Knowing the Score on Credit Can Help

Times Staff Writer

Sam Warnken is a financial genius -- at least when it comes to managing his credit.

A Santa Barbara house painter with a mathematical mind, Warnken was among a few who got a perfect score on a recent nationwide credit quiz. But the 25-year-old maintains that the test barely scratched the surface of his knowledge.

“You’d be surprised by all the things I know about credit,” he said.

He knows, for example, that paying off an old collection account could damage your credit score -- the figure that helps determine the interest rate you’ll pay on a loan. And that some lenders can damage a consumer’s credit by not reporting all the information they have available.


More important, Warnken knows how to fix these glitches to boost his credit score -- and boost his chances of getting the best loan at the best price.

He started studying credit to help himself and some friends get lower-cost loans. Now, he’s so good at boosting credit scores, he may turn it into a sideline business.

As home-buying season kicks into high gear and mortgage refinancings continue to soar, thousands of dollars can swing on a consumer’s credit savvy, said Steven Foster, president of Vista Financial, a North Hollywood-based mortgage brokerage. It makes sense to spend a little time this spring getting credit-smart like Warnken.

Here are credit tips from Warnken and other experts.


How Lenders React

to Your Credit Score

The most commonly used credit score, known as FICO and created by Fair Isaac Corp., is a number between 300 and 900 that tries to gauge a consumer’s propensity to pay his or her bills. In theory, a least, the higher the score, the more creditworthy the borrower.

Credit scores have a marked effect in the mortgage market. Borrowers who score above set FICO thresholds get lower-rate loans and special privileges, Foster said. Here are the relevant thresholds:


* Score higher than 700 and you not only get the best loan terms, but lenders also may make the loan without asking questions about your income and assets, Foster said. So-called no-docs loans make the loan process faster and easier.

* Score 660 or better and you get the best rate from virtually all lenders, but you will have to provide documentation of your income, assets and debt.

* Score between 620 and 660 and you may get a preferred-rate loan, but you’ll have fewer lenders competing for your business, Foster said. Those lenders also will look more closely at the nature of the transgressions on your credit report to determine whether to push you into the dreaded sub-prime market.

* Lenders consider anyone with a score of less than 620 to be a sub-prime borrower. Those borrowers pay at least 1 percentage point more in interest on a home loan and may have to accept unattractive loan features such as prepayment penalties. Just the percentage-point difference in the interest rate would cost $23,410 for each $100,000 borrowed over 30 years.


Factors That Can

Lower the Score

The things that most damage a credit score are bankruptcies, foreclosures and collection accounts, as well as late and missed payments. But Warnken said credit scores also can be lowered by unexpected causes -- such as having just a few heavily used credit cards.

Someone with $5,000 in debt will score far lower if that debt is on one credit card charged to the limit than if the debt were equally divided among two or three credit cards that each had a $5,000 limit, for instance.


Moreover, not having certain types of debt can hurt. To get a high enough score to rank as a preferred borrower, a consumer generally must have both credit card and installment loans, Warnken noted.

Consumers who don’t have a car loan or other installment debt can boost their score by getting a low-cost loan secured by a bank certificate of deposit, Warnken said. This is particularly effective for those trying to establish credit because it’s relatively cheap -- the bank doesn’t charge much for the loan because it has no risk.

Consumers also should look for oversights on their credit reports, such as lenders failing to report the borrowing limits on their credit cards or lines of credit.

Scoring programs compare the amount of credit available to the consumer with the level of overall debt. When accounts are posted without credit limits, the program assumes the loan has been charged to the maximum, which boosts the consumer’s debt ratio and lowers the score, Warnken said.



Bad Advice Can

Hurt Your Credit

Some common notions about how to improve credit can do more harm than good. Some advisors tell consumers to cancel unused accounts to lower the amount of credit available, thinking that will help their score. But it frequently does the opposite, said Craig Watts, a spokesman for Fair Isaac.


A portion of the FICO score is based on the length of the consumer’s credit history. But the score measures only what’s in the report. Consequently, a consumer who cancels all old credit card accounts appears to have a shorter credit history, which hurts the score.

Moreover, it raises the consumer’s debt-to-available-credit ratio, which can hurt too.

Those with a large number of accounts may be forced to close some by nervous mortgage lenders concerned that the consumer will be over-indebted if all those cards are charged to the limit buying furniture for a new home. But to keep a good credit score, the consumer should leave the oldest accounts alone, Watts said.

Another misconception is that to get a home loan, the consumer should pay off old collection accounts, such as the disputed $12 bill from the mail-order record company. Huge mistake, Warnken said.


The reason: The score gives more weight to recent activity. A 6-year-old collection account, consequently, would have a relatively small weight in the overall credit score. But make a payment on that old account and it shows as current collection activity. That can shave dozens of points off a FICO score.


Times staff writer Kathy M. Kristof, author of “Investing 101" and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes .com. For past Personal Finance columns, visit The Times’ Web site at