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Tips
for boosting your credit score
By
Pat
Curry · Bankrate.com
If
you're thinking about buying a house or a car, your credit
score is a very important number.
The
interest rate you'll pay for the money you borrow will be
determined, in large part, by this three-digit number that's
generated from the information in your credit report.
Most
lenders have carved-in-stone rules about handing out the best
terms, and those rules almost always place a major emphasis on
your credit score. If their best rates are offered to
borrowers with a score of 700 or higher and yours is a 698,
those two points could cost you thousands of
dollars.
According
to www.myfico.com, the consumer Web
site of the Fair
Isaac Corp. that created the FICO score (the most
commonly used credit score), the interest rate difference
between those two scores is one-half percentage point.
On
a $165,000 30-year fixed rate mortgage, that half point could
cost you more than $19,000 in interest charges, assuming 6
percent is the lowest rate available (see Bankrate's calculators). Fall below a 675
and the rate goes up another 1.2
percent.
Keep
in mind that these are averages. Most lenders today practice
tiered pricing, with interest rates rising as scores go down.
Each lender chooses its own "break points" between tiers.
Lender A may bump up the interest rate if a score falls below
700, while Lender B doesn't charge higher rates until the
score is 690 or below. So if you stick with one lender, and
that lender's break point is 700, raising your score from 698
to 701 can be vital.
This
underscores the importance of not only doing all you can to
improve your score, but shopping thoroughly when looking for a
mortgage. From the perspective of a mortgage broker, who can
choose among a sea many lenders, there are no sharp break
points. Consumers should do what a good broker does -- look
for a lender that offers the best rate for a specific score.
But
that's jumping ahead of ourselves.
First things first: You can take steps to improve your credit
score. The number of variables that
play into an individual score make it impossible to say that
one particular action will increase a given score by a certain
number of points. But there are some good
guidelines.
"The
mantra for getting a great score is pay your bills on time,
keep account balances low, and take out new credit only when
you need it," says Craig Watts, consumer affairs manager for
Fair Isaac
Corp.
"People
who do that faithfully have very high scores. It usually means
you're being conservative and cautious about credit. It's not
a toy and it shouldn't be a hobby."
Speedy
upgrade
That's good advice, to be
sure, but these actions take a long time. What if you're house
hunting and you just need a few extra points to bump you over
the line to the great rates?
Start
by pulling your credit report and your credit score to see
where you are. To get an estimate of your credit score, check
out our Credit Score Estimator. If your score is above a 720,
you're golden. Improving your score from a 720 to a 740 won't
get you better terms.
What
you're looking for on your report are factors that could be
affecting your score. Look for errors in the report, 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 (negatives are supposed to be deleted after seven
years, with the exception of bankruptcies, which can stay for
as long as 10 years).
After
repairing errors, the fastest route to a better score is
paying down balances on credit cards, says
Watts
and David Herpers, chief marketing
officer for Atlanta-based Amerisave
Mortgage Corp.
"There's
really no silver bullet, but I would think that over 60 days,
it's possible to increase your score 20 points by paying down
your credit lines," Herpers
says.
Had
a few late payments in your past?
If you find yourself in
some financial difficulties, you can protect your score by
making sure your payments don't go 60 days past due, Herpers says. "Some lenders don't report
30 days past due, but they all report 60 days past
due."
Even
if you've paid your bills late in the past, you can improve
your credit score by paying every bill on time from now on,
says John Ventura, a consumer law attorney and author of "The
Credit Repair Kit."
"Forget
about grace periods," he says. "If you want to have a really
good record with the credit agencies, pay your debt before
it's due and keep your balances low."
A
big no-no
One
thing you shouldn't do if you're just trying to boost your
score is close unused accounts, Watts
says.
"If
someone tells you to close unused accounts to improve your
score, they're pulling your leg," he says. "It won't help you
and it can hurt you."
Closing
unused accounts without paying down your debt changes your
utilization ratio, which is the amount of your total debt
divided by your total available credit.
"You
appear closer to maxing out your accounts," he says. "That's
why your score can drop. It doesn't mean people shouldn't
close them, but don't close them to improve your score."
If
you do cut up cards, though, leave the oldest one open, says
Steve Rhode, former president of Myvesta.org, a national
nonprofit financial crisis center.
The
length of your credit history is another factor in your score.
If you close the account of the credit card you got when you
were a freshman in college and leave open the ones you just
got within the last couple years, it makes you look like a
much newer borrower.
"Keep
a couple of the oldest open; I don't care what the interest
rate is," he says. "Creditors don't care what the rate is."
Working
with credit card balances
Another
strategy for bringing up your score: Transfer balances from a
card that's close to being maxed out to other cards to even
out your usage, says David Chung, interim president and vice
president of business development for Maryland-based CreditXpert Inc., which provides credit
tools to lenders. Or just spread out your charges between a
few cards.
"Try
to get the usage on all of them at 20 to 30 percent instead of
a bunch at zero and one at 80 percent," Chung says. "You're
not spending less, you're just
shifting it around to different cards."
It
could work, Watts
from FICO says. "Transferring the balance to a card with a
lower utilization could help," he says, "but it's much better
to actually pay down the debt if you have the cash kicking
around."
If
you're really into finessing the system, check your credit
report to see what day of the month your creditors send
updates on payments to the credit bureaus, Chung says. They're
rarely on the same cycle as your payment due date. That's why
you can pay off your card every month and your credit report
will show you carrying a balance. Then, make your payments
several days before the reporting date.
All
of these strategies generally take at least 30 days because
lenders don't report payments more than once a
month.
Rapid
rescoring
If you're in the throes of qualifying for a mortgage and
need a score boost in a hurry, you can speed the process along
with rapid rescoring. If you've got legitimate negative
information on your credit report, such as late payments or
accounts in collections, you're out of luck. But the process
of rapid rescoring can help increase your score within a few
days by correcting errors or paying off account balances.
You
can't do this one yourself; you'll need a lender who is a
customer of a rapid rescoring service. Generally, the service
will run roughly $50 for every account on your credit report
that needs to be addressed, but it could save you thousands on
your loan.
If
a consumer can find a lender who is a customer of a rapid
rescoring service, new information can be posted within 72
hours, Watts
says.
Some
nifty online tools are available to find out which strategies
could have the most impact on your score. Fair Isaac's www.myfico.com site offers a
credit score simulator when you purchase a credit score. It
will show you how paying down your account balances -- or not
paying any of your bills on time this month -- would affect
your score.
CreditXpert's
"What-If" simulator lets you play with several variables, such
as buying a car, paying off a student loan and opening a
department store account, all at the same time. They don't
sell the simulator directly to consumers, though. You can get
a list of places that do sell it on the consumer page of its
Web site.
The
bottom line, the experts say, is that you're not powerless
when it comes to your credit score.
"There
are a lot of things you can do to improve your score," Chung
says. "You need to understand what your credit is like now and
what's influencing your score today. Then you can take an
objective look at the different options
available."
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