How Lenders Size You Up - personal finance - Brief Article - Column

Kiplinger's Personal Finance Magazine, Sept, 1999 by Kimberly Lankford

Most lenders use a complex calculation to come up with your credit score.

My credit has been top-notch for years, but I was denied a credit card by Capital One because of "insufficient monthly payment obligations." Someone at Capital One told me that not having a mortgage payment (I live on a military base) could be a strike against me. Is that what "insufficient" means?

--CHRISTOPHER MAHAFFEY, Honolulu

You're on the right track. "Insufficient monthly payment obligations" usually means that you don't have enough monthly bills (whether they be from credit cards, a mortgage or a car loan) for the lender to judge how well you manage the accounts. But a meager credit history is rarely the sole reason for a thumbs down. Probably what happened is that you got a borderline credit score, then Capital One reviewed your record and turned you down, stating a sparse credit history as the reason. If there were other reasons, the lender doesn't have to give you all the details.

Your credit score is the result of a complex calculation that weighs various factors (such as number of accounts, debt-to-income ratio and length of time on the job) based on how frequently each one correlates with late payments from the creditor's current customers. When a lender gets a credit score for you, it also gets up to four codes explaining why you didn't score higher. If the number is close to the cutoff, lenders will usually review your credit report before making a decision.

Paying your bills on time is usually the most important factor in qualifying for credit, followed by the size of your outstanding debt, length of credit history and types of credit in use, according to Fair Isaac, a firm that provides credit-scoring calculations for lenders.

Good stocks for kids

I'd like to buy a few shares of stock for my 7-year-old godson so he can

start building a college fund and learn about investing. Do any companies that kids tend to like let you buy just a few shares of stock directly from the company, without a broker?

--H.T.M., Boston

McDonald's (call 800-621-7825 for an application) and Walt Disney (800-948-2222)--the two best-known kid-friendly companies--let you buy their shares directly without using a broker. But with minimum initial investments of $1,000, they have a higher admission price than most gift-givers are willing to spend.

Your godson may like one of these stocks, which have lower minimums and get good marks from analysts: IBM ($500 minimum, plus a $15 initial investment fee; 888-426-6700), Mattel ($500, plus a $10 fee; 888-909-9922) and Sony ($250, plus a $15 fee; 800-749-1687).

For a detailed list of companies with direct-purchase plans, go to NetStock Direct (www.netstockdirect.com/search) and select "direct stock plan."

Home Inventory made easy

I'd like to buy home-inventory software to help with my insurance records. Do you know of any programs that are good for home use?

--J.N., Carmel, Cal.

Few home-organizer software programs include home-inventory records. One that does is MyDataBase ($29.95, plus shipping; call 800-325-3508 to order, or go to www.mysoftware.com to download and click on "store"). The program doesn't walk you through the steps--if you don't know where to go, you'll never find the home-inventory section. The key is to go to "file," then "new," then "select template," then "home inventory." There, you can fill out a detailed form for each item, listing brand, model, color, serial number, location, purchase date and price, appraisal, warranty, insurance policy number and manufacturer contact information.

The benefits of medical-payments coverage

If I have health insurance, do I need to buy medical-payments coverage as part of my auto-insurance policy?

--J.N., via e-mail

Medical-payments coverage--which usually pays $1,000 to $10,000 in medical or funeral expenses for each injured person in your car--is cheap enough that it's worthwhile to buy it to avoid hassles and fill in gaps ($5,000 worth costs about $20 to $50 a year). If you don't have medical-payments coverage, your health insurance may cover most of your medical bills. But because medical-payments coverage has no deductible and usually pays for auto injuries before your health insurance kicks in, you may be able to avoid paying your health-insurance deductible and other out-of-pocket expenses.

Medical-payments coverage can also come in handy if some of your passengers don't have health insurance. Without it, the at-fault driver's liability insurance could eventually pay your passengers' medical bills. But that would mean going through the time-consuming process of establishing blame.

401(k) limits

My company recently switched 401(k) providers, and now only 15% of salary may be set aside. This has forced me to lower my contribution to $125 per week. I thought that by law I could set aside $10,000 per year, but my company insists that the maximum is 15% of salary. Who is right?

--JOE CARUSO, Brooklyn, N.Y.

You can't invest more than $10,000 per year in your 401(k) before taxes, and employers may set a limit on the percentage of your salary that can be allocated--from 1% to 25%--up to the $10,000 cap.