Improve Finances with a Lower Credit Score

Physician's Money Digest, December 2006, Volume 13, Issue 12

Knowledge is power, and two new online simulatorsare providing consumers with the knowledgeand the power to take better control oftheir finances. In the past, credit scores—those all-importantnumbers that indicate a person's creditworthiness—were kept secret from consumers. But withonline simulators created by organizations such as FairIsaac Corporation (FICO) and CreditXpert, consumersare now armed with the tools to help them make better,more informed decisions by knowing their score.

New York Times

According to a report, the onlinesimulators enable consumers to hypothetically adjusttheir credit scores. In other words, what would happenif an individual paid off all of their credit card balanceseach month, or applied for an auto loan? For individualsseeking to purchase a home, knowing how toimprove their credit score before applying for a loan isvaluable information—credit scores can directly affectinterest rates on loans.

Credit scores range from a low of 300 to a high of850, and the higher the number the better. Accordingto the article, an individual's credit score is based onthat person's payment record, how much money theyowe, how long the person has used credit, the characteristicsof the newest credit (eg, credit limit), and thetypes of credit being used. Owning too many creditcards, for example, can lower an individual's score, butso can owning too few.

Explore Online Simulators

FICO offers the myFICO Score Simulator (www.myfico.com). The site offers consumers the opportunityto explore hypothetical situations, such as transferringcredit card balances, increasing credit card spendinglimits, or missing a few payments.

Times

Why is it important to know the results of yourfinancial actions? In an example in the article, achiropractor in Virginia learned that his credit scorewould double if he made a sizable payment on one particularcredit card vs another. He also found out thattaking a loan to remodel his kitchen had little effect onhis credit score. This particular example illustrates thatfinding out this projected information can providepeace of mind when shopping for a loan or looking torefinance an existing home mortgage.

Times

What can make a credit score rise or fall? Assume anindividual has a solid credit score of 707 and threecredit cards. According to the article, which usedthe myFICO simulator, if they paid off a third of thebalance on each of their three cards, they could add asmany as 20 points to their score. Failing to make thecurrent month's payments could cause their score todrop between 75 and 125 points. In addition, using allof the credit available on the three cards could droptheir score by another 20 to 70 points.

Improve Your Credit

Times

The article also examines various scenariosusing the What-If Simulator offered by CreditXpert fora consumer with a credit score of 727 points. Forexample, every time they applied for a loan—whetherit was for a home mortgage, auto, or even a new creditcard—their credit score would drop five points.

That's because lenders believe that taking on new loansmay make borrowers less likely to repay current debts.Experts suggest using the same method collegestudents practice in order to raise their College Boardtest scores—use simulators to analyze the steps theyneed to take in order to raise their credit scores. Inessence, the lower your credit score, the lower theinterest rate you might qualify for when taking out ahome mortgage.