How Great Credit Helps You in a Recession

San Diego banker Henry Li, 27, is paying for his 3 Series BMW on a credit card that has been charging him less than 2 percent interest—for more than three years. He puts his monthly expenses on another card and gets 5 percent cash back on his gas and groceries and 1.5 percent back on everything else. He's always sorting through offers for great discounts on cable service, cell phones, mortgages and credit cards. Sometimes he calls his card issuers and raises his credit limits just for sport.

Why? Li lives the freewheeling life of a person with a high credit score. Break through 750 (on the typical range of 300 to 850; Li says his score is roughly 750), and it's as if you've gotten the keys to the kingdom. Especially now, with wary lenders tightening credit for most would-be borrowers, life is good for the credit-score elites. They still face a broad array of zero percent credit-card deals, mortgages at rock-bottom rates and other gimmes that B and C borrowers can only lust after.

It's made some consumers become score-obsessed, says Craig Watts, a spokesman for FICO, the company that invented credit scoring and has an active cadre of score-focused consumers chatting on its Web site, MyFico. They call themselves FICO High Achievers and trade pointers on how high their scores have gone and how to push them even higher. For those less obsessed, a credit score is a single number that is derived by putting a consumer's credit-report data through proprietary analytics that only the scoring company knows. Lenders use it as a proxy for creditworthiness; the higher the score, the more likely the person holding it is to repay a loan. Though FICO started credit scoring in the late 1980s, there are now several different versions of credit scores calculated and sold by all three major credit bureaus—Experian, Equifax and TransUnion. . There's also another score, called the Vantage Score, created by the three credit bureaus working together.

To become a FICO High Achiever, consumers have to jump through many hoops. They have to have a long history of always paying their bills on time. They have to have had experience with many different types of credit, such as a mortgage, a car loan, a few credit cards, student loans, perhaps a home-equity line or a personal line of credit. They have to be using a small percentage, perhaps no more than 7 percent, of the credit that is available to them. They have to keep old accounts open and apply for new ones only sparingly.

Top credit scorers may have a better grade than is really necessary, according to Kenneth Lin of Credit Karma, a Web site that gives consumers free access to their TransUnion credit scores and features a score simulator so consumers can model their own numbers. "Once you're over 750, that is where you get the best pricing. Being over 800 doesn't have any value unless you are a perfectionist," says Lin. Roughly one in eight people has a FICO score over 800, says Watts. In TransUnion terms, it's only one in 20, says Lin, who reckons that another 15 percent of consumers are between 750 and 799. His site posts a variety of offers for consumers based on their credit scores.

Topping 800 on your credit score may not be financially meaningful, but coming close does open doors and save dollars. A couple of years ago, an Internet columnist writing for The Street calculated that a good credit score could save a consumer more than $1 million over the course of a spending, borrowing and saving lifetime, and with the current tightening credit market, that figure's probably higher now.

Today, a person looking for a fixed-rate, 30-year, $300,000 mortgage can find one at 4.5 percent, yielding a monthly payment of $1,523—if his FICO score tops 760, according to FICO data. The next score tier, between 700 and 759, would get a borrower a 4.74 percent loan with a $1,563 payment. That may not sound like much difference at first, but it's equal to $14,400 more in interest over the life of the loan. Mortgage applicants with credit scores in the 620-to-639 range face 6.1 percent interest and will pay $1,819 a month for the same loan—an extra $106,560 over 30 years.

That may be what motivates folks like Doug Miller, 42, of South Boston, who checks his scores at Credit Karma at least once a month, just to make sure they stay high. Currently pegged at 775, his high scores have helped him to finance a second home on Cape Cod at 6 percent and furnish it on a zero percent credit card. He's getting ready to open up the house for the summer season and found a sweet deal from Comcast waiting for him when he went online to check his credit score.

Those who only aspire to top-score status can take heart. Credit scores are dynamic, and every day of positive credit behavior puts bad scores farther in the past. Robert Feldmann of Honolulu is now one of the FICO High Achievers, with a FICO score topping 800. Five years ago his scores were barely breaking 500, as he had missed both payments and errors in his credit report. He disputed the errors and simply waited until the worst of his problematic accounts disappeared from his credit reports; that can take seven years. Then he started studiously building up a bigger, better history, applying for credit cards but using them only minimally and always paying his bills on time. He bought and paid off a car. Now he's a star among High Achievers. "It makes me feel good—I worked very hard to get where I am," he says. And he's using his powers for good. He hangs out in the FICO forums coaching wannabes into the majors.

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