What's your score.

Learn how your credit rating can help you get credit easier and faster

FOR STEVE JONES, 44, GETTING enough credit to run his business had, always been a frustrating experience. "I've dealt with some of the largest banks in the country," says Jones, president of National Communications Link Network 20, an emergency dispatch contracting agency based in Pleasanton, California. "Sometimes it took over a year to get a small, secured line of credit, a year in which I literally spent days going to banks and making presentations."

Jones' last experience was a bit different. "I called Wells Fargo Bank and provided information by phone," he says, explaining that he needed extra cash for his expanding business. "Within a week my loan was approved; within two weeks we had a $ 100,000 unsecured line of credit at a favorable interest rate."

What made the difference this time around? scoring, the process of putting a numerical grad applicant's creditworthiness. "Credit reviewing enable us to make small loans economically," says James, an executive vice president at Wells Fargo Francisco. "Decision-making time is much shorter, so we can grant credit more rapidly."

Credit scoring is by no means limited to one bank's small business loan department. Today, whenever you apply for a credit card, an auto loan, or a home mortgage, you're likely to be scored. The same is true when you buy auto or homeowner's insurance. Credit scoring not only helps determine whether you'll be accepted or rejected but also the interest rate you'll pay. The better your score, the lower your expenses will be.

The good news is that credit scoring is objective. Unlike lending officers, credit scores don't have "a bad day" or judge applicants by the way they look. While Jones believes he encountered racism in prior face-to-face attempts to get credit, he says that wasn't the case with his latest request.

The bad news is also that credit scoring is objective. If you've missed payments, defaulted on loans or declared bankruptcy, that data will be incorporated into your score, dragging it down. The worse your score, the lower your chances of winning credit approval, no matter how Much personal charm you exert. Therefore, it's vital that you know the score about credit scoring and take steps to improve your grade.

CREDIT SCORING 101

Credit scoring is a process designed to predict the future: whether or not you'll live up to the obligations you incur today. When you make a loan application, the tender will request a credit bureau report showing your prior history (see "Cleaning Up Your Credit," July 1998). The report may be loaded with information, positive and/or negative. How can the lender evaluate that data and make a fair judgment of the likelihood you'll pay your debts?

"Based on past experience, we've determined the most powerful indicators of future risk," says Sally Taylor-Shoff, director of credit bureau risk products for Fair, Isaac & Co., the San Rafael, California, firm that pioneered credit scoring. "We've developed models that weigh the data and produce a score that indicates risk level. Lenders can then decide whether they want to extend credit to borrowers who present that amount of risk."

Credit scores look at three factors, according to Taylor-Shoff: severity, recency and frequency. "In terms of severity," she says, "a report of a 30-day late payment is not as serious as a 90-day late payment. Obviously, one late payment is not as risky as several late payments." As far as recency is concerned, a credit lapse four or five years ago might not concern a lender who sees that you've been paying your bills since then.

Credit availability also may affect your score. If you have no credit cards, for example, you can't show you have been approved for credit and made payments regularly. On the other hand, having many cards--and a huge overall credit line or high outstanding balances--can be a risk indicator. Fair, Isaac data indicate that having two cards probably is the lowest risk level; once you have seven cards or more, credit scores may decline.

On the other hand, there are many factors a credit score doesn't look at, because some factors have not proven to be reliable predictors of debt repayment, says Tom Ducey, vice president of credit policy for Fannie Mae, a federally sponsored mortgage purchaser in Washington, D.C . "Credit scores don't consider your income, the neighborhood where you live or where you work," he says. "They don't consider how many years you've been at your current job. Therefore, credit scores may be helpful to young people who are just starting their careers, provided they handle their debt prudently. On the other hand, if you misuse the first credit card you get when you're still in college or just out of school, the negative reports will hurt your credit score for years."

WHAT'S YOUR NUMBER?

Unfortunately, you may not realize how much your transgressions have damaged your score. When you request a copy of your credit report, you won't see a score on it. Can you get a copy of your score? Possibly, if you're friendly with a bank loan officer or an auto dealer's credit manager. However, the score itself won't be particularly meaningful unless you know the scale and the cut-off points. (The "reason code" is probably more meaningful to you than the actual number you receive. Ask your lender if he or she can reveal the reasons behind your score.)

Although many lenders now develop their own credit scores, the Fair, Isaac score, known as FICO, is widely used, especially for home mortgages. Fannie Mae and Freddie Mac, another quasi-federal agency , suggest strongly that lenders use FICO scores, so these scores are widely used for mortgages. In some cases you can provide basic information to a loan officer who will enter the data into a computer and come up with your score within a minute or two.

FICO scores range from 300 to 900 (other scoring systems may use different ranges). But a 900 FICO score is virtually impossible to get. "There are very few scores in the 800s," says Taylor-Shoff, "even for those people who make all their payments on time. Generally, scores tend to cluster around a mean, with a bell-shaped distribution." For example, with a FICO score of 680 or higher, you'll likely be considered a premium-quality borrower and possibly qualify for a lower rate on a mortgage. With a FICO score of 620 or lower, you'll be placed in the "high risk" category.

