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Suze Orman Money Matters

Suze Orman, Money Matters

Subprime Woes Lead to Credit Score Blues

by Suze Orman

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Posted on Friday, September 21, 2007, 12:00AM

Subprime mortgages are the eye of the current credit-crunch storm, but their impact is being felt throughout the financial world.

While it's obviously a lot harder to get a mortgage right now, every nook and cranny of our financial lives -- from car loans to credit cards -- are also being hit. No one is immune to the credit crunch, and unless you make sure your finances are in great shape you're going to end up paying higher fees and interest rates.

The Credit Score Switcheroo

What everyone needs to understand is that the test lenders use to grade you just got a whole lot harder. I'm talking about your credit scores.

The result of the ongoing credit crisis is that lenders have ratcheted up the credit score ranges you need to land in order to qualify for the best rates and deals. For example, before the subprime mess, a FICO credit score in the range of 620 was considered on the low-end of loanability. But in the wake of the meltdown, the low end has been raised to 680 or so by some lenders. In other words, you need to have a higher score just to have a shot at getting a deal on a mortgage or car loan.

Credit card issuers are also tightening the screws a bit, too. Even if you've been making payments on time, you could be hit with a higher interest rate on unpaid balances simply because the card issuer has raised the FICO score needed to get a lower interest rate.

That is, you may not have changed a thing -- your payments have been on time and your credit-to-debt ratio hasn't worsened -- but all of a sudden your interest rate jumps from 10 percent to 18 percent or more. All because the card issuer raised the credit score needed to qualify for the lowest interest rates.

Give Yourself Some (Good) Credit

I've been stressing the importance of the FICO credit score for a long time, and it's never been more urgent than right now. What's going on in the financial world makes it crucial for you to do everything you can to ensure that your credit score is in tip-top shape.

Sound obvious? Heard it all before? Well, then why is it that in a recent survey by the Consumer Federation of America, almost 40 percent of Americans didn't know their credit score?

Believe me, what they don't know can cost them big. Washington Mutual, which sponsored the survey, estimates that Americans could save $20 billion a year in credit card charges if they managed to raise their FICO score by 30 points. (That estimate was done before the big credit crunch, so the penalty for a low FICO score is even more costly today.)

Here are some ways you can protect yourself in the midst of the credit crunch:

• Get your FICO credit score

First, full disclosure: I work with Fair Isaac Corporation, the company that computes the FICO credit score. But I don't receive a penny when someone purchases their FICO credit score, so I have no financial stake in this advice whatsoever.

Why not tell you to get your credit score from somewhere else, then? Because the vast majority of lenders and credit card issuers use FICO to assess the financial responsibility of potential customers. You need to know your FICO score because that's what businesses are using to check up on you.

You actually have three credit scores, one from each of the three major credit bureaus: Equifax, Experian, and TransUnion. For your purposes, it's fine to save some money and get just one score. The only time you need to check all three scores is if you're mortgage shopping; most lenders will use all the scores, so you want to make sure all three are spotless.

• Don't settle for a score under 760

In the world of credit scores, 760 is the new 720. If you haven't been paying attention for the past year or so, the tightening in the credit markets has pushed the top tier of FICO scores from the 720-to-850 range to a loftier range of 760 to 850.

A score of 740 would have qualified you for top offers in the past, but now it pushes you into the second tier. To give yourself a shot at the best rates and loans, you need to make sure you clear the new bar of 760 or more.

• Scour your credit report

The raw data that Fair Isaac uses to compute your credit score comes from the information in your credit reports from Equifax, Experian, and TransUnion. You need to keep an eye on those reports to make sure there are no mistakes.

If you're surprised that your FICO score is lower than you anticipated, there's a good chance that there's some sort of mistake in your credit report -- or worse, that an identity thief is masquerading as you and has taken out loans and credit cards in your name. Keeping tabs on the information in your personal credit reports is the first step in protecting your credit score. You can obtain a free credit report here.

• Aim for a perfect on-time payment record

Given that timeliness accounts for 35 percent of your FICO score, paying all your bills on time -- not just the credit card bills -- is a surefire way to boost your score.

