Know your score

It's getting tougher to qualify for a loan in today's tight credit market.

Faced with a flood of delinquencies and defaults, lenders are raising the bar for borrowers.

Mortgages, home equity loans, auto loans -- even credit cards -- are harder to come by. Lenders are requiring higher credit scores, offering smaller loans, getting bigger down-payments and demanding more proof of income and assets.

But all is not lost.

There are ways to increase your odds of getting credit at a reasonable interest rate, according to financial experts.

The key is your credit score. Most lenders use FICO, a numerical grade based on an individual borrower's credit history.

FICO, developed by Fair Isaac Corp., uses a formula to calculate a borrower's credit worthiness. Scores range from the 300s to about 900, with most people scoring in the 600s and 700s.

The rating helps lenders predict the probability that you will repay a loan. The higher your score, the lower your credit risk -- and the lower your cost of borrowing.

Last week, someone with a FICO score of 720 or higher qualified for 7 percent interest on a 36-month, $25,000 auto loan, according to a Fair Isaac survey of California lenders. Their monthly payment was $772.

Someone with a FICO score below 590 would have to pay 16.7 percent interest on the same car loan, with a monthly payment of $888.

The differences can quickly add up. Over the life of the loan, the borrower with the lower credit rating will pay an additional $4,176 for the same car.

On a 30-year fixed, $300,000 home mortgage, someone with a FICO score of 760 or higher paid 5.78 percent interest, while a borrower with a score below 580 paid 9.5 percent. The difference over the life of the loan is $276,120.

FICO scores take a variety of factors into account, according to Bankrate.com, a consumer finance Web site. The biggest is payment history -- consumers with a past record of missing payments rank lower than those who always pay on time.

People who are maxed out on their credit lines are considered risky, along with those with short credit histories.

Frequent borrowing or multiple credit applications also are frowned upon.

Free annual credit reports from each of the three major credit reporting agencies -- Equifax, TransUnion and Experian -- are available at www.annualcreditreport.com.

Although reporting agencies use FICO to develop the scores they sell to lenders, the scores aren't part of the free annual reports.

Someone may have a different credit score at Equifax, TransUnion and Experian. That's because the reporting agencies use different information about the person's credit history, said Craig Watts, a spokesman for Fair Isaac.

FICO scores can be purchased from Equifax or Fair Isaac's myFICO Web site.

Santa Rosa's Exchange Bank uses FICO scores when making loan decisions, said Lori DeCosta, vice president and consumer loan manager.

"However, we don't base the decision on the credit score alone," she said.

Borrowers should order their credit reports and take steps to correct any problems that show up, she said. They should pay off all past due accounts, make payments on time, keep debt balances low and close accounts that aren't being used, DeCosta said.

They also should keep their oldest account open and use less than the available amount on all credit lines, she said.

Consumers should have no more than two credit cards, said Jo Caulk, who teaches money management classes at Santa Rosa Junior College. Credit cards should be used for practical purchases, not impulsive spending, she said.

"You should use them for needs, not wants," Caulk said. "Some people think of plastic as free money."

People with less-than-stellar FICO scores may a have better chance of getting a loan with a local lender, said David Williams, vice president at Community First Credit Union in Santa Rosa.

"A national lender may be just going on the number," he said. "For us, it's a starting point. You may not fit into the national norm."

Community First considers a variety of factors, including steady employment and long-time residence.

"We look for stability," Williams said.

Credit reporting agencies can make mistakes that lower your credit score, but there's a way to correct them. The Federal Trade Commission, Fair Isaac and the big three reporting agencies all provide information about disputing items in a credit report.

It can take time to repair your credit -- a collection account will stay on your report for 7 years.

Be wary of credit repair companies that promise a quick fix, according to the Federal Trade Commission. Often, they take consumer's money without providing any help, the FTC said.

"Everything I do, clients can do for themselves," said Cynthia Goff, owner of ScoreONE, a Santa Rosa consulting firm that helps consumers improve their credit and qualify for loans.

ScoreONE analyzes a client's credit history and suggests steps to build a good credit profile.

"They can take the information and run with it or pay me" to act as a go-between with creditors, lenders and reporting agencies, Goff said.

"Dealing with these things can be kind of scary," she said.

You can reach Staff Writer Steve Hart at 521-5205 or steve.hart@pressdemocrat.com.