Financial Planners: A New Look at Credit Scores

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Contributed by Herb White, CFP, Life Certain Wealth Strategies

Nothing ever stays the same, and that goes for how your credit is scored. Now, the size of your balances counts more than it did in the past. This is due to concerns by creditors about large balances—especially those that are getting close to the total credit limit. Prior to the recession, we needed to be more concerned about the effect of late payments and going over a credit limit on our scores than we did our total debt.
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So getting your balances down to under half of your credit limit is a good goal. Even better would be to pay off your credit cards and only use them if they can be paid off at the end of the month.

The recent changes to credit scores were made by the Fair Isaac Corporation (FICO), the company that developed the scoring system, which helps creditors assess an individual’s creditworthiness. This latest revision in the FICO system will actually allow a bit of lenience on late payments. This may be good news for some consumers these days. Obviously, this won’t mean that someone can chronically pay late, but once or twice won’t have the same impact as in earlier FICO versions. Note that this is not related to any late charges that a creditor might apply.

Here are some issues to keep in mind next time you head for your wallet to pull out your credit card.

* Lenders look at the big picture during the slumping economy. They examine the amount of credit you’re actually using relative to your credit limit and are concerned with high balances overall. From the lender’s perspective, more debt means a higher risk of default.

* What is a good number these days? You’ll need at least a 740 score for the best rates. Although credit scores around 700 were considered ideal in the past, you will want to have the best status with lenders now. Always aim for the highest score and keep in mind that for the lowest rates and best terms, you need to get your credit score above 740.

* By the way, the highest score you can get is 850.

* If your credit score is low, and you are considering refinancing or applying for a new credit card—even a department store or gas card, you should wait until you have brought down your debt and your score is better. Start by deferring any large purchases.

* Once your scores have improved, keeping them high means careful, ongoing budgeting—or they will probably slide again.

* Monitor your credit reports regularly. Remember that you have the right to get all three of your credit reports, from Experian, TransUnion and Equifax, once a year for free. Contact each one individually at www.annualcreditreport.com and ask for a report at different points in the year. That means you’ll get an extended picture of how your credit picture looks because the three bureaus feed each other the latest information. You’ll also be able to clean up errors as you find them—errors can negatively impact a credit score—and you’ll also be able to watch for identity theft. Make sure you use the website above and avoid the businesses that use “free credit report” in their title. If they ask for your credit card number, don’t do business with them.

* Does mastering your scores seem like an overwhelming project? Get some advice. Sit down with a financial planner to come up with a budget plan and then get started on retirement planning, saving for kids’ college and staying debt free.

Courtesy of Herb White, MBA, CFP, a Certified Financial Planner™ with Life Certain Wealth Strategies in Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member NASD, SIPC and Registered Investment Advisor.  Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities. .

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