And remember, mailing a bill on the due date doesn't count. Send it in four days early to make sure it arrives by the due date. Better yet, use the online bill payment services offered by most banks.

• Reduce your debt-to-credit ratio

Add up all the outstanding balances on your credit cards and divide that sum by your total available credit limit on the cards. That number is what is known as your debt-to-credit ratio, and it plays a big role in determining your FICO score.

For example, if you have $3,000 in unpaid balances on three cards and a total credit line on the cards of $8,000, your debt-to-credit ratio is 37.5 percent. Get your unpaid balances down to $2,000 and the ratio drops to 25 percent -- which will help raise your FICO score.

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66 Comments

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  • marko - Tuesday, October 2, 2007, 3:32PM ET  Report Abuse

    • Overall: 1/5

    anyone else notice that you can no longer add comments for certain experts on Yahoo finance. I noticed it on Kiyosaki's article (if you can call it that)

  • Doreen - Monday, October 1, 2007, 8:07PM ET  Report Abuse

    • Overall: 5/5

    Wow, lots of hostility from people in debt with bad credit. Of course you have to pay off your debt. It's not her fault if you don't have the money. Find a way to SAVE! Suze forced me to examine every dollar I spend. In only 10 years I have no debt and 300k in savings on a modest salary, living in San Francisco which is one of the most expensive cities in the world. If you're having credit problems don't blame Suze.

  • Yahoo! Finance User - Sunday, September 30, 2007, 2:56PM ET  Report Abuse

    • Overall: 1/5

    Why do you need to worry about your credit score. If you pay cash for things then why does your fico matter? Well what about a mortgage? Find someone that does manual underwriting where they look at the person instead of the nummber. Don't worship at the alter of the mighty fico!

  • QuestionRequest - Saturday, September 29, 2007, 2:53PM ET  Report Abuse

    • Overall: 1/5

    Sickening really. A company making money on ignorant and paranoid people checking their credit scores for a yearly fee of 89 dollars. Suze should be ashamed of herself hawking her "Suze FICO Score Kit-Platinum Version".

  • tropics123 - Thursday, September 27, 2007, 12:37PM ET  Report Abuse

    • Overall: 4/5

    Paying Bills with Online Banking ensuring they are made on time is a good start. Also reviewing credit scores and transferring balances to lower interest fixed rate cards are the best option. Using a credit card comparison site like www.CreditCardRadio.com is a great way to get the best offer and get approved in minutes online.

  • Yahoo! Finance User - Thursday, September 27, 2007, 11:29AM ET  Report Abuse

    • Overall: 2/5

    Why are all of these columns so wordy? Allow me to sum it up: PAY YOUR BILLS OR DON'T BOTHER APPLYING FOR LOANS. It's really that simple. FICO schmico, only deadbeats have anything to worry about.

  • Angela - Thursday, September 27, 2007, 9:25AM ET  Report Abuse

    • Overall: 1/5

    For any of you people to think that you have any control whatsoever over your score, or that you can do anything about it is totally naive. There is no amount of advice you can give anyone to help with their score. Pay off all your cards, well if you had the money to do that, dont you think we would have already done that? I mean nobody is going to keep a balance on something and pay interest if they have the money to pay it off. The advice given is stupid and not possible, and lame. Yes you should check your score once per quarter, and fight the bureaus to correct errors (and I mean fight because things dont get corrected without a battle where they are concerned), and make sure the creditors are reporting properly (and some dont and there are always mistakes) and to make sure that you dont have any fraud or theft, but other than that, trying to affect your score is useless and you are powerless against this crooked society. I have fought this for years, never been late on a single payment for years and years, and still have low scores for some unknown reason and yet I have a net worth of millions. Tried to fix the score for years with little success. You cant win against the "Unfair" Isaac organization. Suze talks like you can just so easily get your score up to 760. Good luck. I have had perfect credit history, tons of loans, all paid of early and on time, and after 7 years of perfection I still cant get there.

