An update on the score

I wrote recently that building and maintaining a good relationship with your banker is a crucial strategy for beating the credit crunch. Relationships are important, but bankers also value numbers, and the most important number for credit is your personal and business credit score.

The FICO scorecard (created by the Fair Isaac Corporation credit analysis firm) is the number most bankers use to determine whether they want to lend you money. It estimates the risk that you will default on a payment, generally within the first three years of a loan. Your score is based on your history of borrowing and repaying money. The national median score is 720; the highest possible score is 850.

Credit scores are often a mystery to people. The Fair Credit Reporting Act gives you the right to view your credit report for free, but such reports generally do not have your FICO score unless you pay to have it included.

Compounding the mystery, The Wall Street Journal recently reported that Fair Isaac has created a new credit scoring model. Called FICO 08, it remains based on proprietary models that the company does not reveal but that emphasize such factors as credit indebtedness and payment history, length of credit history, number of recent credit openings and inquiries, and type of credit most often used.

Reportedly, FICO 08 will place greater emphasis on scoring borrowers who fit into the subprime category. One reported change is that it will give a higher score than previously to borrowers who have only one account in arrears, and a lower score than before when multiple accounts are late.

A complication is that the three major credit bureaus (Equifax, Experian and TransUnion) continue to pursue their own scoring system, called VantageScore. Fair Isaac has sued the three and the VantageScore Co., accusing them of unfair practices to harm the FICO brand. Even so, FICO 08 is expected to be in the reporting mix for the three bureaus this year.

No matter how the score upheaval shakes out, there are practical steps you can take to improve your credit score under any rating system:

• Don't pay late;
• Don't use more than 50 percent of your credit limit on any one card, even if you pay monthly;
• Keep inactive accounts open; losing a line of credit increases your overall credit usage ratio;
• Don't change accounts; the older your average account, the better your score;
• Use your account at least once a year; dormant accounts don't count much;
• Don't apply for small loans when you apply for a large loan within the same year;
• Limit your credit card total to no more than five;
• Create a diverse debt portfolio rather than just using credit cards.

A final caution: Knowing your credit score beforehand can make the bank loan process much easier. The modest expense is worth it when your firm's finances could be at stake.