"We don't push borrowers off a 'credit cliff,"' says Ducey, implying that a FICO score under 620 won't send you into free-fall. "We recommend that mortgage applicants be given one of three ratings: approved, refer to underwriting or refer with caution. If a borrower's score is below 620, the lender probably would took for other ways to reduce the loan's risk, such as a higher down payment in relationship to the value of the home. If a lender determines that an applicant is not ready for a mortgage yet, some counseling may be needed to bring up the score."

GETTING THE SCORE YOU NEED

That was the case when James and Kimberly Stagge of St. Louis applied for a mortgage last year. "We had had some problems in 1995," recalls Kimberly, 32, a federal government employee married to a city police officer. "I'd been sick, my husband was in a car accident and we fell behind on some of our payments. Things had improved by 1997, but when we applied for our mortgage, those problems were on our record."

Norwest Mortgage, based in Des Moines, Iowa, enrolled the Stagges in its "Home Buyers Club," a program that provides free counseling and helps clients negotiate with creditors. "We were told we needed to show on-time payments for two years," says Kimberly. "Our latest delinquency was reported in February 1996. So we followed the program, kept our payments current and in February 1998 got the mortgage we needed to buy our home."

If you're in the marker for a mortgage, what might bring your FICO score down to the dreaded 620 level. Ducey is reluctant to provide hard-and-fast details because individual circumstances vary. "Typically, though, you'd need to show 90-day delinquencies, charge-offs, repossessions, or a bankruptcy to come in at that level. Alternatively, you might receive a low score by using your credit cards heavily, even if you're paying the minimum amount that's due. A minor delinquency a couple of Years ago won't. by itself, drop your score to 620 or below."

For a free brochure that explains the use of credit scoring for home mortgages, What are Credit Scoring and Automated Underwriting?, call Fannie Mae at 800-732-6643 or visit the consumer Web site at www.homepath.com.

How can you get your credit score from a 620 (doubtful) to a 680 (desirable), or make a similar leap in some other scoring system' The best thing you can do is keep paying Your bills on time," advises Taylor-Shoff. Can a consumer turn an "F'" into an "A" in a Year' "That's hard to say because there are so many factors involved," she says. "However, a year's worth of regular payments definitely can make a substantial difference in your score.

IS A GOOD SCORE ENOUGH?

Of course, a solid credit score by itself may not be sufficient to grant access to credit. "On loans of over $100.000, we require a visit by a loan officer," says James of Wells Fargo.

That's what happened early in 1998 when Usua Amanam, 48, president of Amtrat International Corp. in Union City. California. applied for an increase in his credit line from around S200,000 to $500,000. "A loan officer came out to our headquarters, entered the data we supplied into his computer and promised to let us know within 48 hours," Amanam says. "As it turned out, we got our approval within 24 hours, and we never had to submit papers to a loan committee or go through any kind of formalities. When I started dealing with Wells Fargo, back in the 1980s, it would take two or three months to get a much smaller line of credit."

Again, credit scoring is the key to the rapid turnaround, according to James. "When a small business seeks a loan, we try to ascertain the character of the owner as well as the company's ability to repay. Thus, our credit score for this purpose is based on a combination of business and personal credit histories. We have a range of scores that help determine the interest rates that need to be paid and whether or not collateral will be required."

To see how credit scores actually work, compare the records of Consumer A and Consumer B in the accompanying box. Consumer A apparently ran into financial problems a few years ago but has kept his record clean since then. He's been paying down his auto loan; he's current on his credit card debt; and lie's not pushing his credit lines to the max. His lines have been in place for a lengthy time period and he hasn't been applying for credit all over town. Therefore, although the four-year-old problems raise concerns, "this profile would probably represent an acceptable risk level to most credit grantors," says Taylor-Shoff.

Consumer B, although he has never had serious credit problems, presents a more troubling picture. He has acquired all of his credit recently, and he's using it to the limit, even over the limit, while actively seeking more credit. Already, one of his credit cards shows a late payment, a hint of future difficulties.

To most lenders, Consumer B would be a risky loan, so his credit score would be much lower than Consumer A's. Therefore, Consumer A is a winner and Consumer B a loser in the credit scoring game. If you want to put more "W's and fewer "U's on your record, request credit cautiously and be sure to make all of your required payments regularly.

RISKY BUSINESS

Here's an example of credit scoring in action. Consumer A poses a low-to-average level of risk; his credit score is 706. Consumer B poses a high level of risk and scores only 585.

                Credit   Balance   Current       Historical
                Limit              Rating        Delinquency

Credit Card     S5,000   $1,500    Current
Credit Card     3,000        0     Current   120 days, 4 years ago
Retailer        300          0     Current
Retailer        1,000        0     Current
Auto Loan       8,000    2,000     Current

Dates opened. Credit cards are both 11 years old; retail cards are both eight years old; and the auto loan is four years old

Recent credit inquiries: None Public record/collection items: One collection item, four years ago, for @500

CONSUMER B Score: 585

                Credit       Balance    Current        Historical
                Limit                   Rating         Delinquency

Credit Card     $3,000      $2,700      30 days late
Credit Card      1,500       1,600      Current
Retailer           750         300      Current
Retailer           500         450      Current

Dates opened: One retail credit card is two years old; all others have been opened within the post year

Public credit inquiries: Five within the last 18 months, including three in the lost six months

Public record/collection items: None