Boost Your Credit Score

 

 

 

 

Ever since subprime mortgages became more “sub” than “prime,” lenders have been tightening up on credit. The days of the nothing-down, no-documentation mortgage are gone.

Now homebuyers need a down payment and proof of income. What’s more, mortgage applicants need a winning credit score.

Credit scores are also weighed when you want to refinance a home loan or buy something on time. Some auto and home insurance companies will accept or reject you based on your credit score. Even if you’re accepted, the price you pay for insurance may vary according to your credit score.

Fair Isaac is the company that developed the FICO scores used by most lenders. On Myfico.com, the company illustrates how a higher score can lead to better deals on a 30-year, $300,000, fixed-rate mortgage:

FICO Score	Monthly Payment
760-850	$1,716
700-759	$1,758
660-699	$1,813
620-659	$1,972
580-619	$2,482
500-579	$2,694

The median FICO score in the U.S. is 723. Even if you’re a cut below that level, with a 660 score, you won’t pay that much more than someone with a superlative 800 score.

However, once your score dips below 660 (about 30% the U.S. population falls into this group), you’re considered more of a credit risk so you’ll pay much higher interest rates. Those with scores under 620 are likely to be quoted rates far above the norm, if they can get credit at all.
The bottom line is that your credit score has become vital to your financial well-being, so bringing up your score pays off. To do so, you should know how your score is compiled. Here’s what goes into a FICO score:

Payment history: 35% of your score. Pay your bills on time, even if you send in only the minimum amount due. Late payments will knock

points off your score. Generally, a 90-day delinquency is more serious than a 60-day delinquency, but recency also counts. For example, a 60-day lateness a few months ago will hurt your score more than a 90-day late payment five years ago. This part of your score also takes into account factors such as bankruptcies, foreclosures, and wage attachments. Filing for bankruptcy, for example, can affect your score for seven to 10 years.

Amounts owed: 30%. The key here is your debt-to-credit ratio. Once you go over 35%, your score might drop, according to Steven Katz, director of consumer education for TransUnion’s TrueCredit.com. Suppose, for example, you have $20,000 worth of available credit on your credit cards. If your balance goes over $7,000 (35% of $20,000) your score might drop, even if you pay down the amount you owe by the due date.

That

35% rule may be card-by-card. For example, if you have a $12,000 limit on one credit card and an $8,000 limit on another, charging $4,000 on the $8,000 card can lower your score, even if you owe nothing on the $12,000 card. Generally, says Katz, it’s better for your score to spread your credit card usage among two or more cards, rather than load up on one card.

Length of credit history: 15%. When it comes to credit scoring, older is better. You shouldn’t close down old cards where you have a good record. Moreover, closing old cards reduces your total credit availability, which can raise your debt-to-credit ratio. Say you have $30,000 in credit lines from three cards. You close one card with a $10,000 limit, bringing your total credit down to $20,000. If you have balances adding up to $9,000, you’ll go from a 30% debt-to-credit ratio ($9,000 over $30,000) to a ratio of 45%, which probably will raise red flags.

New credit: 10%. Try to avoid opening many accounts within a few weeks. “Some people fall into a trap during the year-end holiday season,” Katz says. Shoppers are told they can get, say, 15% off on all purchases that day by getting a store card. That opens a new line of credit, and opening several new lines in a short time can lower your credit score.

Types of credit: 10%. Your history will look better if you have a record of making payments on installment debt (such as an auto loan) as well as revolving debt (credit cards). If you want to see your credit scores from all three credit bureaus (Equifax, Experian, and TransUnion) go to www.myfico.com.