How would you feel if everyone in your neighborhood knew something about you that you didn’t know? Uncomfortable? At a disadvantage? Well, if you don’t know what your credit scores are, you’re sort of in the same boat – because every creditor you apply for financing with knows your score, and so do most insurers and many employers. Why would you give them that much power?
At the Dealership
Imagine that you’re at an auto dealership, drooling over your next car. Everything’s done but the paperwork. Surprise! The finance manager is standing there, looking uncomfortable. Your credit score (also called a FICO score) won’t qualify you for a car loan. Why? You assumed your credit was okay, and now you see that the boat loan you co-signed for your husband’s deadbeat cousin hasn’t been paid in months. You slink out of the dealership, mortified. Had you looked at your credit report in advance, you’d have avoided some embarrassment (and perhaps fixed the problem before it got out of hand).
Meanwhile, your neighbor is at the car lot across town. He marches in with an advertisement for zero percent financing and orders a new convertible. He’s livid when the salesperson informs him that the zero percent loan is only for buyers with FICO scores of 760 and over, and his is a measly 748. However, the salesperson says they can finance him at six percent. Frustrated, he accepts the dealer’s offer. Had your neighbor checked his scores, he’d have been able to negotiate a better interest rate. Here’s why.
The Many faces of FICO
Most people don’t know that the credit reports they see and the scores they purchase aren’t usually the same ones that lenders get. In fact, there are about 50 different FICO scores, geared to different applications and sold by the major credit bureaus – Experian, TransUnion and Equifax. So a mortgage lending score might be different than an automotive FICO or an insurance FICO. And Equifax’s automotive FICO might assign you a lower score than TransUnion’s. If a lender tells you that you’ll have to pay a higher interest rate because your score is 748, and you have a report showing that your score is 765, that’s a powerful negotiating tool. You can demand the rate you deserve or take your business to a dealership or mortgage lender that uses a different (better) scoring model.
For most conventional (non-government) home loans, your credit score determines your mortgage rate. In fact, Fannie Mae and Freddie Mac, the companies that buy and sell most mortgages in the US, have very specific pricing adjustments that depend on credit scores. These pricing systems divide applicants into 20-point credit scoring tiers, for example FICOs from 600-619, 620-639, and so on. When you improve your credit and jump up a tier, you’re offered a better mortgage rate. Conversely, if your score drops a single point, say from 660 to 659, it could cost you hundreds or even thousands of dollars.
Knowing your score and the tiers (click here for Fannie Mae’s matrix) can help you position yourself to pay less, either by boosting your score a few points before applying for a loan, or by dealing with mortgage lenders that use a friendlier scoring system.
Finally, arguably the most compelling reason for keeping tabs on your credit history and credit scores is identity theft. Unless you relish the thought of some creepy couple sailing around the world after emptying your bank account and wrecking your credit rating, taking a periodic peek at your credit is a wise move.
It’s not even expensive or difficult. By law, you are entitled to a free copy of your credit report from each of the three bureaus once a year. That means every four months, all you need to do is go to www.annualcreditreport.com (the government’s hassle-free and no-cost site) and request a report from one bureau. For a small charge, you can also purchase your credit scores. And remember – any time you are turned down for credit, you’re also entitled to a free look at your credit history.
Knowing what’s on your report helps you dodge embarrassment, negotiate better terms, and thwart identity thieves. The link is RIGHT in this article. You might as well click it now and make sure your house is in order.