Simple ways to raise your credit score
For house hunters aiming to take advantage of today’s soft real estate markets, one mysterious number is becoming increasingly fateful – and it’s not the seller’s asking price.
A credit score, calculated to tell companies whether a consumer is likely to pay bills on time, is taking on more significance in an era of mounting defaults and foreclosures. On a scale of 350 to 850, scores in the 500s were good enough to secure a mortgage just last year. But now, any score below 600 is almost always a deal breaker, according to Jay Brinkmann, vice president of research and economics at the Mortgage Bankers Association, a national trade group for lenders.
For people who do qualify for a loan, high credit scores can blunt the pain of interest rates, which have been rising in recent weeks. According to Fair Isaac Co., whose FICO credit score represents an industry standard, raising one’s score from 550 to 720 produces savings to the tune of $131,000 over the life of a 30-year, $150,000 mortgage. Monthly payments, if initiated in late June, would have been 27 percent less for the borrower with the 720 score.
On June 29, federal regulators issued tougher lending guidelines, prompting the Mortgage Bankers Association to warn that the new rules will “constrain consumer credit choices.”
Beefing up a credit score is sometimes as simple as making a couple of calls or filling out a form.
Experts have suggestions for where to find the biggest payoffs with relatively little effort:
1. Get the data
Because credit scores are based on credit reports, anyone seeking higher scores needs to know what’s in those reports. To get one free report each year from each of the three major credit bureaus – Equifax, TransUnion, and Experian – go to www.annualcreditreport.com.
Many companies will supply personal credit scores for a fee, but the formula that one uses to calculate a score may not be the same one influencing a lender’s decisions. At www.myfico.com, you may sign up for a free trial of an online product that tracks his or her FICO score, the one most commonly used by lenders. Or go to www.bankrate.com and use the free calculator for a rough estimate.
2. Fix reporting errors
Mistakes happen, and they haunt consumers.
Errors can include such negative marks as paid debts that are listed as unpaid or any defaults more than seven years old. (Federal law requires most negative items to be dropped from a report after seven years.) Reports list procedures for fixing errors, but consumers who don’t get results may need to play hardball.
» Details…“Sometimes just having a lawyer step in [with a letter] will break the automation and get the bureaus to pay attention,” says Liz Weston, an MSN Money personal finance columnist and author of “Your Credit Score: How to Fix, Improve and Protect the Three-Digit Number that Shapes Your Financial Future.” ”
3. Don’t push credit limits
Credit bureaus look favorably on people who use less than 30 percent of their available credit. Example: If a credit card has a $10,000 credit limit, the user shouldn’t carry a balance higher than $3,000, even if he or she pays it off in full as soon as the bill arrives.
With this approach, “you’re proving you can handle debt,” says Stephanie Bittner, a credit and housing counselor with CCCS in Cherry Hill, N.J.
If this poses a challenge, several moves can help. For instance, call up a card issuer and request a higher limit, then stay below 30 percent of that. Or transfer balances that are pushing one card’s limits to another card where the balance is low. Better yet, pay all balances down, or pay them off completely, and then use credit sparingly.
4. Keep accounts open – and in good standing
Since untapped credit looks good, credit score optimizers don’t shutter their seldom-used accounts. But they don’t race around applying for cards at myriad retailers, either, because that smacks of an artificial attempt to elevate a credit score. Instead they keep existing accounts open, preferably with small or zero balances.
Ironically, going without credit cards altogether is not a good idea, since cards have become essential tools for building good credit, according to Michael Eisenberg, a West Los Angeles certified public accountant.
5. Pay all bills – even library fines – promptly
Thirty-five percent of a score is based on payment history, which may include everything from credit lines to parking tickets and library fines. To let any bill become 30 days overdue is to court demerits on a credit score.
When paying off overdue bills, consumers must be wary of debt-settlement firms, according to Darryl Dahlheimer, program manager for Lutheran Social Service Financial Counseling, a nonprofit advisory agency with 10 locations in Minnesota. For a fee, he says, they’ll negotiate a lower payment to a collections agency, but the consumer’s credit report will bear a painful seven-year scar that reads, “Settled for less than full balance.”
“It’s cataclysmic to a FICO score to have a locked-in, unpaid collection debt” on a credit report, Mr. Dahlheimer says.
- Source: Excerpted from Simple ways to raise your credit score, G. Jeffrey MacDonald, Christian Science Monitor, July 2, 2007