  • Yahoo! Finance User - Thursday, September 27, 2007, 8:29AM ET  Report Abuse

    • Overall: 2/5

    FICO. schmico. BAN THE FICO SCORE. C'MON YU ALL. ITS AN OUTDATED AND RIDICULOUS SYSTEM THAT JUST DIED. NET WORTH COUNTS MORE. GET RID OF THE FICO SYSTEM,

  • Terry - Wednesday, September 26, 2007, 9:35PM ET  Report Abuse

    • Overall: 1/5

    Same old bit, same old bit. Your credit score is what it is. checking it twice a year like you go to the dentist is just to see if someone has stolen your identity not to see if you can get a mortgage or credit. I am a builder and it's not my credit score that can get me a loan it's because the banks don't have a market to resell the loan to anymore and therefore no new money is comeing into the market. Do not blame your fico score for not getting a good rate, it's not personal it's the mess the mortgage industry got themselves into and now everyone is going to pay a big price for there greetiness!!

  • Yahoo! Finance User - Wednesday, September 26, 2007, 5:15PM ET  Report Abuse

    • Overall: 1/5

    Yawn! How many times can you hammer on about needing a good credit score? Honestly, Suze, you'd be so much more credible if FICO wasn't providing you with a paycheck.

  • Yahoo! Finance User - Wednesday, September 26, 2007, 2:21PM ET  Report Abuse

    • Overall: 1/5

    Useless blather…On one hand we are told that the credit issuers can raise the interest rates at anytime for any reason, and then you have the unmitigated gall to say we should keep our credit in check. So the people who are just keeping it together will incur higher rates as a penalty for just keeping it together because the credit companies simply say so. I think you playfully called it the “credit score switcharoo”… Thanks for the helpful advice there, Suze. The “full disclosure” thing was a nice touch. I think you are a shill for big business, nothing more & nothing less. I commend you though, you have a good gig. In the interest of full disclosure why don’t you tell about “trigger leads” and how the credit companies are making big money there as too? As for checking your own credit report, that is a huge farce, I happen to work in the financial industry (mortgages) and I can tell you that we laugh at people who bring us reports from “Free Credit Reports.com” and such. Can you imagine any lender using a credit report that was not originated from a system that they have approved? By the way, there is NO FREE in Free credit Report .com. Again, useless blather

  • theoldman - Wednesday, September 26, 2007, 12:18AM ET  Report Abuse

    • Overall: 2/5

    It's the same 'ol, same 'ol standard advise. All very well and good and, perhaps it stands repeating, but nothing really new. But, Suze, i'd like to bring up your,"Women and Money", book and a theory that just occured to me as to why so many U.S. women have a terrible relationship with money. You've outlined many actions to overcome that and improve that relationship but, i think you missed the root cause... It's because the money's mostly men! All the bills and most of the coins! No wonder women are having so much trouble with their money! They house it, give it a nice safe to live in and no sooner than they turn their backs on it and it sneaks right out of the house! And, if it comes back at all, who knows how many hands it carressed along the way, giving interest to all sorts of strangers, instead of its lady owner! And, of course, this make the woman angry and, like most men, it just doesn't stick around for that and leaves for greener pastures! It's really hard to have a good relation with a bunch of dirty old bills! So, not until all the money is replaced with women money, with women faces on the bills and coins, will women finally be able to have that long, deep, mutually giving relationship with money that they all long for and all their financial decisions will bear them the happiness they seek. - theoldwiseguy

  • KC_scientist - Tuesday, September 25, 2007, 5:36PM ET  Report Abuse

    • Overall: 2/5

    I agree that there's a conflict of interest with FICO and at the very least she should mention the new competing methods. As for those blaming Fair Issac for the subrpime problems. That's ludicrous. FICO scores do not consider income and also do not consider the impact of different types of credit products. Mortgage Institutions designed loan products that did not verify income and/or take affordability into account. Many also designed products that made defaulting a likely outcome.

