To get the best deal on a loan, you need some new strategies to bump up your score – and keep it there.
Borrowing
money today requires impressing an increasingly hard-to-please crowd.
With creditors of all kinds more cautious than ever, you need an A+
application to land the best terms — and that means an A+ credit
score, the number lenders use to judge your risk of default.
The most commonly used credit scoring system,
called FICO, rates people from a very risky 300 to a pristine 850. And
right now we’re in the middle of a credit score crunch: "You need a 750
or better today to have the same treatment you got with a 700 two years
ago," says John Ulzheimer, president of consumer education at
Credit.com.
John D’Onofrio, CEO of Autoloandaily.com, seconds
that: "Two years ago a 680 was enough to get a great car loan rate.
Today it’s often the minimum to qualify at all."
Think you’re
still in the clear? Don’t be so sure. Lenders have been making changes
that could cause your score to slip from excellent to average. Improve
and protect your number with these strategies:
Learn Your Score. You
have three FICO scores, based on your credit reports at the three
credit bureaus: Experian, Equifax, and TransUnion. The numbers tend to
be in the same ballpark, so pony up $16 to get one representative score
at myfico.com. You can get an estimate free at Creditkarma.com. But the FICO score gives you a better sense of what lenders see.
Scout for Mistakes. Your
scores are only as good as the information they’re based on. And a
third of people who’ve pulled their reports have found errors,
according to a Zogby poll. That’s good reason to read your report.
When you buy your FICO score, you’ll get a copy of the report it was based on. Get gratis histories from the other bureaus via annualcreditreport.com (you’re entitled to one free from each bureau every 12 months).
Spot
an error? Request a correction, following the instructions on the
bureau’s website. Let’s say the size of a credit line was misstated or
an account was mistakenly marked delinquent. Getting the error fixed
could raise your score as much as 200 points, says Ulzheimer, who has
also worked for Equifax and FICO.
Never, Ever Be Late.
As you’ll see in the pie chart on the right, the biggest chunk of your
credit score comes from your payment history. Just one late payment can
shave 100 points off a 750-plus credit score, says Ulzheimer. Lenders
can’t tattle on you to the bureaus until you’re 30 days past due, adds
credit expert Gerri Detweiler. But don’t risk it. For all your bills,
enter recurring due-date reminders on your computer calendar.
Source: CardRatings.com |
Missed a payment? Get back on track within the
next 30 days, and you should "get back the lion’s share" of points
lost, Ulzheimer says. More than 90 days late? The damage can stick for
years. If it was a one-off lapse, call your issuer and plea for a
good-will adjustment to your credit report. (It’s a long shot.)
Remember the Magic 20%. The
second-biggest factor in your score is how much you owe vs. how much
credit has been extended to you. The part of this that’s easiest to
finesse is your credit card utilization rate, or your total card
balances compared with your total credit limits, as well as each card’s
balance relative to its limit.
Example: If you’ve charged $5,000
on cards and have $50,000 in credit, your rate is 10%. For the best
score today, 10% is ideal, but you can probably creep up to 20% and
keep a high rating.
Unfortunately, with banks lowering credit
limits and canceling unused cards, it’s harder to maintain such a low
percentage. In the previous example, if your available credit is cut to
$20,000, your rate shoots to 25%. That could sink your score by as much
as 50 points, says Ulzheimer. The lesson: Know your limits, watch for
changes, and stay under 20% on each card and in total (0% if you’ll be
applying for a loan soon).
Already above 20%? Paying down debt is
the obvious way to lower your utilization rate, but another strategy is
to apply for an additional credit card to increase your overall credit
limit. That may cause you to lose a few points in the short term — so
don’t do it if you’re about to apply for a mortgage — but it should
pay off in the long run.
Keep Oldest Cards in Play. As
noted, credit issuers these days are eagerly canceling cards that are
not in use. Besides reducing your limit and increasing your utilization
ratio, having an account closed can hurt you in another way, especially
if it’s among your older ones.
See, 15% of your score rides on
the length of your credit history. The longer you ably manage revolving
debt, the better you look. So don’t cancel your oldest cards. And don’t
let them get canceled on you: Move a recurring charge to each so they
stay active.
Already ditched or been ditched? A new card (see
previous) can help with your utilization rate, but there’s little you
can do to help the "history" component of your score, except to keep
other old accounts in use.
Accept Fate on the Rest. There
are other factors involved in your score, but they’re not so easy to
manipulate. For example, 10% is based on how well you manage a mix of
credit types, such as mortgages, car loans, and credit cards. But you
don’t want to go out and, say, finance a car just for a score boost;
besides, you can easily get 750-plus with just a few well-tended credit
cards.
Along the same lines, 10% is based on "new credit," but
the effects of a new application can be positive or negative, depending
on your history.
In other words, if you want to be among the crème de la credit crème, accept what you can’t change, and focus on what you can.
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