Tips for Improving Your Credit Score

Do you even know your credit score? It’s a very important number. If your score is just two points below the most desirable scores of 700 or better, it can cost you thousands of dollars in interest on a home mortgage.

Your credit score is the number one tool that lenders use to determine the interest rates you’ll pay for credit cards, car loans and home mortgages. Consumers with scores below 600 are typically charged high interest rates, and if your credit score is really bad, you may be not be able to borrow at all.

Take a look at this loan savings calculator put out by the Fair Isaac Corporation, the folks who developed the most commonly used scoring system, the FICO score. Borrowers with a credit score below 559 will pay $593,651 in interest on a 30-year fixed rate $200,000 mortgage. That’s a whopping $356,776 more than folks with the best credit rating will pay. If you raise your score even one point, you’ll see a savings of $53,327 over 2. the life of your loan.

Your score is based on how well you stack up in five categories, each of which is weighted according to importance:

1. 35 percent of your score is based on your payment history. Do you pay your bills on time? If payments are late, how late are they?
2. 30 percent is based on the amount you owe. How much do you owe? On how many different accounts?
3. 15 percent of your score is based on the length of your credit history. Are you a first-time borrower?
4. 10 percent is based on the recency of your accounts. Do you have any credit accounts? How many accounts have you opened recently? Have there been a lot of credit inquiries on your record lately?
5. 10 percent is based on the types of credit used. Do you owe money on high-interest credit cards? A car loan? A mortgage?

So how do you fix your credit score? First of all, get a copy of your credit report. Under federal law, you’re entitled to a free report if a company denies your application for credit based on information in your report. You must ask for your report within 60 days of receiving notice of the action, which will give you the name, address and phone number of the consumer reporting company to contact. If you haven’t been denied a loan, you can get a copy of your credit rating by contacting one of the three companies that compile the report: Equifax, Experian or TransUnion.

Once you get the report, examine it for accuracy. Look for errors, such as accounts that aren’t yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that shouldn’t be reported any longer–negative items are supposed to be deleted after seven years. If you find any inaccuracies, you must dispute them, in writing, with both the credit reporting company and the creditor. See this article from the US Federal Trade Commission for information on disputing credit report errors.

If you still have a questionable score after any errors are corrected, you can lower yoour score by taking the following steps:

1. Payment History

• Pay your bills on time. If you haven’t been doing this, there’s no time like the present to start. The longer you pay your bills on time, the better your credit score.
• If you are having trouble making payments, contact your creditors to see if you can work out a lower payment plan. This is a long-term project, but if you strike a deal with your creditors and begin paying on time, your score will eventually improve.

2. Amount owed

• Keep balances low on credit cards. High outstanding debt can affect a credit score.
• Pay off your current credit cards instead of opening new accounts. The most effective way to improve your credit score in this area is by paying down your high interest credit cards–period. Transferring the balance of all your credit cards to one lower interest account may sound tempting, but it may in fact lower your score.
• Don’t open new credit card accounts that you don’t need, just to increase your available credit. Another approach that could lower your credit score.

3. Length of Credit History

• If you’re trying to establish credit, don’t open a lot of new accounts right away. New accounts will lower your average account age, which will lower your score if you don’t have a lot of other credit information.

4. New Credit

• Do yourself a small window of time for which to shop for rates for a new loan. If you make a few credit inquiries during a short period of time, FICO will rate those inquiries as rate shopping, but if you spend months applying for loans, FICO will figure that you’re looking for new lines of credit rather than searching for the best rate for one loan. And as you know, having too many accounts can lower your score.
• Reestablish your credit history if you have had problems. If you’ve filed for bankruptcy, by all means open a new credit card account. But not a lot of credit card accounts. And pay this one off monthly.

5. Types of credit

• Apply for and open new credit accounts only as needed. Remember, you don’t want to have too many open accounts.
• Manage credit cards responsibly. Having credit cards and making timely payments increases your score, which is why people with no credit history have a tough time getting other loans. The key here is keeping on top of payments and not having too many accounts.

One caveat: Do not close accounts for which you still have outstanding debts. Closing unused accounts without paying down your debt changes your utilization ratio, the amount of your total debt divided by your total available credit. Pay down the debt first, then close the account.

photo credit sxc

Tags: calculators | credit | savings | Shopping

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This entry was posted on Tuesday, March 11th, 2008 at 4:27 pm and is filed under Debt Management. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.