FICO Matters

Thinking about money management can be a sh*tty business, but it can also have profound effects on our lives. As the Dickens character Mr McCawber (from David Copperfield) put it:

Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six pence, result misery

In the quest for personal financial freedom, there are numerous weapons at our disposal, and notable among this arsenal is the double-edged sword known as the credit card. Why double-edged? On one hand, its usage can yield reward points and cash back; allow us to pay for “big ticket” items in monthly installments (rather than one lump sum); and make us more attractive to future moneylenders. On the other hand, though, it can unleash monstrous interest payments; lure us to purchase items we don’t really need and can’t really afford; and make us less attractive to future lenders. For these latter reasons, my financial mentor (code name: “TG”) once told me:

You should use debit cards instead of credit cards unless you pay the bill in full religiously every month. If not get out the scissors.

That said, I initially charge about 30% of my expenditures to credit cards (largely on gas and groceries using this mamma jamma), so it’s definitely not my intention to scare anyone away from them. Rather, my goal is to shed a little light on how they can affect our “FICO” (aka credit) score.

F.I.C.O., which is named for Fair, Issac & Co. (the company who created it), is a number (in the 300-850 range) that indicates one’s “credit worthiness”. In other words, moneylenders (of car loans and home mortgages, etc.) perceive people with high credit scores as likelier to repay what they borrow—and thus more trustworthy. As a consequence, people with higher scores are more likely not only to qualify for a loan in the first place, but also to pay a lower interest rate on the loan they receive (which can save a lot of $ over time).

Since it can clearly pay off to maintain a high FICO score, it's helpful to know how one is actually calculated. To help answer this question, I turned to the folks at The Motley Fool and Bankrate. As it turns out, there are but five major criteria:

1. Past payment history (35%):
• Consistently paying your bill on time will help you immensely; late payments (esp. by 30 days or more) will not.
2. Amount owed (30%):
• As one's outstanding balance creeps nearer to one's credit limit (aka closer to "maxing out"), one's FICO score creeps downward.
• Note: this is where the wisdom of paying your bill in full each month really shines through (not to mention the costly finance charges that doing so prevents).
3. Length of credit history (15%):
• The longer your history, the higher your score.
4. Mix of credit (10%):
   
• FICO rewards borrowers with both unsecured/revolving loans (e.g., credit cards) and secured/installment loans (e.g., car loans and home mortgages).
5. New credit applications (10%):
   
• A lot of inquiries (specifically, those resulting from applications for new credit) in a short amount of time can lower your score.

Admittedly, this is pretty dry stuff, and can thus be difficult to remember. Lucky for us, though, Brumpelstiltskin's very own Mickens has composed the following limerick to help keep it all straight:

Card Payments Too Often Belated,
Limits Maxed But Never Abated,
A History Quite Short,
Plus Inquiries For Sport,
And No Mix Makes F.I.C.O. Low Rated

In conclusion, if you're wondering how to go about about checking your FICO score, I've got great news for you: doing so is easy and free. Namely, the 2003 Fair and Accurate Credit Transactions (FACT) Act "requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months". You can do so online any time via this website.

Greenspanke (left) is finance minister for Mic's Tape and manages a separate Quicken file for each member of Brumpelstiltskin