MASTERSON ONLINE: Credit score matters - NWAOnline

Three decades have passed since I began paying close attention to my credit score and everything that's affected by it.

In today's economy, those of us who purchase anything on time or credit know all too well the positive or negative impact a FICO score (customarily ranging between 280 and 850) can have in all phases of our lives.

I've also never understood where the acronym FICO, used to determine and describe these scores, originated or what it even means. Then I looked beneath the surface and found the acronym stands for the Fair Isaac Corporation, founded by Bill Fair and Earl Isaac. They created the system after realizing a method was needed to establish one's credit risk, first introducing the FICO score in 1989. The company changed its name to FICO in 2009.

Today, FICO has become a major data analytics company providing products and services to businesses and consumers. It is best known for producing the most widely used consumer credit scores that financial institutions use in deciding whether to lend money or issue credit. I've also read that more banks and lenders use FICO to make credit decisions than any other scoring or reporting model.

While prospective borrowers can explain away negative items in their credit report, it's nonetheless a fact that having a low FICO score is a deal-breaker with numerous lenders. Many lenders, especially in the mortgage industry, have established FICO minimums for approval, so much so that even a single point below this line can reap a denial. Achieving a high FICO score requires having a variety of credit accounts and maintaining an excellent payment history.

Equifax, Experian and TransUnion are the top three U.S. credit reporting companies who typically gain information about you and me from credit bureaus.

(By the way, valued readers, if this tedious context is wading too deep into the thorny financial weeds for you this morning, feel free to head to sports or features. However, there really is an interesting and relevant point to all this coming just ahead.)

FICO scores are calculated using data in credit reports compiled by one of the three reporting agencies. Those figures are then arranged into five categories and percentages. For example, our payment history accounts for 35 percent of the total. The amount we owe equals 30 percent. The length of our credit history is 15 percent, and new credit with credit mix each account for 10 percent.

The likelihood of being approved for a loan improves along with a buyer's rising credit score. Experian says an increasing percentage of loans of late are being awarded to prime borrowers with a credit score in the range of 661 to 780.

Basically, a score's significance to creditors runs pretty much like this. From 250 through 579 is considered very poor, while 580 through 669 is rated fair. Good would be in the range from 670 to 739 and very good from 740 to 799. Anything factored above 800 falls in the excellent range. Although I need to add that changes are coming this year in the way FICO scores are determined.

All this matters to you and I because lenders, such as banks and credit-card companies, use these scores to evaluate potential risk posed by lending money to consumers and to mitigate their losses due to bad debt.

They not only use the scores to determine who qualifies for a loan, but also in setting the interest rates we pay and our credit limits. Lenders also use credit scores to determine which customers are likely to rake in the most revenue.

Other organizations like mobile phone companies, insurance firms, landlords, and government departments also rely on FICO scores to size up our individual's creditworthiness and proven trustworthiness.

Can't say as I blame them. As a landlord, I'd feel more comfortable leasing to a 35-year-old with a FICO score of 800 rather than 400. Wouldn't you?

With all this ciphering and calculating in mind, I happened across some intriguing information concerning the credit scores of individuals living in cities across Arkansas. Writing for the website WalletHub, reporter Adam McCann on Feb. 5 listed the median credit scores for 2,572 U.S. cities.

Arkansas scores broke down this way with each town's percentile rank in parentheses; 99 is the top percentile nationally: Little Rock 660 (19th), Fayetteville 687 (46th), North Little Rock 635 (5th), Springdale 662 (20th), Fort Smith 661 (20th), Rogers 692 (49th), Bentonville 721 (68th), Bella Vista 743 (85th), Mountain Home 706 (58th), Russellville 670 (29th), Cabot 675 (38th) Jonesboro 662 (20th), Pine Bluff 610 (2nd) and my hometown of Harrison 675 (38th percentile).

And there, valued readers, you have rather rambling insights into what I'll call "Mike's FICO Scores for Us Dummies."

While we're talking finance and credit, there is a related tip I'll happily pass along to valued readers who want to put a credit card to work making money while boosting their credit score, rather than using checks or a debit card, which I did for many years until finally wising up.

Actually it was my pennywise brother who pointed out back in 2014 how much money and credit building I was ignorantly dismissing by not acquiring--and regularly using--a credit card with beneficial rewards that accumulate with each purchase.

I'd always been among those eager to square up my finances immediately with a debit card. It just felt comfortable. Until brother reminded me I was spending the same amount of money each month as I would by routinely using a credit card and simply paying off the balance each month.

In other words, if I spend $1,000 a month on gas, food, utilities, etc., while paying as I went, why not simply wait until month's end and write one check to pay off the credit card company in full at no interest, while also receiving the considerable financial and/or travel rewards?

Plus, by paying the balance in full each month, my credit score was bound to rise, which it has. Last year I received nearly $400 back at year's end from using just one card. The easy-peasy concept costs nothing ... well, except willpower and the dedication to write that settle-up check each month.

Now go out into the world and treat everyone you meet exactly like you want them to treat you.

Mike Masterson is a longtime Arkansas journalist, was editor of three Arkansas dailies and headed the master's journalism program at Ohio State University. Email him at mmasterson@arkansasonline.com.

Editorial on 02/15/2020

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