  • MFE Owl - Tuesday, September 25, 2007, 4:49PM ET  Report Abuse

    • Overall: 1/5

    This lady is Fair Isaac's (the FICO owners) biggest partner. She sells her products through them. It seems like a conflict of interest for a journalist to be promoting her business in a "serious" financial column. Also, the credibility of the FICO score has fallen off a cliff after many investors thought FICO was partially to blame for underestimating how many people would default on loans. Now, the credit unions themselves are planning to come out with their own proprietary credit score. FICO will finally have some much needed competition soon.

  • NicholeO - Tuesday, September 25, 2007, 3:19PM ET  Report Abuse

    • Overall: 1/5

    I think Suze has brought this topic to alot of people's attention, but she just says the same stuff over and over again. What I find most frustrating is that she doesn't seem to understand what people really want to know - how do I save my home, how do I pay the mortgage payment/Car/whatever I have right now. Fixing scores takes time, dedication and persistence. Since she works for FICO, she should tell them to become more responsible in their reporting and when a consumer sends them docs that show something is paid off, they should remove it no matter what some two bit credit collection company says. It would be nice to see someone like her, with her name recognition, doing something to change the way companies like FICO do business. I meet with people all the time who have lower scores because of things that continue to report on them that they paid off, were included in Bk's, weren't theirs to begin with. It is disgusting that we are held hostage by some third party who has no stake in our financial well being and this third party determines how we are treated when we apply for credit.

  • ElizabethZ - Tuesday, September 25, 2007, 11:49AM ET  Report Abuse

    • Overall: 2/5

    A couple good points I guess but overall a bunch of drivel - I just closed on a house 9/21 with 100% financing - granted I have a great work history, fully reportable assets and income and several established accounts on my credit report but my median score is only 637 due to late payments in the past and inquiries (what is the deal w/ inquiries lowering your score - so stupid). I also have a chapter 7 that is about to fall off after 10 years in January 2008 but it is still on there. I have a bit of a higher interest rate, 7.5%, but it is fixed, w/ no prepayment penalties of any kind and the payment is still very affordable. The house is a bit of a fixer-upper but to move in we only need to do a few repairs as it is a very well maintained full brick 2000sf, 4br, 2.5ba craftsman bungalow, we already have 10% equity based on the appraisal we received for the financing vs. the purchase price and we will be able to refi in 6-8 months after we do a few projects and easily raise that to 20% and lose the PMI and get a lower rate as I imagine the chap 7 falling off and 6 months of the house loan on my report should raise it some. The program I qualified for required the 620 score she claims is now much higher. You just have to look if you want the financing, it is still available. She gets on my nerves anyway.

  • David - Tuesday, September 25, 2007, 4:11AM ET  Report Abuse

    • Overall: 1/5

    Wow. Is there a rating below one star? What ever Suze gets paid to write articles for Yahoo, it's too much. A coloring book would have been more educational. I can read the articles of other "advisors" and regurgitate the same information myself. So can I have my own column too?

  • Ripped Off - Tuesday, September 25, 2007, 12:47AM ET  Report Abuse

    • Overall: 1/5

    This just sucks as advice. It's not that your heart is in the wrong place; end world hunger, stop all wars and get everyone a, what was it again 760 FICO score. This is far to complicated a subject for Suze, I’m sorry it just is. That is probably the real story here but unfortunately it is not the one being written about. The article is factually inaccurate which is disappointing, and I really have to wonder as many others who posted about this article, did anyone look at this before it got put on Yahoo???

  • Yahoo! Finance User - Monday, September 24, 2007, 11:17PM ET  Report Abuse

    • Overall: 2/5

    credit score is important, however if you owe more than what your homes appraised value is then your last concern is what rate you can get. values have decreased drastically in michigan. some people have never been late but the homes around them have foreclosed which causes their value to go down. i see this everyday as a mortgage loan officer, these people are stuck and they cant sell because every other home in the area is for sale too. its very sad.

  • naty - Monday, September 24, 2007, 9:32PM ET  Report Abuse

    • Overall: 1/5

    She needs to be realistic.....

