Credit rating vital in slow economy

(Note: This is the first in a two-part series.)

By ANNE KAZMIERCZAK
Register Reporter

It looms over you, an invisible specter controlling your life in ways you may not know. It’s your credit rating, and it’s more important than ever.
“When I first started in banking 25 years ago, they weren’t used much,” said Emprise Bank’s Glenn Buchholz of the numeric designation of a person’s financial credibility. “Now, they’re really important.”
“A lot of different places are starting to use just credit scores” to determine whether an applicant might qualify for a loan, an insurance rate, phone service, a new car... some of them things credit ratings were never before applied to, Buchholz said.
While maintaining a high credit score is paramount, few people understand how easily credit scores can be impacted, he said.
“Everybody you borrow from reports to credit bureaus,” he said. “Over time, (bureaus) score you based on how you pay creditors.”
The credit ranking “tells how much money you have borrowed and how you’ve paid it back,” Buchholz said. Included is whether payments were made on time.
Also included in the score, which runs from zero to 800, is how many times a person applies for credit, although, Buchholz noted, “it doesn’t tell if you got it or were turned down.”
A credit score can be lowered in seemingly innocuous ways.
That credit application when shopping for a new car? Ding! A missed payment on a Visa bill? Ding! A home loan to take advantage of the government’s tax credit for new home buyers? Ding again. Anytime one applies for credit, a credit check is run by the loaning company. Each time that occurs, the score is lowered, Buchholz said.
Other dings come from collection actions.
“Say you were in college and shared a telephone,” Buchholz said. “If your name was on the account, even if you paid your portion of the bill but your roommate didn’t,” he said, “that will go to collections if they didn’t pay.”
As a result, your credit score decreases, he said.
So, what can a person do?
“If your name is on old debt, make arrangements to pay it off. Most people take regular payments,” he said, making eventual payment manageable even to those on a limited budget.
Current unpaid debt lowers the score, too, Buchholz said. Other impacts to one’s credit score include how many payments are owed regularly, including credit cards, auto loans, house payments and other debt. All are factors in determining a credit rating.
The best way to protect your credit rating is to pay off debt in a timely manner, Buchholz said. And “don’t overuse credit. Only use what you need.” Having more credit cards than needed — even if they’re never used — lowers a credit rating, Buchholz explained.
“If for years you don’t borrow money, that can affect your credit score negatively,” he said.
Effectively, not using credit takes your score back to zero, just as if you had never had it in the first place.

FOR TRADITIONAL loans, banks seek applicants with a credit score of at least 650, Buchholz said.
“Right now, with the economic crunch, they want to focus on people with higher scores who are more likely to pay them back,” he said. So banks are actually filtering out potential borrowers at the 700 level, he said.
“As the economy slows down, banks have more bad loans, so they tighten up,” Buchholz said. Bad loans are those that have not been repaid to the banks, he said. “Typically when the economy is going good over a period of time, they loosen standards.”
Still, any ranking under 650 is considered poor at any time, he said.
“There was an old tried and true banking ratio that seems to work for most people,” Buchholz said.
Add all your monthly debt, including rent or house payment, auto loan payment, credit card payment and the like, “and divide that by your gross monthly income,” he said.
Say, for example, you make $3,000 per month, Buchholz said. If you pay $800 a month for housing, $400 for your car and $300 for credit cards each month, divide that total ($1,500) by the $3,000 income to find your debt ratio.
“In this case, it’s 50 percent,” he said. “That person is not in good shape. If that number is 36 or below, you’re usually in decent financial shape.”

BUCHHOLZ advised that individuals “periodically check your own credit report.”
Three major credit agencies, TransUnion, Experian and Equifax, allow free online checking of credit records. All three reporting agencies can be accessed through annualcreditreport.com, a secure Web site that allows checking each of the three companies.
One free credit report is allowed from each agency every 12 months.
Some people check all three companies at once, to compare reports, while others space perusal to one report every four months, to follow any changes in credit history that arise over the year.
When you check your own report, it does not lower your score, Buchholz said.
“Make sure everything on there is yours,” he said.
“One thing to look at is who ran your credit report. If you applied for a car loan, that’s expected,” he said. But if other, unauthorized agencies have been pulling your report, that could indicate credit fraud or identity theft is occurring, he said.
Credit fraud and identify theft are other ways credit ratings can be lowered.
“People should probably give their credit rating about two years to recover” after a negative impact, Buchholz said.
To build credit in the current economic slowdown, live by the old rule: stay within your means and don’t buy what you can’t afford. If you don’t have the cash saved for an item, don’t buy it.
(Tuesday: Opportunities exist for attaining home ownership in Allen County.)