Dear Liz: I’ve been reading your Money Talk column for years and it seems like about a third of the questions are about credit scores. Why are people obsessed with their FICO score?
I didn’t know my score until recently when my bank accounts started showing my score when I’m online. I’m 65 and have had credit cards since college over 45 years ago. I pay my bill in full each month. I have never been late with a mortgage payment or any other bill. When I went to buy real estate or an automobile, I was never turned down.
In other words, I used credit successfully for decades by behaving responsibly without knowing my score. Are people interested in their FICO mostly used as a status symbol or a way to show off?
Answer: Some are, but most understand that credit scores have a huge influence on our financial lives. The scores help determine whether we can get credit and the interest rates we pay, but also whether we are able to rent an apartment, get affordable home and auto insurance (in most states), and to benefit from the best offers from a mobile operator.
Credit scores reward responsible behavior, but have some quirks that are worth knowing about. Using more than a small percentage of your credit cards’ available limit, for example, can hurt your scores, even if you pay off your balances in full. And closing credit accounts might seem like the responsible way to deal with a card you no longer use, but it can also hurt your scores.
Also, you should know that you don’t have just one credit rating; you have many, and they will differ depending on the credit bureau and credit score formula used.
FICO is the main credit scoring formula, but there are many generations of FICO scores currently in use, from the oldest versions that have long been used in mortgages, to the most commonly used version (FICO 8), to the most recent version. (FICO 10). Auto lenders and credit card issuers use versions of FICO tailored to their industries.
FICO’s main rival is VantageScore, which also uses different generations.
On top of that, credit scores are constantly changing, based on ever-changing information in your credit reports.
Your bank makes it easy to monitor one of your scores, which can give you a general idea of how lenders might view you as a borrower. Don’t be surprised if the score your bank gives you doesn’t match what a lender will use the next time you buy a car or refinance your mortgage.
Advisors ‘Assets under management’
Dear Liz: We have been using a paid financial advisor for 25 years. We would discuss what we needed, she would tell us how many hours it would take, and then she would bill us by the hour.
She recently joined a firm that charges 1% of investment portfolios to provide financial advice. Is it still considered paid financial planning? If so, how do you find a company that charges an hourly rate? We don’t want to spend thousands of dollars just having someone modify the detailed roadmap that has already been created.
Answer: So-called “assets under management” or AUM fees are in effect considered fee-only planning, as long as the advisor only accepts fees paid by clients and does not receive commissions or other compensation for investments they recommend. AUM fees are a common compensation method and 1% is a fairly standard fee. If the advisor does significant, ongoing investment planning and management for you, the fee may be worth it. If not, there are other compensation methods that might be more suitable. Garrett Planning Network represents paid consultants willing to bill by the hour, while XY Planning Network and the Alliance of Comprehensive Planners offer paid consultants who charge fees.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, #238, Studio City, CA 91604, or by using the “Contact” form on asklizweston.com.
#credit #score #oddities #applying #loan