Consumers need to see how their credit score charts against other people and against what the lenders are saying the matching interest rates are.

The population of the U.S. is split when it comes to FICO scores.  About 40% of us have a 750 or above, but 55% have a 700 or above.

Population statistics are meaningless though.  You shouldn’t care if you are keeping up withe the Jones and the Smiths, especially if there scores are lower.    The key relationship is between FICO scores and interest rates.  Now, credit scores are not the only factor in determining interest rates.  I just met a woman with a thin file, but she was well off and willing to put down 50% on a home loan. She got a great rate.  But back to the more typical scenario, the one for the rest of us.

Note, that the chart from myFICO shows that the best interest rates go to 760 FICO scores and above.  This chart back in May 2005 used to have a top range of 720+, but was changed to 760 and above and has been this way ever since.

If nearly 4% of consumers are 60 days late on paying a mortgage but only 1% are 90 days late on paying credit cards, are people paying off their credit cards before their mortgage? That would be a historic change.

THE ASSOCIATED PRESS

NEW YORK — The percentage of people who were delinquent on their credit card payments rose in the third quarter from the same time last year, while average debt per borrower jumped 7.7 percent, according to credit reporting agency TransUnion LLC.

For the quarter ended Sept. 30, 1.09 percent of credit card holders were delinquent at least 90 days on one or more of their cards. That compares with 1.03 percent for the third quarter of 2007, and an increase from 1.04 percent in the second quarter of 2008.

The rise in delinquencies in the third quarter reflects cyclical trends that show late payments tend to rise in the late summer months, according to Ezra Becker, principal consultant in TransUnion’s financial services group. The year-over-year gain is yet another indicator of the difficult economy, he said, although it also shows that more than 98 percent of people are paying their credit card bills on time.

“Clearly there are increases in certain states that are higher than others, so there’s an economic impact there,” Becker said. “But really, we haven’t seen delinquencies on the card side reach the historic highs that we’ve seen on the mortgage side.”

He noted that card issuers have more flexibility than mortgage issuers, and can do things such as lower credit card limits to stop holders from using their accounts.

The figures are extracted from TransUnion Trend Data, which consist of 27 million consumer records randomly sampled each month from the credit reporting agency’s national consumer credit database.

The average debt per borrower for the second quarter stood at $1,742, up 7.7 percent from $1,617 in the third quarter of 2007. Debt per borrower increased 1.4 percent from the second quarter, when it stood at $1,717.

“This is a clear impact of the recession,” Becker said. “People are relying more on their credit cards to make ends meet, to bridge the gap paycheck to paycheck.”

• FICO score system goes from 300 to 850
• VantageScore goes from 500 to 990
• Experian’s PLUS score goes from 330 to 830

If you are thinking about a loan, you should know that most lenders use FICO scores and that it is well worth saving $1000s over the life of the loan to check your FICO scores instead of relying on non-FICO scores to guide you. In addition, all 3 FICO scores from all 3 bureaus should be checked if you are looking at a refinance or a home loan.

Credit Score Review

When you get your credit score or credit scores, you need to review your score(s) to find out where you are and where you need to go.

To evaluate where you are, you need to know what kind of credit score you have. Is it a FICO credit score? One of the non-FICO credit scores? Once you know this, you need to look at the range of the credit scores to see where your credit score rates. By rates, do I mean percentile vs. others? No , that’s not that interesting, Who cares how you compare to others if the whole group is doing poorly? For instance, it used to be that a 720 was a great score and now a 760 seems to be the new great credit score. Therefore, you need to know where your score falls in relationship to the interest rates charged by credit score.

myFICO.com has a great chart on their home page that shows the relationship of credit scores to interest rates. This shows you where you fall. Have a great score? Great, make sure you get educated to keep your score high. We recommend FICO score monitoring product Score Watch. Low score? You might be tempted by those ads to raise your credit score. Don’t mind them, you can raise your score on your own. Even the FTC agrees with this. Don’t get tempted by credit repair shops as well. If anything, you want to seek out credit counseling from a U.S. Department of Justice approved agency.

The culprit? I let my American Express go up by $1000. How? I didn’t stick to my own plan of paying 2x per month and it hurt my score. One of the key strategies to improving your credit score is leveraging the fact that you get paid twice per month, to pay off each month.

