April is Financial Literacy Month, and although the month is almost over I believe it's wise to be smart about money year-round. This is as good a time as any to talk about it.
Specifically, let's discuss credit scores because they play such an important role in your ability to borrow money. Mortgages are my chief interest, of course.
Assisting me today are the folks at Clarifi, until recently known as the Consumer Credit Counseling Service of the Delaware Valley (http://goo.gl/qNVbo), and the credit-score website MyFico.com.
I recommend further research at these sites and others.
I'll use my space here to outline some of the things that go into your credit score and how to prevent that single late bill payment in 1992 from messing it up.
First, a credit score is a number used by lenders to determine your credit worthiness, based on the information in your credit report.
Fair Isaac Corp., or FICO, produces these scores, using information obtained from the credit reports on you generated by three agencies: Experian, TransUnion, and Equifax.
Most credit scores fall between 600 and 750. Anything below 600 these days means that being approved for a loan will be very difficult. It also means that the interest rate you'll be given will not be the lowest. But mortgage underwriters have considerable leeway when making such decisions.
Scores higher than 700 are considered good and usually bring faster mortgage approvals and lower rates.
Many of you, however, have reported problems obtaining mortgages or refinances quickly, even with scores exceeding 800.
When I looked into those situations, the problem was not the credit scores but appraisal issues or the processing, which is overwhelmed by record foreclosures and poorly trained staff. Generally, high credit scores do make a difference in quick approval.
Here are five factors used to determine credit score:
• Payment history is about 35 percent. Late payments, bankruptcies, and other negatives on your credit report can bring down your score.
• How much you owe is about 30 percent. FICO looks at that, as well as the number of accounts with balances and the amount of credit available to you. Clarifi says it's a good rule to use only 30 percent of your available credit.
• Length of credit history is worth about 15 percent of the score. A lengthier credit history is better for your score, but it's still possible to have a good score if your credit history is shorter. So if you're going to cancel a credit card, make sure it's not the card you've had the longest. A card with a longer history is better for your score.
• New credit is about 10 percent of the score. Opening new lines of credit can actually hurt your score, but not by much — usually, less than five points. That's because the "inquiries" lenders do when checking your credit can be counted against you. If you're rate-shopping for a new loan, do it within a certain period of time, such as 30 days, to avoid putting any dings in your score. However, scores can tell the difference when you're rate-shopping for multiple lines of new credit or just one type of new credit.
• Kinds of credit used are worth about 10 percent of a score. Having different types of credit is one of the things that can affect your score. So having a mix of credit cards and installment loans, including a mortgage, along with a student or auto loan, can be good for your score.
One way to boost your score is to pay off a loan balance, rather than move it around to lower-interest accounts. Another is to manage your credit cards responsibly.
A third is to set up a method to remind yourself to pay the bills when they are due.
Paying online appears to be the easiest way to do so.