Your Money - Unraveling the Mystery of Credit Score

By Linda Lane Dear Linda, What exactly is a credit score, and why is it so important to have a good one? In the Dark in Moorestown

Dear Dark, A credit score is a measure used by lenders to gauge the credit risk of a borrower. Developed by Fair Isaac Corporation, it’s based on an applicants' credit history and how much she’s used credit. Expressed as a number between 300 and 850, the score determines not only whether the loan is approved, but also what types of terms are offered by the lender. All three national credit bureaus (Equifax, Experian, and TransUnion) now report these scores, which may also be used to determine the rates on business or car loans.

Dear Linda, I am looking to purchase a home. In the past, I had several late payments due to catastrophic illness. How will this affect me? Recovered in Marlton

Dear Recovered, According to Matt Thoman, Product Developer with EMortgage Management LLC in Haddon Township, NJ, your credit score not only affects whether you’ll get approved for a mortgage, but what interest rate you’ll qualify for. If you have poor credit, it can force you into a government-backed loan. This could add up to 2% to the principal balance. The bank will still be the final word and could be even more restrictive than the government regulations. Do your homework with a qualified mortgage expert to find out where you stand before you start looking for your new dream home. Dear Linda, When faced with the choice of buying a new pair of designer shoes or paying my credit card bills on time, I just can’t help myself, and often go for the shoes. My friend keeps harping on me to pay my bills on time. What’s the big deal? I do pay them. Chic Boomer in Cherry Hill

Dear Chic, I love a new pair of shoes as much as the next girl, but let’s step into reality. Paying your bills on time accomplishes several things: you avoid late fees on your card (some as high as $39 per month), you feel secure knowing you control your debt, you protect your credit rating and you can avoid higher interest rates. On Bankrate.com on 06/25/08 I found a huge range from 19.92% APR for poor credit to 7.90% APR for excellent credit. So get current and stay current. If your bill goes to collection and ends up on your credit report it’ll stay there for seven years.

Dear Linda, I’m a small business owner, and need a loan to help my company grow. The bank is asking for my personal credit history. Why? Selling Widgets in Collingswood

Dear Widgets, Most small and/or new companies do not have enough financial strength and history to borrow. Your personal credit will be a very important piece of your borrowing process. Be mindful of your personal commitment. If you commit your personal assets, and your business goes under, they could be attached. Be sure you get good advice on this from your tax and legal advisors.

Dear Linda, I was downsized from my long term job, and went through a divorce. As a result, my credit has been damaged. I now have a new position, a new beau, and life is getting better. I know I need to improve my credit situation, but have no idea where to start. Reinventing Myself in Medford Dear New You, Congrats on making a fresh start! You’ve just emerged from two of the hardest situations a woman can go through, both emotionally and financially. First, sit down with all your bills and figure out what you owe. Make some payment arrangements with creditors, but always try to pay off the highest interest debt first. Get current and stay current. Get a copy of your credit reports from the credit bureaus to make sure the information on them is correct. If it isn’t, you need to dispute it. Keep copies of any written correspondence and a log of phone calls with name, date, time and content of any conversations. There’s a wealth of free information on www.myfico.com. I suggest you review the site, and as always, consult your tax and legal advisors. Get everything in writing, and READ IT. This may be an arduous process, but you have come so far in turning your life around, you want to be sure your credit repair decisions are informed and sensible.

Linda Lane is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, Inc., member of SIPC. Two Bala Plaza, Suite 901, Bala Cynwyd, PA 19004, 610-660-9922. Insurance offered through Massachusetts Mutual Life Insurance Company (MassMutual) and other fine companies. The views expressed here are those of Linda Lane and are not necessarily those of MML Investors Services, Inc. or MassMutual. In addition to her work in financial planning, securities and insurance, Linda is the Founding Mother of The Old Girls’ Network a 300+ member networking organization and a frequent keynote speaker. She lives in Cherry Hill with her three sons and Spike, The Wonder Dog. Contact her at 856-810-0440 ext. 26 or lindalane@finsvcs.com.