Your Credit Score is More Important Than Ever

The economy is in freefall. Since the credit crisis, people with poor credit scores, and even those with better credit, are seeing their options dwindle and rejection rates soar. Having an excellent credit score, says Liz Pulliam Weston, personal finance columnist and author of Your Credit Score: Your Money & What’s at Stake: Updated Edition (FT Press, March 2009), is more important than ever. So is knowing how to fix, improve and protect your score.

PMD: Why is your credit score so important in today’s economy?

Weston: What has happened since the credit crisis is it’s turned into a world of credit haves and have nots, to a degree that I could never have predicted this. If you have credit scores of 740 to 750 and above, you wouldn’t even know there was a credit crisis, you still can get plenty of credit card offers, best rates on home loans and car loans … the world of borrowing is still open to you. You get much below that, and it has become pretty tough.

PMD: Are people more aware today of their credit score?

Weston: People are definitely more aware of credit scoring, but there’s still a lot of confusion about how they work, and in particular what you’re looking at. Because if you went to Experion, for example, you couldn’t get your FICO score. They don’t sell FICO scores to consumers from their website. In fact, they don’t sell FICO scores to consumers at all now. All FICOs are credit scores, but not all credit scores are FICO. And FICO is the leading formula, and you have a FICO at each of the three credit bureaus: Experion, TransUnion and Equifax. And it’s frustrating because people will buy their score and think they know where they stand, and then go to a lender and find out no, you don’t have the score you think you have. And your scores are changing all the time.

PMD: Are credit scores even more important to physicians in private practice?

Weston: Yeah, and I think so particularly now because we’re looking at a lot of banks that are trying to reel in lines of credit. And lines of credit are the lifeblood of most businesses. If you don’t have the cashflow to make payroll you borrow a little and then you pay it back. And right now we’re seeing a lot of banks reeling in those credit limits. If you have a good credit score you have leverage. They actually want to keep the people who are good risks. Most often small businesses rely on your personal credit. For example, I have a business credit card for my business, but it shows up on my personal. So, having separate credit just for your business is more the exception than the rule.

PMD: What are some ways to improve your credit card score?

Weston: Getting those credit card balances down is big. That really can have a dramatic impact. Paying down an installment loan like a mortgage helps your credit score, but not nearly as much as using the same amount of money to pay down a credit card. You also want to make sure you’re not late on any bills, because even a single late payment can knock 100 points off your score. Don’t let things fall between the cracks. I talk to so many people, even doctors, who have medical bills that don’t get paid by the insurer, somehow fall through the cracks. Libraries now are using collection agencies; municipalities are turning their parking tickets over, so there’s lots of ways your credit can get bad, so you want to bird dog all of those things.

PMD: Are there guidelines for how many credit cards a person should have?

Weston: Not really. Having more credit is not generally a problem, because it does show that others have thought you credit worthy in giving you that. I will say a couple of things: If you’re trying to improve your scores, do not close your accounts. Closed accounts can never help your score, and they may hurt it. So if you’re in credit score improvement mode, bring down the balances but don’t close them. And if your credit limit gets reduced, fight back and try to get it reinstated, because that can have a negative impact. You want to have a nice big gap between any balances and any credit limit. That said, I also wouldn’t go out and apply for any more credit. If you’ve got a bunch of credit cards and lines of credit, every time you add one you risk hurting your score. So, apply for credit only when you need it.

PMD: What other actions can impact your credit score?

Weston: One solution people also grab is some kind of debt consolidation, like they’ll get a particularly low rate on a credit card, and they’ll pile all their debt on that one card. Well, with the FICO scoring system it’s better to have small balances on a number of accounts than to have one big balance on one credit card. And they need to know that settling your debts can really have a negative impact on your credit score. It’s going to hurt your score a lot if you go to your credit card companies and say I can’t pay you $100,000, I can only pay you $20,000. And that’s because what matters most to your credit score is what your original creditor says. And the original creditor doesn’t like it when they’re not paid. Any time you pay less than what you owe, it can have a real negative impact on your score. If you’re not living up to your end of the bargain, it makes you look less credit worthy. So, if you’re tempted by debt settlement, go into it with your eyes open.

Ed Rabinowitz is a veteran healthcare writer and reporter. He welcomes comments at edwardr@frontiernet.net.