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David Stanley Ford

Sometimes it can be tough to find out how your credit ranks
FICO

BY DON MECOY    Comments Comment on this article15
Published: February 15, 2009

Cutting up credit cards can be a good step for consumers seeking to control their budget. But you might not want to close the account.

Shutting down a credit card account can lower your credit score, and lower credit scores mean higher interest rates for credit cards, auto loans and even insurance.



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BY THE NUMBERS
High score means lower rates

Oklahoma rates on a 30-year, fixed-rate $300,000 mortgage:

FICO   Annual

Monthly

credit scorepercentage rate

payment

760-8504.72%…$1,560

700-7594.941%…$1,600

680-6995.117%…$1,632

660-6795.33%…$1,672

640-6595.758%…$1,752

620-6396.302%…$1,857

Source: Informa Research Services via myFICO.com

Lenders use credit scores to gauge risk, and consumers who are cutting back in these tough economic times can inadvertently lower their score by reducing the amount of credit they have available.

The credit score system is not designed to be consumer-friendly, said Jennifer Wallis, vice president of Consumer Credit Counseling Service of Central Oklahoma.

"The whole point of credit scores is not for consumers; it’s for lenders,” Wallis said. "Looking at it from a consumer viewpiont can be really frustrating. The whole industry is designed for the benefits of lenders and creditors to understand the risks associated with each borrower. I’m not saying it’s right, that’s just how it is.”

What’s the score?
Fair Isaac Corp., which uses a proprietary method of calculating its industry-leading credit scores, recently updated its secretive formula. The new calculation is aimed at producing more accurate risk numbers for lenders, particularly in the evaluation of consumers who are relatively new credit recipients and those who have repeated payment problems, Fair Isaac said.

"Risk scores from Fair Isaac’s newest redevelopment of its FICO scoring model are expected to provide up to twice the improvement in predictive power compared with previous revisions to the model,” the company said in a statement.

TransUnion, one of three major credit bureaus, will market scores from the new model, which continues to use its trademarked credit score scale of 300-850.

Experian, another major credit bureau, offers its own proprietary credit score called VantageScore, which uses a scale of 501-990. The new offerings aren’t making things any easier for consumers, Wallis said.

"That makes it even more confusing if you’re a consumer trying to figure out what’s good and what’s bad for your credit score when there are so many different ones,” Wallis said.

Experian this weekend stopped offering FICO scores to consumers through Fair Isaac’s myFICO.com. FICO scores based on data from two other credit bureaus, Equifax Inc. and TransUnion, remain available — for a cost — through the Web site. While the move doesn’t affect lenders, who can still use FICO scores based on Experian data, consumers won’t be able to find out in advance what their particular score is.

More bad news
The average consumer faces other obstacles in these economic times, Wallis said. Credit card companies have been tightening their belts, she said, and some customers have suffered.

"Consumers don’t have the power that we used to have with credit card companies because they’re looking at any way they can to make money,” she said.

Credit card issuers have sought to boost fee income, and in some cases have notified customers that they will raise interest rates unless the consumer opts out, Wallis said. To avoid the higher interest charges, "you can either close your account and just pay off balance at your current terms, or they won’t renew your credit card whenever it expires.”

Wallis advises consumers to monitor their credit reports, which can be obtained from the three credit reporting bureaus for free once a year at annualcreditreport.com.

Consumers with questions about credit scores can get free counseling at the nonprofit Consumer Credit Counseling Service of Central Oklahoma. For information, call 789-2227.

"Consumers don’t have the power that we used to have with credit card companies because they’re looking at any way they can to make money”

Jennifer Wallis,
Vice president of Consumer Credit Counseling Service of Central Oklahoma

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David Stanley Ford


Related Topics: Business, Personal Finance, Consumer Credit and Debt, Personal Credit Ratings, Credit Card Debt


