Vail Daily column: What it takes to get a credit score
Once upon a time, a individuals perceived social standing was dictated by family ties, education, address, club memberships and occupation. As a result, many lending standards of bygone years were tilted towards certain social groups.
This resulted in a lot of discrimination when lending, which deprived a lot of groups of people from the benefits of home ownership and the financial and emotional security that in most cases comes with it. Granted, home ownership has been financially ruinous for many people in the past eight years, but historically homeownership has been overwhelmingly rewarding in many ways. There are many social benefits as well to having as many people owning a home as possible.
To remedy this discriminatory lending, a method needed to be found to evaluate a borrower’s credit worthiness that was blind to all the extraneous factors noted above. That brought about credit scoring, most notably developed by a company called Fair Isaac and their FICO scoring.
WHY YOUR NUMBER MATTERS
FICO scores analyze all the data in your credit bureau file and determine the likelihood of you defaulting by generating a three-digit number. The higher the number the less chance you will default (660 is a good minimal number, in the 700s is better. The scores top out at 850 generally, and less than about 1 percent of the population achieves over 800. A large part of a lenders decision is now based on credit scores.
These days if you don’t have a FICO score, even a bad one, you’re going to miss some opportunities in life. Try and buy a home without an established credit history and you had best have a rich uncle to loan you the money or have just hit the lottery. No conventional loan programs are available to people without a FICO score, and there are a surprising number of people in the world who have never had a credit card or loan and even more who have not had one lately.
WHAT IT TAKES TO GET A SCORE
To get a valid FICO score takes at least three things. First (this is the easy one), you must be known to be still alive (meaning the Social Security Death Index has not flagged your Social Security number as belonging to a deceased individual).
Second, you must have had one credit card or loan open for six months. (This is the chicken or the egg dilemma.)
Third, one credit card or loan in your name must have an updated status within the last six months.
THE CHICKEN OR THE EGG
As to the chicken or the egg problem (getting a card or loan with no score), it is often possible to get a small line of credit on your checking account or a department store card with no credit history. Car loans are possible, but you might have to pay a higher rate and put down a larger down payment. Sometimes a family member can co-sign for a card or a loan.
HOW YOUR SCORE IS FIGURED
Note the six-month timeline is crucial here. If for example you had a car loan or student loan and paid it off a year ago and never missed a payment but had no other credit in the mean time, you probably won’t have a FICO score and while you might be able to get another car loan or a small card, you won’t be getting a conventional mortgage or a Amex Platinum card anytime soon. But if you were to get a new card or loan, your score history would include your payment activity on your older credit activity and strengthen your score. Loans from private individuals and utility bills or rental payments don’t count when it comes to figuring your credit score.
There are numerous other aspects to managing your credit that will impact your credit history, and whatever you do, try to never miss a payment. Even not paying a library book fine or a parking ticket can end you up in collection. I once had to decline a loan because the borrower had a library book fine of about $30 that had gone to a collection agency and it whacked her credit score about 50 points.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.