The Credit Crunch Now Effecting Individual Credit Scores

As if steadily increasing foreclosure rates and falling home values weren't enough, the subprime mess has begun to spill over into other areas of the financial sector. Credit card issuers are now starting to get their risk exposure in check (which would otherwise be a good thing), but if issuers cut down credit limits substantially consumers could be effected in an unintended way.

FICO scores - individual credit score that gives lenders a rough estimate of how much of a risk you are - are based in part on your credit utilization rate. This means, if a credit card issuer cuts your available credit in half, that will have an effect on your utilization rate -- at FICO score as a whole. For example, say you have a credit card balance of $4,000 and credit line of $10,000, if Discover drops your credit line to $5,000. Assuming you have no other cards, your utilization ratio has rose from 40% to 80% overnight. Additionally, card issuers have begun to raise interest rates from bad to ugly. You already know this -- but, there's even more incentive now to pay down credit card debt. Unless you have some payday or auto title loans floating around, the credit card debt should be priority #1. There are few other investments that you can make a 29% return on your investment, and that doesn't even include fees that card issuers tack on each month.

It should be noted, that credit utilization accounts for about 30% of your FICO score. The most important factor in your credit score remains your payment history, which makes up 35%. The rest of your score is calculated by weighting your credit history (15%), types of credit (10%), and new credit (10%).

Credit Score Basics

This is going to be a rudimentary post for many people out there, but I recently requested my credit report so I'll blog briefly about it.

Under the (relatively) new law everyone in the U.S. is entitled to one free credit report annually. With identity theft on the rise and the ability of your credit score to ensure you affordable rates on loans, approval on renting, and now increasingly employers are using credit checks to determine how trustworthy new recruits are it is an important stat to know. How exactly the FICO (Fair Isaac Corp) score is a closely guarded secret, but it takes into account the amount of credit you have available, history of payments and any new credit you have applied for. Scores range from 300 to 850.

If you would like to check out what kind of dirt the credit bureaus have on you (there are three of them Equifax, Experian, and TransUnion) you can visit annualcreditreport.com and request all or one of your reports. I would recommend that since you can receive one free report from each bureau per year that you spread them out - request Equifax this week, Experian in four months, TransUnion in eight months. It's more of a hassle but it's better to know if someone opened a credit card in your name four months down the road than a full year. The quicker you find mistakes and errors the easier they are to fix. It is also good practice to request a report about six months before applying for credit or a loan. Creditors pull your report and if there are inaccuracies it can take months to iron everything out.

Should anything be wrong you can file a protest (depending on the company either on their website or by written letter) and convince them to remove or at least investigate a questionable entry. The bureau has 30 days under federal law to respond to your request and if they deny your request and something is legitimately inaccurate and they refuse to change it you can sue them.