John Ulzheimer on Credit Score Myths

John Ulzheimer on Credit Score Myths Jill Schlesinger: Wondering what hurts and what helps your credit score, John Ulzheimer is the man to ask, he's the president of consumer education for credit.com and before that he worked at Equifax and at Fair Isaac, the company that invented the FICO score, which means he's truly a credit insider, John, Great to Have you here. Jonh Ulzheier: Thank you so much for having me. Jill Schlesinger: Well let's start off with what's up with FICO, why are they like guarding the secrets of palace in there, why is everything so secret. Jonh Ulzheier: Well, it's their core product, FICO depends on banks and insurance companies buying their FICO credit scores to maintain and retain and stay in business. They have done a very good job over the past decade opening the curtain a bit so to speak and letting consumers know at least here are the five main areas that effect your score and here's roughly the percentage of points that each of these areas are going to cost you if you do things like miss payments, max out credit cards, apply for credit excessively and in some cases avoid credit altogether. Jill Schlesinger: Well, let's go into some of these myths and misconceptions about credit scores because a lot of people give a lot of advice and I want to start with one thing that many people say that paying your bills on time, that's the most important thing, what do you say to that? Jonh Ulzheier: That is clearly a good start but that is not the key to the kingdom, 35% of the points on your FICO score are directly tied to whether or not you're making your payments which means that 65 percent of the points have absolutely nothing to do with whether or not you make payments or you miss them so while it's a fantastic start you can not hang your hat on the fact that that you're just making your payments on time and assume that you've got fantastic credit. Jill Schlesinger: A lot of young people I talk to they say I hear that carrying a balance on your credit card is good for your credit score, what's the answer to that one? Jonh Ulzheier: I'm quite certain that the credit card industry introduced that myth laughs but there's nothing wrong with carrying a balance on your credit card what's problematic is when you start carrying a very large balance on your credit cards and the issue here is utilization, it's the percentage of your credit limit that you're using up in the form of a balance. So if you have a one thousand dollar credit limit and a one thousand balance you're completely maxed out on that card, that is not good for your credit score. If you have a relatively low balance, 10%, 15% of the credit limit, that's really where you want to be, anywhere in the 7 to 15 percent range. Jill Schlesinger: What's this I hear about employers being able to check your credit score that does not seem legal to me? Jonh Ulzheier: That — that, we'll consider that the myth of the decade actually, employers do have the ability to look at your credit reports but they do not have the ability to look at your credit scores. Credit reports and credit scores actually two completely separate things, a lot of people refer to them as if they're one item, credit report with a score and in fact they're actually two, so while employers can in most cases and in most states look at the report for pre-employment and continued employment screening, they do not have access to your credit score, you have never ever heard of a verifiable example of somebody not getting a job because they had a low credit score. Jill Schlesinger: So who can get your FICO score? Jonh Ulzheier: Well, any lender, any insurance company, any landlord and any utility provider. Jill Schlesinger: Okay. Jonh Ulzheier: As long as they have what's referred to as permissible purpose to access your credit report, then they also have the ability to buy a score from one of the three credit reporting agencies, about you, about me, about anybody and they use that score to determine the level of credit risk or insurance risk that, that particular applicant has and then they'll use that of course to either grant or deny or set the terms. Jill Schlesinger: You know the housing market has been in a complete mess, it's really screwed up a lot of people's credit and we found out recently like foreclosure is on the rise. Now what's the difference in impact on your credit score between a short sale and a foreclosure? Jonh Ulzheier: Very good question, that's actually unfortunately the root of a lot of myths. The assumption is that a short sale is actually better for your credit score than a foreclosure, in reality it's not, it's the same, a short sale is reported to the credit reporting agencies as a either a charge off or a settlement and in both cases that's accurate reporting because the lender has accepted less than the full principal amount and considers the loan to be now paid in full, that's a settlement. What do they do with the deficiency balance, they charge if off, that's a charge off so while the disposition of the mortgage is actually better for the neighborhood for example because you're keeping the house clean, you're mowing the lawn, you're not ripping copper piping out of the wall, from a credit scoring prospective there really is no difference between a short sale and a foreclosure. Jill Schlesinger: Last question, is it true that my credit score, anyone's credit score will be wrecked for basically 7 years if you have a short sale, a foreclosure or a bankruptcy or do those you know basically...we know the foreclosure and the short sale are the same so are you done for seven years on that? Jonh Ulzheier: Well, I don't want to say that you're done, it will be on your credit reports for 7 years and a bankruptcy in the example you gave that's 10 years, you're not done for the entire period of time, you credit score will improve as that item gets older, what you'd like to do is you want to put time between yourself and the incident and you can absolutely can rebuild your score and as the item gets older it's going to lose the negative impact on your FICO score and actually you can have very, very solid scores within three or four years assuming you don't do the same things again. Jill Schlesinger: Oh, that's ending on a nice foot there that gives me some hope for folks who really are in trouble. Jonh Ulzheier: That’s the goal. Jill Schlesinger: There you are, John thank you so much for joining us! Jonh Ulzheier: Always a pleasure. Jill Schlesinger: And thanks for watching.