Aren’t tracking your credit score? Start tracking your FICO score now with Score Watch

792 Credit Score, Down -5 from October

Ready to cry “Big Brother Tactics”?

Well, don’t point a finger just at the government. Over 20% of all employers are checking credit scores EVERY time according to a study by the Society of Human Resource Professionals. Plus, that study was done a couple of years ago, so I suspect that the numbers are even higher now. Yes, this is legal. Yes, it is common. Yes, you need to be aware of this.

How about an apartment search? Over 59% of landlords reportedly check credit reports/scores as part of their application process.

The reality is that credit scores are used for most important decisions we face. It should be no surprise that Obama’s staff applicants are under this financial scrutiny.

Inquiries do impact credit scores, but not nearly as much in relationship to the amount of media attention they get.  It seems where ever I look, I see a blog post about credit inquiries saying “you’ll get dinged” or my personal favorite credit myth “checking your own credit score hurts you”.

First off, let’s define an inquiry.  There are two types of inquiries:  soft inquiries and hard inquiries

• Soft inquiries are when you pull your own credit or when your credit is pulled for a non credit/lending related decision.  Examples: getting your score on any of the consumer credit score websites or an employer pulling your credit
• Hard inquiries are when a lender checks your score for an application of credit.
• Both types are listed on your credit report

Hard credit inquiries impact your credit score because a bunch of smart math doctorates figured out that applying for a lot of loans was correlated with higher risk.  This rule was put in place back before the internet, so the folks at Fair Isaac had to come up with a nice caveat for online loan shopping.

• Any mortgage loan credit inquiries in a 30 day period are counted as 1 credit inquiry [this varies slightly by FICO software version, some allow for 45 day windows].  Sadly, auto loans don’t have a similar feature, nor do personal loans.

At 10% of your credit score, sure, inquiries are important.   But, timing is the key issue, hence, I like this golden rule:

• Don’t apply for new credit cards or a new cell phone a couple months before you plan to get a home loan.

Can adding to the mix hurt you? Sure, I added an expensive [note: i live in San Francisco] mortgage to my credit file, and while the mixture might have helped, it was countered by the high amount of debt I’m now carrying. So, my score went down. I suspect my score will reach it’s all time high, if and when, I claim that mortgage as paid in full.

Of all the credit score factors, this ranks lower than most, but considering we are moving into a time when every point in the score can make a difference, it’s worth looking into.

So, let’s say you’ve got a two credit cards, they have the same limits, the same balances, etc. The one difference is you’ve had one for 1 year and one for 10 years. Which one is helping your score more? The older account. Risk models love data, and more history means more data. More good history means less risk.

Parents: Your length of credit history is set, but you can help your kids. Get them started early with a secured credit card. You can do the authorized user card approach, but I think the secured card builds better habits.

This is why a model FICO score user has over 18 years on their oldest account. Time is your asset, if you start early. But start early and smart… please

Plus, you want to consider paying off loans early if you can. Having a car loan paid in full on your credit report is better than having one with payments still to be made.

Looking for a tip on managing amounts owed? Here’s two:

1. Pay off your balances twice per month, on your payday. Heck, you get paid twice per month. You might as well pay off expenses twice per month as well. Why does this help? If you pay your balance off twice per month, you have an opportunity to reduce the balance figure reported to the bureaus. A $1000 balance could be half paid before the issuer reports to the credit bureau, so now $500 balance is reported. This helps your credit utilization ratio and improves your credit score
2. You can get set the closing date for your credit card and make payments ahead of that date. Your credit cards have due dates and closing dates. Let’s say those are the 15th and the 5th, respectively. If you make a payment on the 12th each month, you are reducing the amount reported as a balance and it has the same impact as discussed in #1.

If you don’t want to do these things, you should consider using your credit a bit less until you are in the 10% credit utilization range.

Finally, you can impact your CUR by having your credit limits raised. This is getting harder now as many companies are starting to reduce credit limits, but it’s still worth a shot.

At 30% of the credit score factors pie, amounts owed should be carefully managed.  Remember that along with Payment history, these two factors are 65% of your credit score.