Boost Your Credit Score
Boost Your Credit Score
Published: October 2, 2005
By Lynn Brenner
Want to save yourself some serious money and develop clean credit? Then boost your credit score! It’s easier than you think and can save you thousands of dollars by lowering the interest rates on your mortgage, bank and car loans. Improving your use of credit can help cut your insurance premiums too.
What’s a Credit Score?
Your credit score is a three-digit number between 300 and 850. It’s called a FICO score, after its creator, the Fair Isaac Corp. Lenders use your score to determine your interest rates. The lower your score, the more you pay. A score above 700 helps you get the best rates. Lenders also use a FICO score to decide whether to approve your credit application, whether to increase your credit limit and how to treat you if you make a very late payment. (You can find out your score at www.myfico.com for $14.95.) Contrary to popular belief, your FICO score isn’t determined by your age or income. It’s based on your past use of credit, as recorded by agencies like Experian, TransUnion and Equifax. But a recent survey found that 80% of all credit reports contain mistakes! To make sure your report is accurate, order a free annual copy from each agency. (Go to www.annual creditreport.com or call 1-877-322-8228 or write to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Ga. 30348-5281.) You’ll have a chance to correct any errors. If there’s accurate negative information on your report, consider calling the creditors and asking if they’ll remove it. A creditor may agree to erase a single late payment from an otherwise pristine record.
Take the Right Steps
Here’s how to become a smarter borrower:
• Pay bills on time. Payment history is the single most important factor in a credit score. Any bill overdue 30 days or more shows up on your credit report. A credit-card issuer who sees a pattern of late payments on that report may raise your interest rate—even on a card you’ve always paid on time.Ignore any offers to skip payments on your credit-card bills, adds Greg McBride, a senior financial analyst at Bankrate.com. If you accept, you’re only doing the issuer a favor: The interest just keeps accruing on your unpaid balance. • Reduce your credit-card balances. A recent survey found that 28% of consumers think maxing out a credit card improves a credit score. The opposite is true: The closer you are to your credit limit, the worse your score. If your limit is $5000, for example, carrying a $1250 balance (25% of your limit) is considered much better than carrying a $3750 balance (75% of your limit). Try to keep your balances below 30% of your available credit. If you use a high percentage of your available credit, there’s a greater risk that you’re spending beyond your means and will have trouble making payments. That lowers your score.Before FICO scores, consumers were advised to close unused lines of credit before applying for a mortgage, so prospective lenders would not worry that they’d take on too much debt. That’s no longer good advice, says McBride. “If you’ll be in the market for a mortgage or a car loan within the next couple of months, I’d refrain from closing unused lines of credit. It will have a negative short-term impact on your credit score. Let’s say your total balance on credit cards is $10,000 and your total limit on all cards is $40,000. If you close unused lines of credit, you’ll increase your ratio of debt to available credit—and hurt your FICO score.” • Limit your credit applications. Every time you apply for credit, the prospective lender checks your credit report. Too many credit inquiries can lower your score. But FICO counts credit inquiries by different car or mortgage lenders in any 45-day period as just one credit check, so you’re not penalized for comparison shopping. • Build a track record. With no credit history, you have no credit score. Recent graduates should establish a history with a single credit card or gasoline company card before applying for a car loan or a mortgage. But you don’t have to carry a card balance, says McBride. FICO scores don’t distinguish between consumers who carry a balance and those who don’t. It’s always a good idea to pay your monthly balance in full if you can.
Good Credit Has Its Rewards
The higher your credit score, the less you’ll pay for
a mortgage. For example, take the cost of a $200,000, 30-year, fixed-rate mortgage. Here’s a snapshot of what borrowers with varying credit scores nationwide were charged, on average, for this loan on Aug. 5: The difference in cost between the highest credit score and the lowest score eligible for that loan is a whopping $478 a month, or $5736 a year—which adds up to $172,221 over the life of the loan. To find out what different loans will cost you—depending on your credit score and what state you live in—go to www.myfico.com and use the loan calculator.
Credit Score; APR; Monthly Payment; Total Interest Paid Over 30 Years
720-850 – 5.793% – $1173 – $222,141
700-719 – 5.918% – $1189 – $227,888
675-699 – 6.456% – $1258 – $253,008
620-674 – 7.606% – $1413 – $308,671
560-619 – 8.531% – $1542 – $355,200
500-559 – 9.289% – $1651 – $394,362
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