So What Do All Of Those Numbers Mean Anyway?

600, 700, 800, we're all familiar with credit scores but have you ever wondered exactly what all of those numbers mean?  They have to mean something, right?  Every other number we see means something so why would credit scores be any different?

The signs that say 55MPH mean we're not supposed to go past 55 miles per hour (yeah, right).  The sign that says $5.00 means that whatever we are buying is going to cost us 500 pennies. If our report card says that we've gotten straight A's then that means that we've earned an average of 90 (or more) of the points available during the school quarter or semester.

So what do those pesky little credit score numbers mean?  Have you ever thought about it?

We all know that a higher score is better.  But, according to whom?

According to lenders and insurance companies, that's who.

Any time you ask someone other than a lender or insurance company (or me ☺) "is my score good?" or "what's a good score?"  The answer should always be prefaced with…"according to the companies that use credit scores…"

Anyone who isn't a lender or insurance company really can't answer either of those questions with 100% certainty. 

Here's an example…

"John, is 725 a good score?"

I think we all recognize that a 725 isn't a bad score but is it really a good score? It might surprise you to know that it's no better than average compared to your peers. 

If you asked a lender if a 725 is a good score then they may or may not say "yes."

Here's how I would define a good score…

"Any score that gets you approved at the best terms that the lender or insurance company has to offer."

Other than that it really doesn't matter.   As long as you get what you want at the best price available...that's what matters.

If, in order to get the best terms, I need a 725 then yes, it's a good score.

But lenders and insurance companies (and any other company that uses credit scores as a component of making a decision) don't all use the same minimum score requirements.

You should familiarize yourself with the term "score cutoff."  Score cutoff is a term used in the lending and insurance industries.  It's essentially whatever minimum score they will require of you in order for them to give you credit or insurance.  Simple enough.

Most score users have several cutoffs for each of their products.  Let's make up an example.  We'll use a fictitious product from a fictitious bank.  In this case we'll use a platinum card from John's Bank. 

Here are the terms for the John's Bank Platinum Credit Card, which are based on several score cutoffs.

750 or higher – no annual fee, 7.9% APR and a $25,000 credit limit
700-749 – no annual fee, 8.9% APR and a $20,000 credit limit
675-699 – $25 annual fee, 12.9% APR and a $15,000 credit limit
650-674 – $40 annual fee, 15.9% APR and a $10,000 credit limit
649 or below – Application declined

Ok, so what we've just done was to create a set of score cutoffs and terms specifically for the John's Bank Platinum Card.

In this example is 725 a good score?  If you used my definition from earlier then you'd have to answer "no."  No, because you wouldn't have gotten the best deal.

Not all lenders will use the same cutoffs as John's Bank so a good score will vary from lender to lender and product to product.

So back to my original question…what do all of those numbers mean?

In order for any lender or insurance company to create a successful score cutoff table they have to have a very solid understanding of what each of those numbers mean. 

It's certainly not arbitrary to set credit terms based on random cutoffs. 

There's a significant amount of research (and money) that goes into creating a table like the one above. 

Here's the deal…

Each of those scores represent the odds of you going delinquent.  The higher your score the better your odds of not going delinquent on your accounts.  The lower your score, the better your odds of going delinquent. 

That's why John's Bank is willing to give you better terms the higher your scores are.  They feel comfortable about your credit risk.  They feel comfortable that you will make your payments on time so much that they're willing to give you availability to more unsecured credit.

Think of the trust involved here.  If I qualified for any of those platinum cards I could get the card, activate it, use up the entire credit limit and never pay John’s Bank back. 

And since you can't repossess dinners or vacations it's likely that John's Bank is never going to recover everything owed.

That's an incredible amount of trust to give, in part, to a single number.  Think about that for a moment.  My 750 equated to $25,000.  Would you ever be comfortable letting me borrow that kind of money simply because some number says that I'm good for it? 

