Is your credit score costing you
money?
In these uncertain financial times, even those with
excellent credit histories may have trouble getting a mortgage or other type
of loan. That’s why it’s important to know your credit score and the effect
it may have on your checkbook, according to the Iowa Society of Certified
Public Accountants.
Why it matters
Your credit score is based on your financial situation and your past history
of managing your credit. Companies use it to decide whether or not to extend
you credit or a loan.
Many people understand that lenders check credit
scores when an individual applies for a mortgage, a credit card, or for a
car or student loan. You may not be aware, however, that your score can also
be important when you try to rent an apartment, since more and more
landlords want access to this information to help gauge whether tenants will
keep up with the rent. In addition, a bad credit score could mean higher car
insurance premiums and an inability to sign up for certain cell phone plans.
Finally, you may be surprised to learn that even some employers may check
your credit score to get a better sense of the character and reliability of
the person they’re planning to hire.
The facts behind the score
There are three national credit bureaus: Equifax, Experian, and TransUnion.
Each one has its own scoring method, but they are all typically based on one
model, often known as FICO. Your credit score generally can range from 300
at the low end to 850 at the high end. It is calculated based on a number of
factors. The most important is your payment history, including late payments
and bankruptcies. The score also takes into account how recently any
problems have happened, so a payment problem several years ago should carry
less weight than a recent one. Another factor is your current debt
situation, including how much debt and how many credit cards you have. The
credit bureaus also consider the length of your credit history and whether
you have long-term loans or short-term installment debt.
In dollars and cents
What’s the actual impact that a weak credit score will have on your
finances? The FICO web site (www.myfico.com)
provides some answers based on recent interest rates. The monthly payment on
a $25,000, 36-month auto loan might be about $763 for someone with a high
credit score in the 720 to 850 range, because they would be charged a low
interest rate since they are considered a good credit risk. Conversely, a
borrower in the 620-659 range would pay around $814 per month and someone
with a low score between 500 and 589 could end up paying around $868. That’s
$100 more per month than someone with the best credit score. Borrowers with
a low credit score seeking to take out a 15-year home equity loan or a
30-year mortgage could pay several percentage points more in interest on the
loan, which could translate to hundreds of dollars a year, depending on the
size of the debt.
Consult your CPA
What’s your credit score? Everyone is eligible to receive a free credit
report annually from each of the three major credit rating bureaus. To learn
more, go to
www.annualcreditreport.com or call 877-322-8228. It’s a good idea to
check your report regularly to monitor your score and to ensure you haven’t
been the victim of identity theft. Fraudulent use of your credit cards or
identity can also lower your credit score.
Be sure to turn to your local CPA for answers to
any questions you may have on managing your debt or other financial issues
facing your family. To access “Find a CPA” on the web, go to
www.findanIowaCPA.com.
