Don't Mess With Taxes

We all know the power of credit scores. These digits determine not only which mortgage rate we get, but also how much our auto insurance will cost and sometimes whether we'll even get hired.

That makes a recent article in Forbes all the more interesting. Michael Maiello asks Where Was FICO? as all the subprime loans were being made:

"For years Fair Isaac Corp. was the wonderboy of the credit industry. Its trademarked algorithm for scoring people on creditworthiness became the standard in retail banking. FICO became as generic a name in credit ratings as Bic in ballpoints or Kleenex in tissues. Over the past decade this Minneapolis firm's earnings quintupled to $100 million on $825 million in revenue.

"And then something bad happened. FICO scores got entangled in the subprime mortgage mess.

"No doubt a lot of other players deserve more blame for the meltdown in home lending: mortgage brokers, pool underwriters, hedge fund speculators. But Fair Isaac gets a little blame, too, because its scores did not deliver the predictive power that was expected of them."

Maiello looks at how FICO's scoring system didn't hold up so well in the recent subprime model. Lenders, he writes, put too much weight on FICO alone, ignoring to a large degree the two other factors in a mortgage application: how much the borrower is putting down and how well he has documented his income.

Help is on the way, for lenders at any rate. The story says Fair Isaac is developing new algorithms and VantageScore, a company owned by the credit bureaus, has emerged as a competitor.

Upping the numbers: Regardless who's keeping your credit score and who's checking them, you can improve your numbers. Here are six simple steps you can take:

1. Get a free copy of your credit report (at www.annualcreditreport.com or by calling 1-877-322-8228). Look it over closely and correct any errors.
2. Pay your bills on time.   
3. If you have a questionable credit history, open a few new credit accounts and -- this is the key --  use them responsibly. That means following tip #2.
4. Don't open accounts you don't intend to use.
5. Keep your balance low in relation to your available credit.
6. Jump off the debt transfer train. Moving balances around and closing accounts can hurt your score by changing the ratio of your total credit card balances to your total available credit lines.

J.D. over at Get Rich Slowly has a good post on care and feeding of your credit score. Bankrate has an interactive FICO score estimator. And this online brochure from the Federal Trade Commission has more on credit scoring, how you can make your ranking better and your rights if you're denied credit.