Last year I attended an FPA session on improving your credit score by Oksana at StrategyCredit.  Here are some things I learned, many of which most people don’t know.

Your credit score really just measures the chance you’ll pay someone - essentially how much of a financial risk you are.  They are used for everything from apply for a credit card or mortgage to getting auto insurance or even a job.  A high score means (the credit agency thinks) you have a high chance of paying your bills/loans.

The FICO score, created by Fair Isaac Corp in 1958, is the leading credit score metric.  Here’s what different scores mean:

Fair Isaac’s website has an education section about credit scores and how to improve them, which is really useful, and a must-read.

Here are the components of your score:

• 35% payment history
• 30% amounts owed
• 15% length of credit history
• 10% new credit (lots of new accounts lowers your score)
• 10% types of credit used (not using multiple types lowers your score)

Seven Credit Score Truths

• Missed payments on even 1 card can cause increased interest rates on all of your cards
• “Installment” debt owed (e.g. mortgages, auto payments) does not reduce credit score
• Late mortgage or credit card payments and collection accounts (if paid up) can be removed from your credit report by calling the creditor (credit agencies cannot make these changes)
• Late payment history is removed from the credit report after 7 years
• In general, credit report inquiries drop your credit score - BUT, multiple queries within 30 days do not cause your score to drop (i.e. it’s not bad to shop around your mortgage)
• Paying off student loan doesn’t improve credit score if the loan is current
• Your highest credit balance (ever) is what matters, rather than max credit (your credit card limit)  e.g. a credit card with a 30k limit, but the most you ever charged in a month was 5k, if you charge 5k again in another month it is considered “maxed out” at that point, since you never had a higher balance.  The 30k means nothing.

Building Credit History (can’t get a credit card?)

Building credit can sometimes be a chicken-and-egg problem - you can’t get a credit card without credit history, but you can’t build credit history without a card!  One of the best ways to improve your credit score is to have a long history of always paying off your debt on time.  To start building your history, here’s some ways to get it going if you can’t otherwise get a card:

• Secured credit cards - you pay a certain balance up front, say $500, and then get a $500 limit.  Doesn’t sound all that great, but it is if you can’t get a card elsewhere.  Find one that will send your collateral back after a certain period of time.
• Local bank credit cards - often times local banks or credit unions are more willing to issue cards to ‘new’ chargers

Credit Score Optimization Strategies for Home Buyers

If your score is decent, little ups and downs caused by fluctuating credit card balances, new accounts, inquires, etc aren’t a big deal.  But if you are shopping for a mortgage, your current credit score is very important because it affects an interest rate which can in turn affect your finances for another 30 years or so.  You should do the following:

• Do not open or close accounts (including credit cards)
• Check your revolving accounts balance, keep it low
• Check your credit limits, and your highest balance (based on card history) - make sure cards (including Amex ‘charge cards’) have not been charged near their highest balance limits in the last 1-2 months
• Do not pay off accounts in collection

Remember that shopping around a mortgage doesn’t lower your score!

Fraud and ID Theft

Sometimes you can’t help it - wallets get stolen, cards get left a bars… most times you can just cancel the cards, kick yourself in the shin and get on with life.  But if there are unauthorized charges, here’s what to do:

• File a police report (very important)
• File an affidavit with the creditor
• Get the creditor to delete your name from the account (reporting agency can’t help here)

If you are worried about future stolen cards or your credit report in general, you can use a credit score monitoring service - it costs money, but can be worth it if your credit is fragile.  Check out myfico.com.  Personally, I just order a report from one of the 3 agencies every 4 months on a rolling basis so I always have a pretty up-to-date view of my report.

Any rumors you’ve heard about cards?  Stories about your credit?  Leave it in the comments!

This is the last in a series of posts covering the lessons to be learned from Warren Buffett’s Letter to Shareholders of Berkshire Hathaway.  [See Part 1 (on the economy) and Part 2 (on investing)]

On home ownership:

Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser.

This backs up a belief I’ve developed over the last couple years - a home is a place you live, and not an investment.  Investing should be done objectively; very rarely are home’s bought and sold objectively.  Investments are purchased only the time is right (cheaply priced, hopefully); Houses are purchased when they are needed (e.g. a family grows to large for the space, or a new job is in a new location.)  Investments are (supposed to be) sold as soon as the required gain is attained, or loss threshold is reached - but it’s not possible to do this with your house, due to the emotion and inability to sell at a moment’s notice, not to mention you still need a place to live.

Remember: It’s always best to separate emotions and investing.

[Apologies for the first version of this post!  My editor must have accidentally posted the non-complete version ;-)]

This is the second post in a series reviewing Warren Buffett’s letter to shareholders, which I think holds good lessons for us all.  [See Part 1].

On investing:

When investing, pessimism is your friend, euphoria the enemy.

If you take only one thing away from everything you learn this year, make this your mantra.  Treat everything related to your finances with pessimism.  The basic things to frown at are stock tips, great new funds, and anything that sounds too good to be true.  When everyone is smiling and patting themselves on the back for how good they’ve done, run the other way.

Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

Once again… my view is that the stock market is on a super-sale right now.  Stay the course and keep on socking your money away!

When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.

… Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

Here I was thinking about index funds.  Not sexy, not complex, and not keeping you up at night.  I like sleep.

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Ah yes, here is the eternal reminder that inflation is constantly making us poorer.  It’s any easy point to forget in times like these (”3% less spending power?  WHO CARES because I’m 40% down!!).  But it’s like that little step-cousin who just will not go away.  Stocks go up and down, but inflation keeps beating you over your head, year after year.  Maybe you are allocated defensively right now (I’m personally having a little trouble putting newly saved money into stocks rather than just a money market for ‘just another week’).  When you get over that, hopefully soon, don’t forget about inflation and the need to beat it by investing in stocks.