Suze Orman Money Matters

I know you know your SAT score.

And I bet you know your cholesterol score.

Some of you could probably rip off the phone numbers of old boyfriends and girlfriends you haven't spoken to in 10 years.

So tell me something. If you're so good with numbers, why don't you know your credit score?

I recently spoke to a large audience of successful business people and asked them if they knew their FICO score. I got plenty of reassuring nods. But I know better. A few minutes later, when I mentioned how to get your FICO credit score, everyone whipped out their pens and Blackberrys to take down the info.

It never fails: no matter who's in the audience, I typically get a 70 to 90 percent failure rate when I ask who knows their credit score and why it matters.

This has got to stop. Right now.

Take Credit Now

Your credit score is a lot like your cholesterol level. A good score means you are financially healthy; a bad score means you are seriously out of shape and at high risk for some serious problems.

Even though you may have no clue what your score is, plenty of businesses you come into contact with sure know your score. Your credit score plays a big role in stuff like:

• The interest rate you are offered on a mortgage
• The interest rate you are offered on a car loan
• Whether you can get a cell phone contract
• Whether a landlord will rent to you
• The premium on your car insurance
• Whether a prospective employer will hire you

Your credit score tells businesses what sort of credit risk you are. With a good score, everyone is going to be happy to do business with you and offer you good credit deals.

But a bad score is a big fat warning flag for them. Businesses might still be willing to deal with you, but they're going to be nervous enough about your ability to pay your bills on time that they are going to charge you more. It's their insurance policy in case you do indeed turn out to be a lousy credit risk.

I am not exaggerating when I tell you that your credit score is either going to save you tens of thousands of dollars or cost you tens of thousands of dollars. So how the heck can you not know what it is? More importantly, how crazy is it not to be doing everything possible to make sure your score is as high as possible? (Be sure to check out Five Ways to Improve Your Credit Score below for tips.)

FICO Is the Way to Go
There are a handful of companies that compute credit scores, but my advice is to stick with what is known as your "FICO" Score. This is the granddaddy of credit scores, computed by Fair Isaac & Co. One FICO score costs $14.95. (You actually have three different FICO scores, which I'll explain in a minute.) To be honest, other businesses offer cheaper credit scores, but you can't afford to go with cheap. Here's the deal: businesses trust FICO and use its scores when checking up on your financial health. So if a mortgage lender or car financing company is going to be checking your FICO score, you better make sure you know exactly what your FICO score is. Just because your credit score from some other business looks fine, doesn't necessarily mean your FICO score is in good shape. And trust me, when you are applying for a mortgage, or a job, you don't want any nasty surprises.

Go to www.myfico.com to get your FICO credit score. As I mentioned above, you actually have three FICO scores, one from each of the three major credit bureaus. (More on them in a sec.) Unless you are going to be buying a home soon, I think it is perfectly fine to spend just the $14.95 to get one report. While there are indeed some differences among the three reports, they typically fall within a reasonable range. The one caveat is if you are buying a home. Quite often, a mortgage lender will take an average of your three scores, or could even just use your lowest score to determine the interest rate you will be offered. So for prospective home buyers it makes sense to fork over the money to see all three FICO scores. The $45 bucks for all three is a small cost when compared to the size of the mortgage you will be taking out.

How You Doing?
The folks at FICO break down credit scores into six basic ranges. Higher is better.

Typically any score above 720 is considered top-notch and will qualify you for the best deals. But in some instances lenders are going to want to see a score above 760 to snag a super offer like a zero-percent car loan. Here's a recent breakdown of typical range categories used by lenders across the country:

And here's what interest rate you might qualify for on a 30-year fixed-rate loan, based on these FICO score categories.

Okay, I know your eyes are beginning to glaze over, so let's go over a real-life money scenario. Let's see how those percentages would play out on a $200,000 mortgage. If your FICO score is 760+, you're looking at a monthly mortgage payment of $1,126 and total interest payments over the 30 years of about $205,000. But if your FICO score is, say, in the 640-659 range you'd be looking at monthly mortgage payments of $1,260 and total interest payments of nearly $254,000. That's a $50,000 difference over the life of the loan!

Stick with me for one more bit of math, because it's an eye opener. The difference between the two monthly payments is $134. If you were to turn around and invest that $134 a month of mortgage savings for those same 30 years, and you earned an average annual return of 8 percent on that investment, you would have nearly $200,000 saved.

See my point? A great FICO score can translate into a huge financial windfall.

The numbers are just as compelling if you're in the market for a new car. With a top-range FICO score you are in good shape to snag a 5.9 percent interest rate on a $20,000 four-year car loan, which will run you $469 a month. However if your score is between 625-659, the interest rate jumps to 10.8 percent and your monthly payments bump up to $515. Over the life of the loan you will pay more than $2,000 extra in interest with the higher-rate loan. Doesn't sound like much? Come on, it's 10 percent of your original loan amount. That's a huge penalty, if you ask me.

Now let's focus on what to do if your FICO score isn't in the top range.

