Credit matters

If your New Year’s resolution was to boost your credit score so that you could buy a new car or house, Fair Isaac Corp., creator of the FICO credit score which is used by most lenders, has resolved to throw an obstacle in your direction. Even if you weren’t planning on making a large purchase this year, your credit decisions could cost you more money in the future.

When I opened my January Chase credit card statement, I was stunned by the interest spike to 29.99 percent. I had not gone delinquent on any of my accounts, nor gone over the credit line. I dialed customer service, certain that it was a mistake. Yet, the representative informed me that, like most banks, Chase reviews your credit reports annually. Even if you have not defaulted on any of your accounts, greedy banks will move your account to a default APR if you have high credit card balances.

Tuition, textbooks, residence, food and other costs of living the student life quickly accumulate and grow beyond paltry student loans, scholarships, grants and meager paychecks from minimum wage, part-time jobs. Knowing this, credit card companies market high-interest credit cards with small credit limits as a solution to students’ financial woes and as a way to build credit.

According to Nellie Mae, the nation’s largest student loan financial institution, 76 percent of undergraduates take advantage of credit cards, and 79 percent of student credit card holders owe a balance of $2,169, close to the maximum credit limit. Most of them are unaware that even though they pay the minimum balance each month by the due date, they are damaging their credit just by having high revolving balances.

The Fair Isaac Corp.’s 2008 FICO changes disadvantage students further. Their goal to widen the gap between good and poor credit scores penalizes consumers that have “thin” credit histories as well as cardholders with credit card balances near their maximum limit.

People that have made mistakes in the past will have a more difficult time mending their credit. In the past, people were able to earn credit for being an authorized user on a spouse or parent’s credit card. With the new unforgiving policies, authorized users will no longer gain credit history.

Fair Isaac Corp. states that the FICO score is used by 90 percent of the 100 largest banks. The three main credit bureaus, Equifax, Experian and TransUnion, are already implementing the FICO 2008 or planning to by the end of this summer. Credit reports from these bureaus often influence the approval and pricing of credit, insurance, cell phones, employment, utility services and leasing an apartment.

At www.myfico.com, consumers calculate the importance of a high credit score. For a 36-month installment loan for a $25,000 vehicle, someone with a high credit score of 720-850 would have an approximate monthly payment of $769 at a low APR of 6.787 percent. For the same vehicle, someone with a low credit score of 500-589 would have an approximate monthly payment of $868 at a high APR of 15.123 percent.

Based on those calculations, the person with the lower credit score would pay $3,564 more for the vehicle just through interest alone. Lowering consumer’s credit scores who make their minimum monthly balances doesn’t seem to be about financial institutions ensuring that they’ll receive payment as much as the bank fattening their own wallet.

Maintaining good credit scores is important in order to save money in the long run. The U.S. government mandates that each consumer can receive a free credit report every six months from each of the three main credit bureaus. Contact them directly or go to www.annualcreditreport.com to order a copy. Don’t obtain credit reports from bogus sites that demand credit card information so that they can send you a “free” credit report as long as you cancel within 30 days.

Review your credit accounts regularly to ensure that there isn’t unexpected or fraudulent activity on them. Keep credit card balances ideally under 50 percent of the maximum credit limit, but at least beneath 80 percent to keep your credit score healthy. Research other ways to acquire excellent credit because even if you don’t need it right now, there will be a time in the future that you were glad that you did.