Improve Your "Credit Score"-And Pay Less for a Loan

Article excerpt

The interest you pay depends on ratings that lenders have long kept secret. Finally, you can get your hands on your own numbers-and perhaps apply some polish.

One lender likens today's controversial credit industry practices to a scene in the movie Cool Hand Luke. In the film, a prison guard knocks inmate Paul Newman to the ground. "What we've got here," the guard announces, "is failure to communicate."

If the lending industry is the guard and consumers the prisoners, the comparison is apt-except that most borrowers don't even know they've been hit. "Creditors aren't using credit reports anymore," says Ron Kingston, a lobbyist for the California Association of Realtors. "They use credit scores. And credit scores are not subject to consumers' right to review or correct or seek civil remedies."

In the past 10 years, credit scores have become statistical scalpels that separate borrowers into ever-finer groups according to default risk. Then lenders offer prospective borrowers loans with still finer gradations of costs. Even if you're a "prime" borrower, you could pay a higher interest rate than someone else who's a little more prime than you are. And credit scores get factored into virtually all of today's mortgage evaluations, not to mention lenders' decisions on car loans, credit cards, and other forms of consumer borrowing.

Until this year, you often couldn't even find out where you weighed in on the creditworthiness scale. Vigorous protests by consumers have changed that, though: Equifax, one of the three major credit bureaus, now offers scores and credit reports together for $12.95 online (www.equifax.com), and the other two credit bureaus are about to follow suit. Experian says it will make scores available for $6 each by July 1, and Trans Union aims to provide scores along with credit reports by the end of the year.

The scores rate borrowers by credit history, usually on a scale of 300 to 850. However, all three credit bureaus, as well as many individual lenders and industries, use customized versions of the standard scoring formula, so their scales can vary a bit. You'll probably get a different score from each credit bureau. Mortgage lenders will use the middle score, not an average, and they'll combine it with other data, including the appraised value of the property and information from your loan application.

Most consumers score in the mid-600s to mid-- 700s, according to Fair, Isaac and Co., the San Rafael, CA, credit technology firm that developed the first risk-scoring formulas. (Because the firm dominates the industry, scores are often called FICO scores.) "In very broad strokes, the best interest rates are available to those with a score above 660," says Keith Gumbinger of HSH Associates, a Butler, NJ, firm that tracks mortgage rates. "But it ain't necessarily so: At the other end of the scale, credit scores below 620 are usually considered "subprime. Borrowers in this category can expect to pay higher rates for loans.

Even if a less-than-perfect FICO score boosts your interest rate by a small amount, the difference can add up to big money over time. A 7.75 percent rate on a $270,000, 30-year mortgage will cost you $92 more a month than a rate of 7.25 percent-$33,120 in extra interest over the course of the loan. Factor in what you could earn if you were to invest that money instead of paying it to the lender, and the difference really becomes startling.

Do you really want to hand your bank $33,120 more than necessary? We didn't think so. So if you're in the market for any kind of credit, pay attention: We're about to tell you how the scores are calculated-and how you might be able to boost yours. Making the right moves could save you a substantial amount, particularly if you're considering a mortgage or other large loan.

How credit scores are calculated

FICO formulas don't always work in a doctor's favor, especially if the doctor is young. …