Zombie Economics: Credit Scores 101

      Rick Emerson, author of Zombie Economics, joined us today with great information about credit scores. You'll find more great financial information from Rick on his website.

      Q: How can I find out my actual credit score, and how much does this cost?

      A: When people talk about credit scores, they're usually referring to a FICO score, and your FICO score does have a huge impact on your life; it affects what you pay in interest rates, what loans you can get, and prospective employers are actually allowed to check your credit - it could keep you from getting some jobs.

      There are three companies who monitor your FICO score: TransUnion, Experian, and EquiFax. Only EquiFax will provide you with a copy of your FICO score, but the other two companies have equivalent scores that they'll share with you. The cost for each is about twelve dollars, and you can do it via each company's website.

      Q: What about companies who offer to "fix" or restore credit?

      A: Companies that make these claims should always, always, always be distrusted. The short, simple rule to remember is this: No one can remove or alter credit information if that information is accurate. Sometimes there is faulty information in your credit history (someone claims you missed a payment that you actually made, for example), but remember: for twelve bucks, you can look through that credit report yourself and dispute such information.

      Q: What's the first step to improving my credit?

      A: Start paying down your credit-card debts. Ideally, you want to owe less than 25 percent of a card's limit: so you want to be below a $500 balance on a card with a $2,000 limit. And do not be late with your credit-card payments; the key with improving your credit is a chain of payments that are made on time. If you make at least twelve payments on time, it starts to have an exponential effect.

      Q: What about consolidating my debt to a single credit card?

      A: This is tempting, but it's almost always a bad idea. Credit bureaus look at the ratio of debt to limit, so if you pile all the debts onto one or two cards, it can actually make the ratio on those cards so unbalanced that you end up looking worse than before. The key is to pay at least the minimum on each card, putting extra focus on the card with the highest APR.

      Q: What are some common mistakes people make when working on their credit score?

      A1: Often, people will cancel a lot of their cards when they're preparing to look for a loan. This puts a lot more pressure for that credit score on the remaining cards, which is risky.

      A2: Another common trap is co-signing a loan. No one is served by putting two people on the hook for the same debt. Not the bank, not you, and not your friend, who is already a bad risk for the money. How do we know he's a bad risk? He needs a co-signer. Remember: When you lend money, you risk the money and your friendship. When you cosign a loan, you risk friendship, money . . . and your own good name and credit.