Teresa McUsic 
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Savvy Consumer: Clean up your credit while you still can
By TERESA McUSIC
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If nothing else, the recent credit crunch means one thing to all consumers: Credit scores are more important than ever.
For a lot of Texans, the three-digit number that grades your credit report could be a problem. Collectively, Texans have held the lowest credit score in the nation at 670 for several years, according to Experian, the Allen-based credit bureau.
Although 670 isn’t a bad score, (scores range from 350 to 850), this average means many of us have lower scores than that threshold. Not a great number when you consider that 24 states have collective credit scores above 700.
The lower your credit score, the higher you are as a risk to lenders, and that means you have to pay higher interest rates for everything from credit cards to home and auto loans. Or if your score is low enough, you may be denied credit completely.
A chart at Fair Isaac’s consumer page, www.myfico.com, shows just how much those lower scores cost consumers. A Texas home buyer with a credit score of 500 would pay a 10.22 percent annual percentage rate on a 30-year fixed-rate mortgage, almost double what a home buyer with a credit score of 760 would pay.
The same is true for an auto loan. On a 36-month auto loan, that high-risk Texas consumer would pay 15.16 percent APR, while a consumer on the other end of the spectrum would pay just 6 percent, Fair Isaac calculates.
Credit-card companies also use the scores, said Curtis Arnold, founder of CardRatings.com, an independent credit-card comparison site and author of How You Can Profit From Credit Cards.
"It’s getting a lot tougher out there for consumers," he said. "The underwriting standards for the card issuers have gone up in the last several months."
What it means
Previously, a credit score of 700 would give you access to the best interest rates and deals offered by the credit-card companies. Now the best cards require a score of 720, he said.
On the other end, consumers with scores of 675 and lower end up in the subprime credit-card market, which means that they have higher interest rates, he said. Those with scores of 500 and below have it even worse. Even a secured credit card — one tied to an asset like a savings account — may not be an option anymore, Arnold said.
"You can definitely be turned down even for the scum-of-the-earth cards," he said.
Arnold said credit-card companies’ profitability has gone down significantly this year, and their stocks are following suit.
"It’s causing a perfect storm," he said. "Consumers are hurting; at the same time, they’re being squeezed more by the credit-card companies, which pushes consumers over the edge into bankruptcy, further deteriorating the profit of the credit-card issuers."
Hitting home
Access to credit for low-scoring consumers is becoming a big problem at auto dealerships, furniture stores, mortgage companies and other lenders.
"The pendulum is definitely swinging in the opposite direction," said Kevin Williams, a credit counselor at Money Management International in Fort Worth. "Before, there was money for everyone, regardless of their credit history. Now it’s tightening up. A lot of banks are cutting off the pipes."
Williams advises clients to take a hard look at their credit reports and clean up even small issues on it.
"It’s not a difficult task," he said. "If you have a medical bill or something that’s just $75, make the call and pay it off. Little things can add up and can make a big difference in their credit report."
What’s ahead
A new version of the FICO score is now being developed, and Paperno said half of the population will see as much as a 20-point decrease in their score as the calculations behind the score change slightly to more accurately pinpoint risk. The rest of us could see no change or a slight increase, he said.
To complicate matters, the three credit bureaus also have created another credit score, the Vantage Score, which has a smaller range (501 to 990), and calculates the score slightly differently.
Texans rank the lowest in the country in this score as well.
To get a free copy of your credit report at each of the three credit bureaus, go to www.annualcreditreport.com. Be sure to type in the exact Web site name. You can fill out a request form at the Web site and mail it in to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281
Another way to get your report in the mail is to call toll-free 877-322-8228.
Request forms can be downloaded at www.ftc.gov/credit or by calling the FTC help line at 877-382-4357 and asking for its "Your Access to Credit" brochure that includes the form.
Your credit score is roughly divided into five different categories, according to Barry Paperno, consumer operations manager at Fair Isaac, which creates the FICO credit score. Here’s the breakdown:
35 percent of your score is your payment history. One or two late payments won’t hurt, but missed payments, bankruptcy, foreclosures and liens will seriously affect your score. Late payments are higher in Texas and one of the factors that is lowering our scores. Pay at least the minimum and pay on time to raise this score.
30 percent is based on the amounts owed. Owing money in itself does not trigger a low score, but getting close to the maximum limits on your credit cards will. Paperno recommends staying under 50 percent of your limit. For the highest credit score, stay under 10 percent. This is another area Texans are pushing higher than the nation, thus lowering our score. But fixing it can see a quicker rise in your score, since it’s a snapshot, not a history, Paperno said.
15 percent is the length of your credit history. The longer your credit history, the more it will help your score.
10 percent is the type of credit in use. This portion rates the mix of your credit, from mortgages and installment loans to credit cards and retail accounts.
10 percent is new credit. Opening up several lines of credit in a short period of time can lower your score. Multiple card requests can also be an indication of risk and lower your score.
