information is used to develop a credit score. A FICO score is calculated from the following data:

- 35 percent: An individual's payment history, whether or not payments are made on time.

- 30 percent: Amounts owed and how much available credit is being used.

- 15 percent: Length of credit history, or how long each account has been open.

- 10 percent: An individual's use of new credit or recent applications that resulted in a credit score check.

- 10 percent: What types of credit the individual is using - mortgages, car loans, personal loans, credit cards, etc.

The Visa survey, however, found that many consumers are misinformed about the type of data used to calculate scores.

The main points are well known. The survey found 78 percent of the respondents knew that bill payment history is factored in, and 71 percent were aware that current debt levels have an impact.

But just 13 percent knew that bankruptcy would be considered as part of payment history. And an alarming number of those polled also had wrong ideas about other types of information being included in the equation.

For instance, 64 percent believe that income is a factor, and 60 percent think employment history counts. Nearly 59 percent said they thought the interest rates on current debt matters for scores, and 53 percent think assets or savings is weighed.

A substantial number also mistakenly believe that demographics play a role. Among the mistaken beliefs are that traits like gender, race, national origin or the ability to speak English are factored in - with the number one misconception being the 39 percent that thought age is included.

In fact, FICO points out on its website that it's illegal to consider age, race, religion, national origin, gender and marital status in credit scoring. The company says it only considers the payment and account information found in a credit report.

If you find you have a low score, but you know your payment history and other factors are good, it may indicate there's incorrect information on your credit report.

That means a head-in-the-sand approach to the numbers could result in missing out on early detection of issues like identity theft. It may even put getting a new job in jeopardy.

Employers cannot access credit scores, but a poll last year by the Society for Human Resource Management found that 47 percent of all employers check credit reports for at least some job applicants, usually those who will have some financial duties. The group found 13 percent check all applicants. Several states prohibit checking credit history as a condition for most hiring, including California, where Gov. Jerry Brown signed a law on Monday limiting credit report checks for employment purposes starting Jan. 1.

Everyone is entitled to one free credit report from each of the three credit agencies every year. Reports can be requested at .

by Eileen AJ Connelly Associated Press Oct. 12, 2011 01:59 PM

Myths, misperceptions about credit scores rampant

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