I recently had the great pleasure of interviewing Credit Scoring Expert, Barry Paperno. Barry is not just any credit expert though. He is a representative for myFICO.com, which is a division of the Fair Isaac Corp.

The Fair Isaac Corp, or FICO^®, is the organization responsible for creating the most widely used credit scoring model in the United States. The FICO^® score is arguably the most important piece of personal information that you have, and Barry was generous enough to share with us how we can manage and protect that score.

What should people do when preparing for adulthood or starting to build credit for the first time?

From a FICO^® credit scoring perspective, student loans, auto loans, and secured credit cards are a good way to start building credit. And, the good news for young adults just getting started is that it only takes a single credit account and six months of credit history to establish a good FICO^® credit score. Then, once credit is established, the managing of this credit — paying on time and keeping credit card balances low – will be important toward protecting this credit history and making sure the FICO^® credit score remains in good standing.

Now that Fair Isaac Corp. essentially has put an end to the piggybacking loophole, what can parents do to help their children establish and build credit?

Parents hoping to establish credit for their children by adding them as authorized users to their accounts should be happy to hear that Fair Isaac has just recently announced that its new credit scoring formula, FICO^® 08, will continue to include authorized user accounts in the calculation of the FICO^® credit score.

To protect against the piggybacking loophole and any other such manipulation of authorized user accounts, Fair Isaac has incorporated new technology that protects the score from this kind of abuse. In addition to the authorized user method of establishing credit, parents can also co-sign for student and auto loans. These loans appear on the young person’s credit report and are good ways to build a credit history.

What do you think is the biggest myth about a credit score and good credit behavior? For example, some people think they might have too many credit cards, so they close accounts that in turn could actually hurt their score. Are there other things people might be commonly doing wrong?

In addition to the myth that closing accounts can improve your FICO^® score, another myth is that you need to carry balances on credit cards from month to month to establish a payment history. While it’s important to keep your cards active by using them at least a couple of times a year, a low “utilization” percentage – the ratio of balances to credit limits – on credit cards is essential for a good FICO^® score.

It’s helpful to understand that the balance the score considers for this calculation is the amount reported by the lender from the borrower’s last billing statement. This balance can either be the balance being carried forward (revolving) from month to month or it can be the last month’s balance only, if the balance is paid off every month. It’s best for your FICO^® score and your bank account to pay off your balance each month and avoid paying finance charges.

If I were planning to purchase a new car in the immediate future, what steps should I take now to prepare my credit file to get approved for the best possible loan?

The three most important steps toward insuring the highest possible FICO^® credit score at the time you apply for the loan are:

1. Pay everything on time – don’t be late by even one day;
2. Keep your credit card balances low while leaving all credit card accounts open; and,
3. Don’t apply for any new credit or accept any offers before being approved for the loan.

Then once you get the loan, continue #1 and #2, and only apply for credit or accept credit offers sparingly.

It seems I’ve been hearing about the rise of identity theft my entire life. Is it really getting worse? What should people be doing to protect themselves?

I’m not sure if it’s getting worse but it’s safe to say that identity theft is as important a concern as ever. In addition to protecting your personal ID information by never providing it to anyone outside of a secured online connection, check your credit reports quarterly or every six months for any suspicious credit activity. If you have been a fraud victim or if you suspect that you might become one, you can restrict the ability of others to access your credit by placing a fraud alert or freezing your credit file with the credit bureaus.

Let’s discuss negative information on a report. I didn’t agree with a bill I received and believed I was overcharged and was therefore disputing the bill. While disputing with the creditor, they decided to send my account to a collections agency and include the disagreement on my credit file. What can I do as a consumer when I’m wrongfully accused and being penalized for it?

In the event of a disagreement over a bill, it’s best to dispute the information with as many of the possible sources of that information as possible, since you can’t always be sure of the specific source that’s causing the problem. So, in your example, there are three sources who should be contacted with your dispute:

1. The original creditor;
2. The collection agency; and,
3. The credit bureau(s).

If you have proof of payment or other documentation, provide that with any correspondence, and be sure to send all correspondence via certified mail so you have proof it was received.

There seems to be some animosity towards credit card companies because they use what some people feel are “psychological” tactics to get them to spend, or they take advantage of consumers by approving them for more credit then they need. Should there be tighter restrictions on how credit card companies market and advertise their products, or do you think it is our job to be responsible consumers?

Good question. While I definitely think we need to protect ourselves by being financially responsible, which includes being well informed, I’m far from being an expert on credit card marketing, regulations, etc., so I’ll defer this question to those having more knowledge in these areas.

How often should consumers pull and review their credit and what should they be doing with that information?

Depending on your level of credit activity, it’s a good idea to take a look at your credit report and FICO^® credit score either on a quarterly basis or every six months – the more you use credit the more often you should check your credit report and score.

By staying in touch with what’s being reported about you, you’ll ensure the information is accurate and you’ll also see how the actions you take affect your FICO^® score. Then, armed with this knowledge, you’ll be able to take charge of your finances by taking advantage of the best possible loan and credit card rates being offered. By the way, you can check out the latest loan rates matched to FICO^® scores at myFICO.com.

Is the credit score the most important piece of information that lenders use to approve or deny loans, or are there other areas consumers should review before applying for a loan?

