Two numbers always stick with you. Your Social Security number never changes. But your credit score — which can determine whether you can get a house mortgage, or a car loan — has ups and downs that can hurt you. Some critics say it’s unreliable and unfair.
Mortgage brokers, banks, credit card companies and insurance firms use the credit score as their main guide to whether or not to grant a loan and where to set the interest rate. If your score is too low, you may have to pay more in interest. If it drops below a stated level, 620 as set by the biggest mortgage buyers, Fannie Mae and Freddie Mac, you may not get a loan at all.
A horror story reported by Joe Nocera in a critical New York Times column, involves a woman who had a credit card with a $3,000 limit. She had $1,500 worth of debt on the card, and thus had an acceptable 50 percent debt utilization. But when she moved the balance to a different bank, that bank lowered her credit limit to $1,500, the amount she had borrowed. Without adding a penny of debt, she immediately was maxed out. Her debt use jumped to 100 percent. This derogatory news went promptly to the three chief credit agencies, and showed up in a drop in her credit score. The interest rate went up on the mortgage she was seeking.
What has happened is that underwriting standards were relaxed too much during the financial bubble. The big banks were busy packaging subprime loans into high-risk and thus high-interest-paying investment products, whose sales kept climbing. Now that the bubble has burst and we are still stuck in a record recession, lenders are risk-shy. Low credit scores can mean automatic loan rejection or an increased interest rate.
Your score is easy enough to get, but it probably will cost you something. The underlying credit reports are free. Federal law requires the credit agencies, TransUnion, Equifax and Experian, to give you a free credit report once a year. Under the new Wall Street reform law, a consumer can get a free credit score if he or she has been denied a loan or insurance on the basis of their credit rating.
Otherwise the agencies charge a fee of up to $15 for a score. And in getting either a credit report or a credit score, you may lose an hour or two on the Internet examining and perhaps fighting off promotions of credit alerts and monitoring at monthly fees.
Mr. Nocera, the Times columnist, found that one of his credit reports listed him as a former New York Times employee and said incorrectly that he now worked for Rite Aid.
Better check your own report for errors.