Your Credit Score

Your credit score has become a very, very important number. It determines whether you’ll get a loan, the interest rate you’ll pay (the lower your score the more you’ll pay), how much you are charged for certain insurance policies and sometimes whether you get a job or not.

I mentioned in a prior post that Warren Buffett’s credit score was 718. This was due to 23 missed payments on a $294 loan. Turns out there were erroneous entries on his credit report. (I happen to know Buffett would never borrow more than $100) If he can have errors on his credit report, you can too.

It is critical that you keep track of this number. Complete books have been written on this subject and I recommend Your Credit Score, Your Money & What's at Stake (Updated Edition): How to Improve the 3-Digit Number that Shapes Your Financial Future by Liz Pulliam Weston.

Your credit “report" and your credit “score” are two separate things:

1. Your credit report contains information on the various credit card accounts, car loans and home mortgages you have and the balances and payment history of each account.

2. Companies then analyze that information and use it to create your credit score. Several companies do this and they will each have a different number and “range” (showing how good or bad your score is.) FICO is generally recognized as the most prominent credit scoring company.

There have been sites on the Internet which offer to provide you with a “free” credit report, but many of those sites required you to start a subscription service which you end up paying for.

The legitimate Web site I’m familiar with is www.AnnualCreditReport.com where you can order your totally free (with no strings attached) credit reports. You can order them all at once or stagger them at 4 month intervals so you’ll have an ongoing way to see the activity on your report. However, not every business reports to all three of the credit agencies so there may be some information on one which is not on the other.

Some credit report companies that end up charging for reports have paid to have their information listed on certain internet search sites so they will show up when a search is done for “free credit report.” Just be aware.

Ben Stein is a noted multipurpose talent who has written several financial books. He may be better known as the economics teacher in the movie Ferris Bueller's Day Off. He has been on an ad promoting a free (FreeScore.com) credit score service. The actual name, which includes “Free,” would seem to imply you can get a free credit score at this site but it appears you need to give them a credit card number and accept a $1 charge on your card. After seven days of “free trial” you’ll be a member at $29.95 a month. I’m sure this is all very legit and aboveboard and with Ben Stein endorsing it I’m sure he checked it out to make sure his fans would not be taken advantage of, but you won’t know a lot of this stuff before you sign up. I checked the FAQs and it doesn’t ever seem to lay out the exact process involved.

The function of marketing is to reel you in so a sale can be made. There is nothing inherently wrong with this process. It’s basic free enterprise. It gets a little dicey though when you get right to the point of purchase and THEN the full details are disclosed. Of course, it’s even worse if the details are not actually ever disclosed.

Borrowing sensibly and making every single payment by its due date will go a long way toward keeping your credit score in the higher range. Interestingly, when you do this your interest rates will generally be lower which makes it easier to make the payments. Conversely, if you skip payments your interest rate will probably increase which makes it even harder to make your payments. Either way, it can be a self-fulfilling prophecy.

There are a lot of errors on credit reports. One source indicates 25% have errors and a government site reports up to 70% may have errors. Whatever the number is, it just makes good sense to check your information regularly to see that it is error free. It’s usually easier to dispute errors from the last year than it is to work on something from five years ago. Also, if someone has your credit information and is creating accounts or stealing your identity, the sooner you find out about it the better.

Supplemental: The recent CARD Act of 2009 put the kibosh on many of the practices used by companies to entice people to sign up for free credit reports and scores and then begin charging them. To avoid the process of weeding through various offers and conditions, just stick with www.AnnualCreditReport.com