  • Yahoo! Finance User - Monday, September 24, 2007, 8:49PM ET  Report Abuse

    • Overall: 1/5

    Hey, this Suze really makes things up. Perhaps, she is trying to propose new changes to lending practices in the credit industry that would hurt the middle class borrowers even harder. For sure, credit has been tightened a bit by lenders, but not as scary as this columnist told. She truly has no data to validate the information that she provided. It's good that she gives average consumers with sound budget management, and financial advice; however, the information she presented in this article is no where to be true. Read the numbers, and anlyze them!

  • Yahoo! Finance User - Monday, September 24, 2007, 8:43PM ET  Report Abuse

    • Overall: 1/5

    Bogus information.

  • jim - Monday, September 24, 2007, 8:33PM ET  Report Abuse

    • Overall: 1/5

    I think I am going to quit my job as a mortgage broker and become a so called "expert". I can get paid to give horrible untrue information, Does anyone at yahoo read this stuff? I know they don't verify it. 760 is the new 720? Who told her that? The same person who said 40 is the new 30 and blue is the new red? This woman makes a living off taking calls from middle aged idiots asking if they should contribute the whole 6% to there 401K, then ask permission to buy a new washer and dryer at the Home Depot. I want the last 3 minutes of my life back.

  • Cris and LisaF - Monday, September 24, 2007, 8:22PM ET  Report Abuse

    • Overall: 2/5

    The credit card companies need to be rated. We need to educate our children on financial responsibility and require a high school course be completed before they graduate. FICO is a joke at this time in our lives. You have one for mortage and a different one that I just recently heard of from auto lenders. There is not perfect way but, changing the rules in the middle of a game is not fair. If you are promised a rate for a peroid of time, you should recieve that rate. Shame on the mortage companies and the credit card companies for not doing the right thing and just trying to make a buck. Know we all must pay for the mistakes of the mortage and credit card companies as well as the people that knew they were spending more money than they would make.

  • armando - Monday, September 24, 2007, 7:50PM ET  Report Abuse

    • Overall: 1/5

    I think that suze has been a very lucky person some of us real people have had a few curves inn our money manageing and are penilized for the conservative idealism

  • Yahoo! Finance User - Monday, September 24, 2007, 5:50PM ET  Report Abuse

    • Overall: 2/5

    I don't agree with this threshold of 760. I am in the mortgage industry and I am funding many loans for 30 year and 15 year fixed rate mortgages with 620 - 640 Fico Scores with competitive rates. 760 is not a threshold that I know of. The main items to consider are the loan to value, the debt to income ratios and the reserves in the bank. These three items are carrying greater weight than the Fico Scores.

  • Stephen M - Monday, September 24, 2007, 5:31PM ET  Report Abuse

    • Overall: 1/5

    I do not understand why my first post has not been posted. It was not spam, hateful or obscene. I simply do not agree with Suze...does that pose a problem?

  • Ass CLown - Monday, September 24, 2007, 3:57PM ET  Report Abuse

    • Overall: 1/5

    FICO is a joke. It needs to consider income, net worth, and not consider inquiries. I move every six months and have about 30 inquires in two years. It's about 6-8 every time I move. I also spend about 10 K a month in credit cards (which is paid off every months or so), but if I carry a high balance from one month to the next my score tanks in the mid 600's. I just don’t get it. I have zero late payments since I was 18 (29 now), about 100K available to me, and I've never been able to get my score over 740, but some chick in college has one credit card with a 400 dollar max and has a score of 800. Another thing that bothers me. My parents have millions of dollars in the bank, but can't get a fricking cell phone contract because they have no credit. Some equation.

  • Feddere - Monday, September 24, 2007, 3:51PM ET  Report Abuse

    • Overall: 3/5

    SO might suggest to get your FICO credit score and get a score under 760, but pearsonally I prefer to avoid a debt-free life. I didn't think that wasn't not bad.

  • AsmirHab - Monday, September 24, 2007, 3:50PM ET  Report Abuse

    • Overall: 4/5

    Well done Your articles are very educational. Thank you very much. AH

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