Funny Money Friday: Secrets of the dollar bill

We strongly believe that money doesn't have to be boring. Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

How much do you really know about those greenbacks in your wallet? Even with the prevalence of credit and debit cards, most of us use some form of hard currency each day. Let's take a few minutes to get to know these mysterious green and black pieces of paper, starting with the one dollar bill. Here are some fun facts:

• The first one dollar bill was printed in 1862 and featured a portrait of Salmon P. Chase.
• Martha Washington was the first woman to be portrayed on currency when she briefly appeared on the $1 silver certificate in 1886.
• The current one dollar bill design was last modified in 1969. It is one of the few remaining bills that have not been redesigned in recent years.
• The dollar bill is 2.61 inches high and 6.14 inches long.
• It costs the US 4.2 cents to produce a dollar bill.
• The average dollar bill only has a lifespan of 18-22 months before it is worn out and replaced.
• One dollar bills make up 45% of all US currency produced today.
• Have you spotted the tiny owl perched on the front of the dollar?
• The phrase "In God We Trust" was only added to the dollar bill during the "red scare" of the 1950's. It had only appeared on coins before that period.
• The eagle on the back of the dollar bill holds an olive branch with 13 leaves representing peace and 13 arrows representing war.
• The eagle used to face the arrows but President Truman had it switched to face the olive branches in 1945.
• The pyramid on the back of the bill is unfinished to symbolize that our country was still in development.
• The year 1776 is spelled out in roman numerals at the bottom of the pyramid.
• The website WheresGeorge.com allows you to enter dollar bill serial numbers and track the bill as it travels around the country.

Want to learn more about the dollar bill? Check out the extensive Wikipedia entry or buy the book The Secret Symbols of the Dollar Bill. Do you know any fun dollar bill facts? Share your feedback in the comments section below. Happy Friday!

Blogs we like: It's Just Money

This fun blog covers personal finance topics ranging from mortgage flipping to cool freebies. It's Just Money is edited by a 30-something with experience in the lending, insurance and banking industry:

"I don't know everything about money. I do know that amassing money is more about planning, and discipline than it is about income, investments, and tax laws. However, having sold every type of financial product out there, I can also tell you what to avoid and what to look for, both in an advisor and a product or service."

Be sure to read his post on how life insurance salespeople make their money and how to borrow short term money from your IRA savings account.

How to cope with skyrocketing gas prices

Gas prices are hitting new record highs once again. Just last fall, I wrote an article about how to get the most from your fill-up. Back then, prices were just starting to break the $3.00 mark. Now, some gas stations are charging as much as $4.00 a gallon for premium gas.

Sounds like it is time to revisit these fuel cost tips!

• Drive the speed limit - Most cars are much more fuel efficient at 55 than at 75 mph. Also, using cruise control can help you get the more out of each gallon
  
• Remove unnecessary items from your trunk - Carrying around a few gallons of soda and other supplies can lower your fuel economy. Keep your car clean of any unnecessary items.
• Get a tune up - Air filters, tire pressure and motor oil can all impact your car's fuel efficiency. 
• Buy gas with a rewards credit card - At least you'll be able to earn back points on your next $50 fill up.
• Find the cheapest gas in your area - Sites like GasBuddy.com can help you locate the cheapest gas in your area. Don't drive too far though, you could burn up your savings during the trek.
• Consider driving alternatives - Now might be the perfect time to start taking the bus to work, breaking out the bicycle for trips around town or boarding a train for a weekend trip.
• Carpool - Your daily commute can be a lot less expensive when divided between a few neighbors or co-workers.
• Trade in your car for something more fuel efficient - If you are looking at buying a new or used car this spring, consider a buying a Prius, Mini Cooper or other fuel efficient car. You can compare fuel efficiency online here.

You can keep your gas costs under control with a little planning and some moderation. Do you have a great tip for managing rising fuel prices? Share it in the feedback section below!

Credit Card Bill of Rights Introduced

"American families are being crushed by credit card debt, and the increasingly predatory behavior of some credit card companies makes no sense beyond increasing the bottom-line for the companies," said U.S. Senator Robert Mendendez (D-NJ) who has introduced a 'Credit Card Bill of Rights' aimed at stopping "some of the most egregious credit card practices while also ensuring that future generations have the information they need to make financial decisions."

There are two pieces of legislation included in the Menendez "Credit Card Bill of Rights:" the Protection of Young Consumers Act and the Credit Card Reform Act.

The Protection of Young Consumers Act is geared toward protecting college students and other young people, against skyrocketing consumer debt and the barrage of credit card solicitations that lead to it. It will:

1. Stop credit card solicitations aimed at those under age 21 unless they "opt-in"
2. Establish a financial literacy and education program in elementary and secondary schools to help prepare young people to be financially responsible consumers.

The Credit Card Reform Act will protect consumers against excessive fees and interest rates. It will:

1. Prohibit "universal defaults" in which a credit card company imposes excessive increases in interest rates for events completely unrelated to the payment history on that account
2. Restrict excessive late fees
3. Tighten regulations on credit card companies to ensure that they are not offering credit to high-risk cardholders without verifying their ability to pay.

