Credit Report and Score Important

Dear Dr. Dave and Dr. Dee,

Why is a credit score important?

Signed,

Don't know the score

Dear Don't know the score,

Both your credit report and credit score are important for two reasons:

1) Identity Theft: monitor your credit report to prevent identity theft

2) Credit Score: measures your credit risk, and could save you money. Generally, the higher the credit score (FICO) the lower the loan rate offered.

To minimize the risk of identity theft, examine your credit report for any inaccurate or incomplete information. If you think your identity has been stolen, you can place a fraud alert on your credit report, which makes it more difficult for the thief to get credit in your name.

Your credit report is an important piece of information about your finances that all lenders examine. If you ever plan to purchase or lease a home, car, or need a second mortgage, the lenders will check your credit score.

Credit scores are called FICO (Fair Isaac and Co) after the company that developed the scoring system. The higher your FICO, the better the rate. If your credit score is too low, you are considered a credit risk and will have a more difficult time finding a lender or the rate will be high.

A person receives a credit score within the range from 300 to 850. The higher the score, the better the loan rate. Credit scores over 760 get the best loan rate.

For example, if you wanted to borrow $300,000 and received a 15 year home equity loan, then below compares two FICO scores by loan rate and monthly payment (www.myfico.com):

FICO = 760, APR = 4.778% equal to $1,570 monthly payment.

FICO = 630, APR = 6.367% equal to $1,870 monthly payment.

By having a good FICO, you could save $300 per month, or $54,000 over the life of the loan (myfico rate as of 1-22-09).

There are three major credit reporting companies that track your credit risk, Equifax, TransUnion, and Experian. According to the FTC (Federal Trade Commission at www.ftc.gov), each of the three companies is required to provide you with a free copy of your credit report upon request once every 12 months. However, you will have to pay to get the FICO scores from each company. Each company may give a slightly different FICO score, usually not varying by more than 50 points, but it is best to check your FICO score from each company.

FICO scores are based on how you manage your money, mainly in terms of debt and payment history. The credit report details how much money you owe and whether you pay your bills on time. Other categories used to determine credit scores are length of credit history, types of credit in use, and new credit requests. Your income and net worth are not figured in the FICO.

To get free credit reports, go to www.annualcreditreport.com or call toll-free: 1-877-322-8228

For more information about credit reports and FICO, see www.fico.org and http://www.ftc.gov/freereports