While the credit score is one of the most important components of a lending decision, it’s not the only one. Lenders typically consider three factors in their decisions and they’re known as the “3 C’s of Lending”:

1. Credit score – FICO^® is the score most commonly used by lenders;
2. Capacity to pay – the borrower’s income; and,
3. Collateral – assets providing security to the lender.

Of course, the impacts of these factors will be different according to the type and amount of credit being granted, but it should be clear that the FICO^® credit score does not include either of the other two “C’s” – capacity or collateral. So, while it’s important to know your FICO^® credit score and the scores required by lenders prior to applying for a loan, it’s also a good idea to have an understanding of the lender’s other requirements, such as income and assets.

What services does MyFICO.com offer that we should be taking advantage of?

The most important reason to go to myFICO.com is that it’s the only place on the Web where you can get your FICO^® scores and credit reports from all three of the national credit bureaus. This is important because most lenders rely on FICO^® credit scores from more than one credit bureau, so you’ll want to know what each credit bureau is reporting about you, both in terms of your credit information and your FICO^® score. Additionally, myFICO^® provides:

• A Credit Education Center that includes a wealth of credit information;
• The FICO^® Forums online user community where people openly share what they’ve learned firsthand about FICO scoring;
• A Customer Support Center where a myFICO^® customer service representative can help you decide on the myFICO^® product that best suits your needs.

Barry, I want to thank you for taking the time to share your insight on the FICO^® score and the solutions myFICO.com offer consumers. You mentioned some incredibly valuable tips that anyone can use right now to help build and maintain their credit.

Sometimes things are so incredibly easy to understand that they are overlooked. The basic money skills to make you rich, for example, were probably mastered by the third grade. We have a tendency to believe something is important, it must therefore be difficult.

You probably experience this on a day to day basis at your job. The goals you need to accomplish are easily achievable by following some simple rules, but your colleagues and bosses make it difficult to achieve. They schedule meetings to dissect every aspect of the situation, strict processes and guidelines are created, and detailed reports are required to document each step of the process.

What should be a simple process has so much weight of being important, that it has become a difficult project in order to justify its level of importance. In the meantime it has become increasingly difficult to do your job and the small competitor who has no restrictions and can think on their own has quadrupled your level of output because they’ve kept things simple.

In Chicago, semi trucks have a tendency to get stuck in places that are just too small for them to pass. They get jammed in sharp corners, narrow alleyways, and my favorite, under the elevated train. There’s a story that one day a semi got stuck under the train and could not back out. The firemen came and could not wedge the truck out, so they called in the big machines to try to wedge the truck out from under the rail tracks. They spent hours pulling, bending and sawing this truck just to get one of these busy Chicago streets open again. But then a 12-year-old boy came up to a fireman and asked why they didn’t just deflate the air in the tires of the truck. The solution was so simple that it was completely overlooked by the dozens of people trying to get the truck free.

The money skills needed to become wealthy are similarly simple, but tend to become unnecessarily complex. It’s so easy that a third grader could probably tell you the basic money skills you need:

• How much can you afford to spend
• Are you saving for your goals
• You can double your money over time
• Some things may cost more money but have better value
• It’s easier to have 10 people making money for you than to do it yourself
• Most of all, it is important to have fun

Millionaire Money Habit: Just because something is important does not mean it needs to be complex. When in doubt, the solution is usually simpler than it seems it should be.

No matter what, there is always room for improvements in terms of your personal satisfaction and level of success. You can be happy, but what would make you happier? You may be successful, but what else do you want to achieve?

A choice is always made to take action in order to move life forward in a certain direction, or to sit still – in which case you can expect very little to change. It’s Newton’s First Law, right? An object at rest will stay at rest.

While some relaxation is certainly an important part of remaining focused, alert and creative, a constant state of “doing nothing” will not help you achieve your goals. How many things do you need or want to accomplish today, but keep putting off until “tomorrow?” It is easy to come up with excuses to justify that you don’t have time or the resources to accomplish what you need to do.

I wanted to sit down and edit a project while traveling yesterday, but I told myself there wasn’t enough leg room on the plane to open up my laptop. I came to this conclusion without even trying, and I didn’t bother to take out the hard copy I brought with me to make the edits. If I really wanted to complete the project, I would have found a way. Instead, I came up with excuses.

What happens as a result of making excuses is procrastination, which in my opinion takes far more energy than doing. Procrastinating keeps things hanging over your head, and the mental exhausting of “having to do something” is far more strenuous than actually doing.

Things that are put off only build up on top of other things that need to be accomplished, which leads to stress. It’s like the attic you know needs to be cleaned, but figure what damage can throwing one more useless thing up there do? It will get organized tomorrow. In the meantime, those items just keep piling and piling on top of one another until the ceiling comes crashing down. “Tomorrow” never came.

Whatever it is that you want to achieve, make a commitment to make that happen. Whether it be a short term or long term goal, take the necessary steps today to get things in motion. Have a clear plan, but don’t let perfectionism get in the way. Doing is far more powerful than being perfect. There is always going to be room for improvement.

As Benjamin Disraeli once said, “Action may not always bring happiness, but there is no happiness without action.”

Millionaire Money Habit: The difference between those who achieve and those who don’t is simply that winners try. Success comes to those who have the guts to keep trying after they fail.