Monday, October 27, 2003
Do you know your credit score?
It's a trick question, because credit scores -- those three-digit summations of how well you handle your money -- are reminiscent of physicist Werner Heisenberg's famous observation about electrons: You can never quite pin them down, because even the simple act of measuring their location can change it.
Credit scores, too, can be volatile. They're affected by dozens of factors in often-mysterious ways, because they're based on mathematical models that their creators insist on keeping secret.
Delinquencies obviously play a role. So do account balances, credit limits, the number of accounts you have, how many accounts you've opened recently, even the types of credit you have. Credit cards may be weighed differently than installment loans, for example.
And, yes, the simple act of prompting someone to check your score -- as you'll invariably do if you apply for new credit -- can lower it.
Debunking myths
But here's the good news: There's no effect if you're the one doing the checking, according to Craig Watts of Fair, Isaac & amp; Co., the California company that developed the most widely used credit-scoring model in the 1980s and has sold its "FICO" scores directly to consumers since 2000.
Watts says the negative effect of credit inquiries is one of the enduring myths about credit scoring. Another is that closing unused lines of credit is a quick way to raise your score -- depending on what else your record includes, closing accounts could lower it by increasing the ratio of your debt to your overall credit limit.
Understanding what's behind your FICO score can help you get a better handle on how the system works -- and on why it's so important for you to keep tabs on your credit record.
The national credit bureaus are continually amassing data about you. Credit scoring was developed as a way to capitalize on all that data, by predicting your statistical propensities.
The data may suggest you're relatively likely to do things that you, as an individual, wouldn't dream of doing -- such as stiffing your creditors or declaring bankruptcy.
That's why inquiries matter. When Fair Isaac crunches the data, Watts says, it finds that people who have six or more inquiries within the last year are about eight times as likely to declare bankruptcy as somebody who has no inquiries.
That doesn't mean, by the way, that you should be scared of shopping around for a loan. FICO treats multiple requests for your credit record as a single request if they occur within a two-week period. Inquiries from insurance companies never count against your score.
But generally speaking, if a characteristic tracked by the credit bureaus is shown to statistically predict an increase in a borrower's relative risk, then it will lower his or her FICO score.
No matter how high-tech this all seems, remember that you play a key role in protecting the accuracy of your score.
Remember the computer programmer's adage, "Garbage in, garbage out"? Well, not every "fact" on every credit report is accurate. No one but you will catch mistakes.
You can spend months writing to the credit bureaus disputing the mistakes. Under federal law, they must investigate and respond within 30 days. (For information , go to www.ftc.gov/bcp/conline/pubs/credit/fcra.htm.)
XJeff Gelles is a columnist for The Philadelphia Inquirer. Write to him at: The Philadelphia Inquirer, P.O. Box 8263, Philadelphia, Pa. 19101 or e-mail consumerwatch@phillynews.com.