One of the most common questions I get asked is whether I think someone has a good credit score (quickly followed by how they can improve their credit score). I know a little bit about credit scores and can usually give someone a good idea but whether a score is good will depend on a lot of factors.

First off, when people talk about credit scores, they’re usually talking about the Fair Isaac Corporation’s FICO credit score. There are others out there, one for each of the credit bureaus, the VantageScore, but ultimately the one people care about is still the FICO credit score. The others are given less glamorous names, like FAKO score.

With the score itself, a lot of it will depend on what you’re trying to do, how rates are in the marketplace, and whether your score gets you the rate you need to complete the transaction.

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Have you seen those advertisements on television where a guy is going to buy a television, only to get snubbed because one of this credit scores is vastly lower than the other two? Two of the “credit scores” look like Tom Brady while the third looks like Danny DeVito in a ski mask? The premise of the commercial is that you’ll want to use their credit score checking service because you might be at a store, ready to make a purchase, when you discover that one of your credit scores is bad and it derails the whole process.

But, how likely is that?

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I’ve been a fan of Credit Karma for as long as they’ve been around, met some of their people, and am generally very impressed with the service they offer. It’s been a cornerstone of my do-it-yourself identity theft protection system.

They recently emailed me to say they’ve developed a new feature that makes do it yourself identity theft protection even easier – they now actively report credit alerts.

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How much does it really hurt your credit score if you are late on your mortgage? What if you default and are foreclosed upon? Until recently, all we knew was that it was “bad.” Canceling a credit card was “bad.” Missing a payment was really “bad.” Defaulting was one of the worst “bads.” What we didn’t know was how bad it actually was because the FICO credit score equation has always been a black box.

Well it turns out that we might get a little peek into the black box.

Fair Isaac Corporation, creator of the FICO credit score, recently released some data on how your score is affected by certain “adverse actions” – being 30 days late on a mortage payment, a foreclosure, bankruptcy, short sale, etc. They also estimated how long it would take to fully recover from the action. I personally think it’s a little odd because, well, FICO created the score and the equation that calculates it.

Either way, the data is still compelling:
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I’m one of the moderators of the Personal Finance sub-reddit (at Reddit.com), which routinely sees plenty of credit score related questions. This recent one made my blood boil when user wooga told me that his lender advised him to carry a balance to improve his score.

wooga: I was told by the lender that if I paid down to 1/3 of my balance that it would improve my score by 100 points in a few months, more then it would to keep a zero balance(or pay off each month) which is what I normally do. I didn’t believe it. …

I’m glad he didn’t because it’s flat out wrong.

Lenders would like you to believe that your credit score improves when you pay interest but it’s simply not true. Credit cards report your balance when your statement closes. They report it again when the next statement closes. They are snapshots in time with no information about what happens between those two moments. The reports are the same whether you carry a balance or pay off the balance in full, so carrying a balance does not improve your score.

It’s important to remember that the FICO credit score is designed to calculate the likelihood you will default on a loan. Whether or not you carry a balance is not any better an indicator than your balance at statement’s close. If you charge $500, pay off $500, and then charge $500, you are no riskier than someone who charges $500, pays the minimum plus interest, and carries the $500 forward.

Don’t carry a balance if you can avoid it and certainly don’t do it because you think it’ll improve your credit score.

Your credit report and credit score are designed to calculate how likely you are to default on your loans. It’s increasingly being used in some surprising ways, such as determining whether or not to rent you a home. The reasoning for using credit this way, for determining whether or not to rent an apartment to someone, has to do with the reality that in many areas, it’s hard to evict a non-paying renter. You’re essentially “lending” them a place to stay with the hopes they pay you.

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One of the big lessons from the post-credit crisis era, and you could argue we’re still fighting through the crisis itself, is the idea that cheap credit and cheap debt are bad for you. In general, I’d agree that racking up double digit interest rate debt is a very bad thing, but having access to that credit can be a very good thing.

It’s been a while since I wrote a Devil’s Advocate post but I felt that it was time. There’s been a huge backlash against credit and debt lately, in part because they were a cornerstone of the credit crisis, and I think that anger and fear is a bit unfounded. For every irresponsible borrower, there’s a responsible one taking full advantage of credit and using it in a way that enriches their life. Today, we’ll look at just a few of the reasons why you shouldn’t abandon credit.

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With the economy improving and consumer spending on the rise, I’ve been getting a lot of credit report and credit score related emails. With more people buying things, some of which will inevitably be on credit, folks are looking to make sure they don’t make any mistakes that could jeopardize their good credit scores. and increase their borrowing costs. I like the fact that people are becoming more conscious of their behavior and how it affects their financial lives, it’s one of the more positive side effects of the crisis.

Unfortunately, there are still a few ideas out there about credit that are flat out wrong. While I’m no credit expert, I’ve been reading enough experts and am able to separate the fact from the fiction.

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With it being a few short days until Christmas and nearly two weeks since the end of Hannukah, it’s a little late to be “preparing” for the holidays. That, however, doesn’t mean that you shouldn’t be financially prudent in the waning few days before the crescendo. I saw the results of a recent myFICO holiday study (packaged up into a pretty infographic) that gave me greater insight into the American shopper this holiday season. myFICO is a part of Fair Isaac Corporation, originator of the FICO credit score.

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A lot of people are “underwater” on their mortgages, that is the value of their home is below the amount they still owe on their mortgage. Other people simply can no longer afford their monthly mortgage payments and are on the verge of being foreclosed on. Regardless of the reasons, some homeowners are considering walking away from their home and their mortgage and it’s important to understand what the actual costs are going to be.

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