Don't Micromanage Your Credit Score

By JENNIFER WATERS

Link to article: http://online.wsj.com/article/SB10001424052970203753704577253750464639524.html?link=SM_bor_ds_res

Your credit score is like a movie: constantly changing until you decide to freeze a frame.

Your score, which lenders use to assess your bill-paying ability, is in a constant state of flux and will vary from one credit company to the next. In other words, you don't have one credit score, but many.

"Your score can be updated every time there's a new piece of information," says Sarah Davies, senior vice president of analytics at VantageScore Solutions.

VantageScore is a credit-score model created by the three major credit-reporting companies, Equifax, Experian and TransUnion. There's also the FICO credit-score model created by Fair Isaac, which is the score most commonly used by lenders to determine your credit worthiness.

Roughly 70% of credit scores change by up to 20 points in a 90-day window, according to VantageScore. Consider it a reflection of your credit behavior at a particular moment in time.

"You could do something every other day, like pay a bill or miss a payment, and it might change every other day," Ms. Davies says. "The reality is a lot of those updates are insignificant."

A score is determined mainly by how promptly you pay your bills and what kind of debt you carry, though other factors also feed into it. For example, a mortgage and a car loan hold more weight in the scoring system than a handful of retail credit-card accounts. So timely mortgage and car-loan payments are more important.

Your credit score may be as important as your education and your job skills because it helps you navigate your lifestyle. It's taken into account when you buy a house, a car or insurance, and when you seek credit for a small business, try to rent an apartment or get utility service. People with higher scores enjoy lower interest rates and bigger loan amounts. Poor scores can mean high interest rates and less favorable terms.

But mining your score on a monthly or daily basis won't improve it. "Consumers should be credit managers, not credit-score managers," Ms. Davies says.

What's important is that your "range of risk"—what lenders consider key to determine whether you'll make timely payments—is acceptable. But that risk assessment isn't consistent from lender to lender. Auto lenders, for instance, use a different algorithm than a mortgage lender or retailer might.

Scores also vary because the three credit-reporting companies don't have the same information. "Lenders don't report all the same things to all the [credit-reporting companies], which is why scores will vary," says Beverly Harzog, a credit-card analyst with Credit.com.

The two main scoring systems use different point ranges: FICO, which has been around since the late 1950s, scores in a range of 300 to 850. VantageScore, introduced in 2006, goes from 501 to 990.

Still, experts say the range of risk will be about the same if your score is, say, 800 on FICO and 900 on VantageScore.

What matters is which scoring system your lender uses and where you fall on that. If your FICO is 700, don't confuse that with 700 on the VantageScore, which puts you in a lower credit category.

Scores will vary, too, based on when lenders report to the credit company. Some banks may report your payment behavior to Experian at the beginning of the month but give it to TransUnion mid-month.

A credit report from Experian, TransUnion and Equifax, which you can get free annually at AnnualCreditReport.com , will include details on your bill-payment history—but not your FICO score or VantageScore, which are what you should care most about. You'll have to pay for your scores, though it's generally under $20 for each.

Don't worry about your scores changing unless the moves are dramatic. If your score changes significantly, either you made a financial misstep, such as missed a payment or, worse, someone stole your identity.

Here's what you should worry about and how to fix it.

Don't try to manage your score on a daily or weekly basis. If you wait for the full 30-day cycle, all your information will have updated and will be the best representation.

If you want to purchase a home or car in the next year, look at your credit score now and make moves to improve it by paying off debt in a timely manner.

Your credit reports may contain errors. If you contest something in your report, it freezes that information until a decision has been made.

A foreclosure or bankruptcy filing will lower your score significantly and affect you for about seven to 10 years.

A missed mortgage payment will set off alarms, especially if your payment history has been pristine until then, but a late credit-card payment can be more easily fixed by consecutive months of good payment behavior.