Helping to ensure clients know the score

Everyone needs an annual fiscal checkup.

Just as their bodies and cars periodically require inspection, clients’ finances need regular examination. You can help them do this by obtaining and reviewing their credit reports once a year and then taking the time to find ways to improve their scores.

An annual credit check will help clients become more aware of their personal financial situation.

If you think that such a checkup is unnecessary, consider what the United States Public Interest Research Group in Washington discovered in a 2004 study of consumer credit reports.

According to the study’s executive summary:

25% of the credit reports surveyed contained serious errors, such as false delinquencies or accounts that didn’t belong to the consumer, which could result in the denial of credit, a loan, an apartment or a job.

54% of the credit reports contained personal demographic information that was misspelled, long outdated, belonged to a stranger or was otherwise incorrect.

30% contained credit accounts that had been closed by the consumer but remained listed as open.

79% contained either serious errors or other mistakes of some kind.

These mistakes point to the possibility of even affluent consumers having less-than-stellar credit scores. And while good credit scores are critical when someone is looking to buy a new home, refinance their existing home or purchase a car, the average consumer has a minimal understanding of the scores, according to a study released this month from the Washington-based Consumer Federation of America and Washington Mutual Inc. in Seattle.

By taking a few simple steps to increase their credit scores, people can save thousands of dollars a year on a mortgage or car loan.

“Consumers don’t seem to think they need to focus on credit scores. But poor scores are costing them billions of dollars in interest and finance charges annually,” CFA executive director Stephen Brobeck said in the report.

The best advice for improving a credit score is making all credit payments on time, using less than 20% of the available credit line and keeping the number of credit cards to a minimum, noted experts.

In addition, paying off debt — not just moving it around to other credit cards — is essential. Such movement also lowers a credit score, industry experts say.

Clients can get free credit reports from three main national credit bureaus: Equifax Inc. in Atlanta, Experian Information Solutions Inc. in Costa Mesa, Calif., and Trans Union LLC in Chicago.

The best scores, experts say, are higher than 700, a number that prompts lenders to offer borrowers the lowest interest rates on loans. Any credit score below 600 is considered poor and can cost consumers thousands of dollars or more a year in borrowing costs.

In the case of mortgages, for example, a person with a credit score of 720 could qualify for a 30-year mortgage carrying a 5.5% interest rate, according to an example from the Consumer Federation of America.

Someone with a score of 580, on the other hand, probably would pay 8.5% or more. On a $500,000 mortgage loan, the difference between having good credit and bad credit could be an additional $1,000 a month.

I don’t know about your clients, but I could certainly find a way to make $12,000 a year work in my best interests. And I’d appreciate the help of a financial adviser who could save me that much money.