Some consumer advocacy groups are cheering, but as bankruptcy "reform" legislation illustrated last year, reining in the credit card industry is not an easy task. If you support Credit Card Reform legislation, contact your Senators.

Toyota and Lexus Vehicles Certified for New Energy Tax Credit

Two cars were recently qualified by the Internal Revenue Service for the hybrid tax credit enacted by the Energy Policy Act of 2005: The tax credit for hybrid vehicles applies to vehicles purchased on or after January 1, 2006, and may be as much as $3,400 depending on the fuel-efficiency of the vehicle.  The newest hybrid vehicle qualified by the IRS are:

• 2007 Toyota Camry Hybrid $ 2,600
• 2007 Lexus GS 450h $ 1,550

The hybrid tax credit replaces the tax the 'clean-burning fuel deduction' of $2,000, which was previously allowed for taxpayers who purchased a new hybrid vehicle before December 31, 2005. Many currently available hybrid vehicles qualify for this new tax credit including:

• 2005 Toyota Prius $3150
• 2006 Toyota Prius $3150
• 2006 Toyota Highlander 4WD Hybrid $2600
• 2006 Toyota Highlander 2WD Hybrid $2600
• 2006 Lexus RX400h 2WD $2200
• 2006 Lexus RX400h 4WD $2200
• 2006 Ford Escape Hybrid Front WD $2,600
• 2006 Ford Escape Hybrid 4 WD $1,950
• 2006 Mercury Mariner Hybrid 4 WD $1,950

The hybrid tax credit is a "step down" credit.  That means is you purchase a hybrid you only have a certain amount of time to claim the full amount of the credit; the longer you wait, the less you can claim. You are allowed to claim the full amount of the allowable credit for the hybrid vehicle you purchase only up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle.  That means that if Lexus records the sale of its 60,000 vehicle in May of 2006 (the second quarter of the year), you could claim the full amount of $1,550 through the end of the third quarter of the year, or at the latest September 29th (the last workweek day in the third quarter).

For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, you can only claim 50% of the allowable credit. For the fourth and fifth calendar quarters, you may claim 25% of the allowable credit. No credit is allowed after the fifth quarter. If you're planning to purchase a hybrid you should do so earlier in the year if you want to claim the full credit. 

What is the difference between a tax credit and deduction? 
A credit is a direct dollar-for-dollar reduction of your tax liability independent of your tax bracket.  For example, a $1,500 tax credit will lower your tax liability by $1,500. On the other hand, a tax deduction is like an expense that is subtracted from your adjusted gross income when calculating your taxable income.  A deduction reduces your tax liability only in proportion to your tax bracket, or in other words the percentage or rate of taxes you pay. Whereas tax deductions don't need to be itemized to claim them, credits must be itemized.  To claim your credit use Form 3468. .

Share your thoughts and tips in the comments section below.

Credit card review: Capital One Platinum

Occasionally CreditBloggers.com likes to dig deep into credit card offers to expose if they really are a good deal for consumers. In the past, we've reviewed the Blue from American Express card and the Citi Upromise Visa card.

Today, we're going to take a look at the Schumer's Box for Capital One Platinum Card for Credit that Needs Some Improvement.

• APR - 14.9%. Pretty darn low for a card designed to accept borrowers with bad credit.
• Credit Limit - $3,000 to $5,000. That's also pretty decent for borrowers with credit problems.
• Other APRs - You'll get 14.9% on balance transfers and 19.8% on cash advances. Both these rates are below the industry standards.
  
• Default APR - If you are late on your account, the default APR is an average 27.4%. Some cards go as high as 31% for the default rate.
• Annual Fee - $19 annually. Even though this is a small amount, it's disappointing to see an annual fee on this card.
• Other Fees - $29 to $35 per late payment depending on balances. 3% cash advance fee for each transaction. $19 to $29 over the limit fee.
  
• Universal Default Clause - Capital One expressly denounces the practice. Their default rate disclosures are unusually clear for a credit card issuer: "Unlike Some Companies, We Won't Increase Your APRs Because: You pay late only once, You go over your credit limit, Your credit record changes with another lender. We May Increase Your APRs If: You pay late twice in 12 billing periods."   
• Online Banking - Free online account management.
  
