Need Credit? Know your score

McALLEN — By the time a truck driver and his wife sought credit counseling, they owed $12,633 to 26 creditors.

Within months, with the help of a counselor, the pair bargained with lenders, paid off other creditors and reduced the debt to $1,570. As for their credit scores, they’re still recovering.

Credit scores have always been important, but even more so now that banks have significantly tightened lending. And as the familiar commercial jingle reminds, poor credit could mean living in your mom’s basement driving a used hatchback.

For all the attention, most people don’t fully understand what a credit score is. In a survey earlier this year, 56 percent of people did not know that credit score is the single most important factor when applying for a loan for a house, a car or even a new credit card.

There isn’t just one credit score either — there are three. And each agency computes the score, developed by Fair Isaac Corp. and called FICO, differently.

The truck driver had scores ranging from 500 to 549 when he first sought help from Roberto Madrigal, at the McAllen office of Credit Help USA. And not all of his debt was reported to the same agencies. A loan from the U.S. Department of Agriculture was only reported to two.

"A lot of people out there don’t understand the score and they need to learn," said Don Mayer, a McAllen-based certified financial planner with Edward Jones. "Don’t wait until you’re 40 or 50 years old. Learn it in your 20s."

Too often people seek help when their credit is shot and their debts have long been sold to collection agencies, Madrigal said. Most of the time, the financial difficulties are the result of emergencies or poor planning. So, credit experts, recommend first figuring out just what is on the credit report.

The best way to do that is to visit the government-run www.annualcreditreport.com. The reports from all three agencies are available for free to any U.S. citizen once a year. The scores themselves are not. Equifax and TransUnion scores are available for $15.95 a piece from MyFico.com Experian is not.

Those scores, however, probably won’t be the same scores that a lender will see.

Pulling your own credit will not negatively impact the score.

Soft inquiries — like those who check their own scores, when a current lender monitors their credit or when someone gets pre-approved for a loan — do not affect the credit score, said Kenneth Lin, CEO of Creditkarma.com

"That’s actually the No. 1 credit misconception," Lin said. "When you apply for credit through a lender, that lowers your score."

Yet, a loan is not necessarily the only so-called hard inquiry into a credit score. Banks often check credit scores when a customer opens a new account. Some car dealers pull credit scores, even when there is no loan application.

A hard credit check could knock off as much as 30 points, Lin added.

Sometimes the report is inaccurate and not in the consumer’s favor, said James Bowers, managing director of the Center for Consumer Freedom. If there is a problem, all three agencies have grievance procedures.

If the credit report is problematic, consumers also have the option of writing a letter of explanation that the credit agencies will attach to their report.

"It’s really a tragedy that most people don’t pay attention," Bowers said. "There’s fear in finding out what’s on the credit report, like when somebody doesn’t want to get an AIDS test because they don’t want to know the answer."

Understanding the calculation

There are five major factors included in the credit score and they are not income, employment history, assets or a person’s overall financial picture. What matters is how much is owed, if the debt is paid on time, the credit history, the types of debt and how many times the score has been pulled.

The importance of the individual factors varies among borrowers but as a rule of thumb the most important aspect of the credit report is the payment history, Lin said.

"As soon as you miss one, you’ll basically get a ding and that ding will stay with you out to five to 10 years," he said.

Unless the ding is a mistake, there’s no way to remove it from your credit history. After seven years, much of the bad news, including late payments will come off the report, but not always. Debts involved in a bankruptcy proceeding will stay on the report for up to 10 years.

The truck driver now owes money to three creditors. But the bad information about the other 23 are still included, Madrigal said.

The other important factor is "credit utilization," which included how much credit is used, how much is borrowed as a percentage of what is available and what the balances of the credit lines actually are.

The general rule, credit experts said, is that the percentage of available credit used should be about 30 percent. Anything higher could negatively impact the score, while a lower amount won’t do anything to help build credit.

Let’s say, for example, that you pay off your credit cards every month. But if the credit agencies report the balance before the payment is made and that balance is more than 30 percent of you’re available credit, your score could suffer. By looking at the credit reports, it’s possible to figure out if your timing is right, Lin said.

"It’s better to show some activity than zero," Lin said. "You want to show that I can use credit responsibly."

But what if my credit is awful?

After months of making payments on time, bargaining with lenders to reduce debt, paying off other creditors and generally being fiscally prudent, the truck driver increased his credit score to 621.

Other clients Madrigal has advised were not as fortunate. Some are so far underwater that its becomes a matter of prioritizing debt, paying whatever can be paid and not worrying about the credit score. And yet others are forced to declare bankruptcy.

"If they don’t have a way to make payments, how can you help, really?" Madrigal said.

For others, credit counseling can help, but experts advise consumers to be wary of firms that charge up front. Madrigal does charge $35 up front as a fee for evaluating a new client’s credit. After that, he estimates what his firm can do and give the client a price.

Credit counseling firms are required to register with the Texas Secretary of State, under the guise of credit servicing organizations. To make sure a firm is registered, visit the agency’s Web site.

Experts caution that a consumer should research a business first, before paying anything. Some counselors also offer debt repayment plans, which require a monthly deposit to the counseling agency. The counselors then pay off a customer’s debtors at a fixed repayment schedule.

Texas Attorney General Greg Abbott’s office recommends often checking to make sure that a counselor is making the payments to avoid credit repair scams.

Madrigal said that if any of his customers had a problem, they could walk a couple blocks from his office off McColl Road into a regional office of the secretary of state and file a complaint.

There are other free options available for counseling, including the Consumer Credit Counseling Service of South Texas. Credit counselors will work with creditors to reduce payments, restructure loans and settle ongoing claims.

"Communication is the key to your creditors," Bowers said. "If you really, truly can’t pay, see if there is a way to negotiate a longer-term payment plan. You want to eliminate the highest interest debt first."

Rebuilding or starting from scratch

Building a credit score from scratch, or making a bad one good, is always difficult and even more so now. Madrigal and other credit experts, recommend starting with a secured credit card and a savings account.

Banks offer the secured cards to consumers with no credit. Compass Bank will begin offering a secured card in October that is tied to a customer’s bank account. The amount of credit available on the card will be 95 percent of the money deposited at the bank, said Jim Mulkin, director of consumer asset products.

From there it’s a matter of obtaining more credit, when possible, and faithfully making the monthly payments.

After a while the credit history will start to rebuild. Then it’s a matter of developing and staying within a household budget, Mayer, the financial planner said.

"Sit down and add up all the hard bills that you do have … get your bank statements and add those up ... know where you’re money is going," Mayer said. "Are you spending $5 a day on a cup of coffee or other things like that? They may be nice when you’ve got plenty of money, but when times are tight you need to tighten your belt."