Saturday, December 25, 2010

Why your Credit SCORE is not FREE.

While your Annual Credit Report is free (under the law) your credit score is something you have to pay to see.

As I noted in my earlier posting on Your Really Free Annual Credit Report, you have a legal right to see your credit report every year, from the three main credit reporting agencies.  And the correct website is NOT the one on TeeVee with the catchy jingle.  It is

While you are entitled to a free copy of your credit report, you do not get a copy of your credit score as part of this report.  Why is this?

The credit score is a bit of a flim-flam.  It was created by the credit reporting agencies in response to public outcry that some privately held agency could assemble a dossier about you and not let you see what was on that dossier without paying to see it.  Laws were enacted requiring them to show you your credit report, once a year.  So they created the credit score.

From their perspective, the information they gathered was Intellectual Property and in the Intellectual Property game, you don't make money by giving away your product for free. 

So companies that lend money pay large fees to the credit reporting agencies to be able to "run" someone's credit.  Usually they pay a flat fee for a large number of reports, or pay a per-report fee, which might include a monthly maintenance fee.

When I was a Landlord, for example, I paid TransUnion about $25 for each credit report I ran.  Anybody can do it - all you need is the signed consent of the person you are running credit on, and their Social Security number.

Under the law today, you are entitled to look at your own report once a year, for free.  In some instances, for example, if you have been denied credit because of an unfavorable report, you may be allowed to view the report more often than that.

While your credit report is information you are entitled to, your credit score on the other hand, is another piece of Intellectual Property that the credit agencies create, using a formula that is a bit obtuse.  The credit agencies argue that your credit score is their property, and thus you are not "entitled" to that piece of information under the law.

For a small additional fee, some agencies will report your score to you.  For example, Equifax will tell you your score for $7.95.  Other agencies might want you to "sign up" for a "free" credit protector service first - but the service is a negative option cancellation deal, where you have to hand them a credit card number and they ding your card until they tell you to stop (and then they say you never said to stop!).  At least Equifax is a little more upfront about it.

Do you need this information?  As I have noted before, you can kind of figure out what your score is, from the data provided.  If you have a lot of late payments, missed payments, uncollected debts, etc., your credit score is going to suck, period.  On the other hand, if you have a good payment history, a low debt-to-credit ratio, your score will be high.

The score ranges from 280 to 850 from Equifax.  Why this range, and not 0-100 or 0 to 1000 I do not know (perhaps so they can argue it is Intellectual Property and non-obvious?).   Apparently if you have a pulse, you automatically get a 280.  To qualify for a lot of these "come on" financing deals at car dealers and the like, you have to have a 770 credit rating or higher, and most people don't have credit nearly that good.  If you think a credit score of 670 is good, think again - you will get the worst sort of financing.  Bear in mind that 280 is the minimum -  670 is hardly above the middle of the pack

I actually paid to see this score from Equifax ($7.95) and it was interesting.  They assigned me a 819, which was not the highest it has ever been.  When we sold our Washington Road home and paid off the mortgage, it was 830.  We are debt-free now and have no late or other negatives on our report - why is it lower?

The reasons they gave illustrate why the "credit scoring" system is such a stupid game.  The "key factors affecting your score" were given as:

1. Credit Line on Revolving Accounts
2.  Insufficient Information or Account History on Mortgage Accounts
3.  Percentage of Department Store Accounts to All Accounts
4.  Insufficient Information or Account History for Credit Union Accounts.
Let's look at these factors and try to understand what they mean and how they affect the score and why - and how you can prevent your score from being dinged as a result.

With regard to the first item, having a lot of open credit lines can hurt, even if they are not being used, as it means you can run up a lot of debt in a hurry and thus make you a larger risk.  At the present time, I have only one credit card with a credit line of $10,000.  This may sound like a lot to some, but until recently, I had over $50,000 of credit line on credit cards.  I have since closed most of those accounts.  So I am not sure why they are dinging me here - too much credit line, or too little?  Or was the old credit line bringing me down and their computers have not updated yet?  I do not know for sure.

Again, no late payments, missed payments, uncollected debt, so I am not sure why this affects my score.

The second item is odd, too, and probably due to the fact that I refinanced this most recent mortgage before paying it off.  And I paid off a second note about a year after taking it on.  We also paid off a mortgage on our house in New York only a year after taking it out.  So for four mortgages which were paid off in less than three years, there is not a full 29 months of history that they'd like to see.

Sheesh! - you'd think that actually PAYING BACK a debt would increase your score, eh?  But as I have noted time and again, creditors would prefer you pay back their loans - payment at a time, so they can collect their hefty interest fees.  Paying off early makes it less fun for them!

The third item is interesting, as I do not have any open Department Store Accounts at the present time.  I took advantage of some of these silly promotions offered by Sears, Lowes, Radio Shack, and the like, where if you opened a charge account, they would give you 10% off or something.  I immediately closed the accounts, but they still are on the report.  These promotions were probably a bad idea, in retrospect.

What is interesting about this, as it illustrates how having too much credit is a bad thing, and how department store charge accounts are NOT viewed as a favorable thing to have.  Many financial advisers tell young people to open a department store charge account to "build up their credit score" - but clearly too much of a good thing can hurt you.  Why is this?  My guess would be that the default rate on these easily-given lines of credit are very high.

If the only account you can get is from a department store, and you have a plan to "build your credit" I suppose that could work.  But opening a lot of department store cards could backfire on you, big time, particularly if you run up the cards and can't afford to pay them off.

The last item is interesting in that it is something that I could not have any control over.  I closed my credit union accounts five years ago, and whatever data they reported is old, incomplete, or whatever.  There are no late or missed payments, no unpaid debt - everything was "paid as agreed" and yet, because the credit union never reported some payments as "on time" (but instead made no report at all) my credit score is dinged.  Hardly a fair situation, don't you think?

This illustrates how arbitrary the credit score can be, and how the score, by itself, is not a real picture of someone's credit history - although it could be a good filtering criterion.

All told, these "factors" mean little, as my credit score is excellent and I can borrow money anywhere on my terms, if I want to.

And there's the rub, eh?  Since I have no debts anymore, and money in the bank, why on earth would I want to borrow money at this stage in my life?

The old saying is true:  In order to borrow money, you have to first prove you don't need it!

But regardless of whether you are a poor 280 or a screaming 850, bear one thing in mind:  You are NOT your credit score.  Don't let these reporting agencies get you to believe that this score is somehow an indicia of your underlying worth as a human being.

Once you start praying to the false God of the credit score, your life will go downhill in a hurry.  Because worshiping the credit score is to worship our debt culture and our consumerist culture.  Don't let the credit industry call the tune - and force you to dance.

Take on as little debt as possible.  Save debt for big things - a house or an education (a real one, not one from a for-profit university).  Going into debt for shiny trinkets is a really bad idea, and if you do that, you have sold your soul to the credit reporting agencies - all for a handful of shiny junk.