• Perks - Roadside assistance, rental car insurance, travel services, travel accident insurance.
• Negatives - Capital One is notorious for not reporting credit limits accurately to the credit bureaus. This missing reporting can impact your credit scores.
• Acceptance Requirements - You can have credit issues and still receive this account.
  

Overall, the Capital One Platinum card is a great choice for someone struggling with credit issues. In this credit category, most other offers have higher interest rates and lower credit limits. Although I have issues with the way Capital One reports to the credit bureaus, I do appreciate their policy concerning universal defaults.

Do you have a Capital One card? Share your thoughts and tips in the comments section below.

Coming to a store near you...credit reports?

Driving through Fresno last weekend, I spotted an actual "credit report" store in a little strip mall. Is this a new trend? The store had a big banner advertising "Get your credit report here!" out front. I didn't have time to stop and investigate. If you have more information about these stores, share it in the comments section below.

If you do decide to purchase your credit report in an actual store, here are a few things you should think about first:

• Are they buying consumer or commercial reports? Is the store set up like a car dealer or other retailer? If so, the credit reports they are ordering may be causing a damaging hard inquiry to appear on your credit report.
• What are they charging? Under FACTA law, you are allowed one free credit report from each credit bureau every 12 months. Internet access isn't required to order these reports, you can also submit a request by phone or mail. Other credit report and credit score products cost from $9.00 to $50 depending on what information is included. Beware of expensive markups on repackaged free credit reports or other services.
• How are they storing your data? You'll need to provide your Social Security number, address, financial account numbers and other sensitive data when ordering. Are these records stored on an unlocked computer? Could an identity thief easily access your files?
• What else are they trying to sell you? The credit report products could just be a lure for a larger sell. Watch out for predatory lenders, credit repair organizations or other scam artists who could use your credit information.

A store that helps people order their credit reports sounds like a good idea on paper. It can be difficult for consumers without internet access or a good understanding of the credit system to check their credit. However, there are quite a few potential dangers and pitfalls to watch out for with these types of companies.

Have you seen a credit report store in your area? Have you purchased a report from such a store? Share your feedback and tips in the comments section below.

Update: Mortgage fraudster's website

A few minutes of internet research has turned up the official real estate website for Henry Aguilar. A quick "Who Is" search revealed that dcoreinc.com is registered in Aguilar's name.  Aguilar is current suspected of posing as a real estate broker in order to steal more than $120,000 from unsuspecting clients in Sacramento.

You can check out what a real mortgage broker/identity thief's website looks like online at www.dcoreinc.com. Don't miss the flash introduction that claims "service is number one" at their company! The bio section is also a real winner. Here is one notable quote from the website:

Don't get short changed. People don't talk about it a lot. But finding the right real estate agent can be the difference between a happy, stress-free home buying or selling experience, and an unhappy, stressful experience.

That is about as ironic as it gets. I bet Aguilar's customers wouldn't really consider it a "stress-free" experience when he illegally bought and sold homes in their names and borrowed against their home equity. What's that old phrase about laughing to keep from crying?

National Teach Children to Save Day

Today is the 10th annual National Teach Your Children to Save Day sponsored by the American Bankers Association. How can you teach your children responsible financial management? Here are some tips:

• Encourage your children to save for a major purchase - A summer's worth of mowing lawns and saving allowance money will make that Nintendo all the more valuable.
• Dole out allowances in small bills - Instead of giving your kids a $10 or $20 bill each week, give them their allowances in smaller denominations. One $5 bill and five $1 bill's is a much easier combination to break apart and save.
• Explain the financial world - It may seem odd to talk to your nine year old about how credit cards work, but these can be incredibly valuable lessons. Use bill payment and check-out experiences to pass on money management skills.
• Pay interest on your child's savings - Reward savings by offering to pay "interest" or incentives on the amount your kids save. For example, you could offer a $5 reward if a child saves $20 a month.
• Visit financial education centers - Many banks have special areas or education sites  designed for kids. Citigroup has multiple sites and Sovereign Bank hosts KidsBank.com. Many children's museums also have banking exhibits.
• Hold off on giving them credit cards - My own rule is that until you have a job and a steady income, you can't afford credit. The temptation to overspend and go into debt is just too great for most teens and college students.
• Buy a Moonjar or make your own - A Moonjar is a modern piggybank for kids with three compartments, one for spending, one for saving and one for sharing.

Share your tips for teaching kids about money! What did your parents teach you? What do you wish you had been taught? What are you teaching your kids? Post your feedback in the comments section below.