Read Your Report
A bit of backstory is necessary here. Your FICO score is based on all sorts of financial info that is tracked by three major credit bureaus: Equifax, Experian, and TransUnion. The credit bureaus know how many credit cards you have, whether you pay your bills on time, and all the details on any loans you might have, such as mortgages and student loans.

Sadly, though, all this access to your personal records is no guarantee of accuracy. The truth is that the credit bureaus can have faulty info on you. An old account you paid off might show up as being unpaid. Or you may find that someone has hijacked your account -- the epidemic known as identity theft -- and is running up credit card and loan debt in your name.

These kinds of erroneous info can send your FICO score south.

So job one is to make sure the info on your credit reports is correct. Once you clear up any mistakes, your FICO score should improve. The good news is that a new federal regulation entitles everyone to a free credit report once a year from each of the three credit bureaus. If you live in the West or Midwest, you already can get your reports for free. Everyone else will be eligible for their free reports by September1. You can check whether you live in a state that is already eligible for free reports at www.annualcreditreport.com, as well as obtain your reports there.

And here's a neat credit report tip for the new system: you can create an ongoing free monitoring system of your credit by getting just one of the three free reports every four months. For example, start with Equifax, and then four months later get the Experian report. Then four months after that, check your TransUnion report. And you can repeat this system every year. If you find any incorrect info, follow the directions on your report to file a dispute.

For more advice on boosting your FICO score check out my Five Ways to Improve Your Score.

Five Ways to Improve Your Score

If you've got a low FICO score, don't get all depressed. Snap into action; there's plenty you can do to snag a higher score. And it's not nearly as hard as you might think. Here are the five major factors that determine your FICO credit score:

• Pay the Minimum Due on time each month. Notice I said MINIMUM. You don't need to pay off your balance every month to get a good credit score. Just hand over the minimum on time every month and you'll please the credit folks. Think about it for a sec: the thing lenders, landlords, and other businesses care most about when sizing you up is whether you will be diligent about paying your bills on time. Showing that you can pay your credit card minimums every month is considered a sign that you are indeed a good credit risk. Your ability to pay the minimum on time makes up 35 percent of your FICO score.
  
  
• Reduce your debt-to-credit ratio. Another 30 percent of your score is determined by how much outstanding debt you have relative to the total available credit limit on all your cards. (Part of this calculation also includes whether you have other debts such as car loans and mortgages, and how much you have left to pay on those, compared to the original loan amount.) The lower your debt-to-credit ratio, the better. And there's plenty you can do with your credit cards to improve your ratio. Let's say you have two cards. One has a balance of $5,000 and a limit of $10,000, and the other has a balance of $2,000 and a limit of $8,000. That means you have total credit debt of $7,000 and a total credit limit of $18,000, which works out to a ratio of 38 percent. Now let's say you manage to cut your balances in half, so you now have just $3,500 in debt and the same credit limit of $18,000; your ratio will fall to 19 percent.
  
  The FICO brain trust says there is no specific number that qualifies as a "good" ratio, just that lower is always better.
  
  Another tactic for lowering your ratio is to boost your credit limit. But please be very very careful before you call up a credit card issuer and ask for a bigger limit. I only want you to do this if you know you have the will power to not use that extra money. The whole idea is to lower your ratio by changing the denominator in the calculation, without touching the numerator. For example, you maintain a combined credit card balance of $7,000, but you get your limits raised so your new combined credit limit is $25,000. That means instead of a 38 percent ratio you now have a 28 percent ratio. Again, only attempt this if you have the resolve to never touch the extra credit line.
  

• Save your credit history. About 15 percent of your credit score comes down to your credit history. The more history you have, the more evidence the FICO folks have to size up your credit habits. Therefore it's a big mistake is to cancel a credit card you no longer use. When you cancel the card you wipe out all that history. Look at it this way: if you were trying to size up two people to entrust with your money, would you lean towards the person you've known for ages, or someone you've just known for a short time? That's the way lenders think. Besides, when you cancel a card, you also lose the credit limit it carries, a move that hurts your debt-to-credit ratio we just discussed.
  
  Now if you are concerned you won't be able to leave an unused card unused, then just tuck it away someplace safe where you can't easily get to it -- or hit it with a pair of scissors if you have to. Without formally canceling your history you'll have made sure there's no way you can use it.
  
  
• Avoid offers for new cards. Even though your mailbox is full of credit card offers, and you're asked if you want to open a card at just about every check-out counter these days, I want you to just say no. Too many cards makes lenders nervous, and your card count is responsible for about 10 percent of your FICO score. The theory is that if you open up a bunch of new card accounts you are an accident waiting to happen: you have way too many opportunities to ring up big balances you won't be able to pay.
  
  
• Get the mix right. While you don't need 10 cards, lenders nevertheless also like to see that you can handle multiple credit lines simultaneously. An example of what they would consider a responsible array of personal debt would be a credit card or two, one department store card, and an "installment" loan such as student loan debt or a car loan. The idea here is that you want to show 'em you are responsible enough to juggle a few different types of debt. It's a bit ironic, but the one thing that makes lenders absolutely nuts is if you have no cards or loans; they then have no way of gauging whether you will be a good customer. So your mix of credit cards and loans constitutes the final 10 percent of your FICO score.