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All of you who crow about your 5% back and miles you get for charging, you do know that on average, people buy 15% more per month using credit cards than if you paid cash, regardless of whether or not you pay the entire balance each month (which honestly is very few people, especially right now). Visa is glad to give you 5% back because you're giving them an extra 10%. You think they're in this to give you a break? The overwhelming majority of miles given in credit card charges are never redeemed. Airlines raise their miles annually which means you have to charge more stuff to get your free tickets. Their raises on miles way surpass the rate of inflation. Someone please explain me how this makes any sense? Cut up all your credit cards and YES-CLOSE THE ACCOUNTS. Make a written budget every month and use cash to make the majority of your purchases. It is impossible to go into debt using cash- once its gone, you're done spending. We use a debit card for gas and it accomplishes everything a credit card does and is every bit as convenient. If you have to buy fuel on credit as a consumer (not a trucker) you have more complext financial problems than whether or not to have a ccard.
Jeffrey, Oklahoma City - Feb 17, 2009 at 1:14 am
I take exception to this article. I was told to close an inactive, but open, account several years ago. The theory was that as long as it was open, there was a possibility that I would run up the balance and not be able to make the payment on the mortgage I was applying for. So what gives? I think this article is CRAPTASTIC and full o'blarney!
Chris, Jones - Feb 16, 2009 at 2:53 pm
Bob - you may be missing Doug's point. By using my credit card as a convenience and gaining the rewards points, I've been able to fly my family to 3 different vacation destinations in the last 2 years for free. I NEVER carry a balance, so I never pay one cent in interest. I also get an itemized statement of every dime I spend, which makes budget tracking much easier and more convenient.
Kelly, norman - Feb 16, 2009 at 9:18 am
Doug, I use something called a Debit Card. They work great. And I'm sorry, but you never saved money using a credit card to buy gas.
Bob, Bugtussle - Feb 16, 2009 at 7:50 am
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Also, to take care of credit scores, and debt, there are things people can do, such as consolidate cards, use zero % interest cards, and other ways to lower expenses and bills. This site has several ways to do this, as well as get other help such as with mortgage, electric bills, etc.
http://needhelppayingbills.com/html/help_with_credit_card_debt.html
John, Lancaster - Feb 16, 2009 at 4:28 am
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Bob, by "convenience" I mean being able to buy things without having to write a check or carry cash. It's easier at the gas station, for buying things online, and renting cars/equipment. One of my cards gives 5% back on gas, 2% on food, and 1.25% back on everything else so when gas was 4$ a gallon I was paying 20 cents less per gallon than someone using cash. All my cards get paid in full every month so I never pay a dime in interest on any card.
Doug, Midwest City - Feb 15, 2009 at 8:54 pm
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Doug, having cash in the bank is smarter than having several credit cards. I never understand people who say they "have several for convenience". If they are maxed out, what good is that if/when spending power is needed? Credit card companies like to play games with their various fees and interest rates (C*r*apitol One is a great example) that they screw the consumer. You get cash back? What a joke, as you'd be better off investing that money and having it work for you. Nothing in life is free.
Bob, Bugtussle - Feb 15, 2009 at 2:26 pm
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I recently canceled a credit card that I never used. I never considered how it might affect my credit score but wanted to eliminate any risk of unauthorized use of the account which could have a much worse adverse effect than simply closing the account.
Brad, Edmond, OK - Feb 15, 2009 at 2:20 pm
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I had 2 credit cards, I have cut them up since last year. I don't really care if it lowers my score slightly. I'm not in a position right now or will I be in the near future, to buy anything where I would need to borrow. Credit card companies and banks WANT us in debt, they want to scare you with your credit scores and interest rates. Screw them all, they won't get a dime from me any more. I wouldn't have a bank account either if I didn't have to have one with my payroll checks. They've got enough of my money in terms of this bailout!
Jess, Warr Acres - Feb 15, 2009 at 1:29 pm
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Oh, and since I sort of wondered off the topic of FICO scores. That's up to the lender (if I ever need one) and as with all loans there is room for negotiation. Right now the best source is your local Credit Union. The larger banks like Chase are not terribly interested in "little people" it seems, as they have access to Uncle Sam's wallet.
Doug, Midwest City - Feb 15, 2009 at 12:13 pm
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I have several cards for convenience, and one because it gives cash back. All have been set to autopay, in-full, every billing cycle. Like J, gramps told me never to be in debt and I live by that rule. Sure I could have lived life higher on the hog, spent like mad, the HUGE house, plasma TVs, Cars, etc and been one paycheck away from bankruptcy like several I know. I'd not trade a single thing for the peace of mind I now enjoy.
Doug, Midwest City - Feb 15, 2009 at 12:10 pm
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J, you are right. I'm a big Dave Ramsey fan who cut up the credit card three years ago and never looked back. Being in debt is a joke and not a necessity and times like these prove it. Before the recession, people borrowed like crazy and rolled their eyes at me when I inquired what they'd do if they lost their job. I was looked upon as an idiot. Guess who's the idiot know?
Bob, Bugtussle - Feb 15, 2009 at 7:37 am
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GM is going to declare bankruptcy on Tuesday....so much for the BILLIONS we gave them for a bailout...the American taxpayer is the most retarded individual on the planet.
Carrie, Edmond - Feb 15, 2009 at 1:15 am
As my grandpa used to say.... If you cannot gather enough money to pay cash for it.. you do not need it
Cowboy, MWC - Feb 15, 2009 at 12:47 am
Let's see I have two options be a slave to the FiCO Score and have the credit card agencies own my soul.

OR

I can save my money and live within my means. If I want something I can save the money and pay cash for it.
Cowboy, MWC - Feb 15, 2009 at 12:46 am

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