Updated: 9/21/2010 9:00 AM ET|
Raise your credit score to 740
As lenders continue to tighten credit requirements, getting a good interest rate -- or a loan at all -- requires that you understand how the scoring system works.
In our post-crisis economy, good credit isn't just nice to have -- it's essential if you want to level the playing field with lenders.
Credit scores are three-digit numbers lenders use to gauge your creditworthiness, and until the financial crisis hit, a 720 FICO credit score was enough to get the best loan terms. Even people with lower scores could get decent deals, and at the peak of the lending boom it seemed that no score was so low that it merited a rejection.
These days, lenders typically demand 740 scores for the best mortgage rates. Lower scores mean higher rates or perhaps no loans at all. Fannie Mae, the giant mortgage-buying agency, has lifted its minimum score requirement from 580 to 620.
People with top scores are still getting credit card and balance transfer offers. If their issuers raise their rates or lower their limits, they can move their business elsewhere. People with weaker scores, by contrast, are finding their access to credit slowly strangled. Issuers can push them around, and credit seekers have little recourse.
Less-than-stellar credit can hurt in other ways. After all, credit information is used by:
- Insurance companies to evaluate applicants and set premiums.
- Landlords to decide who gets apartments.
- Employers concerned about higher risk of theft from those with troubled finances.
Clearly, cultivating good credit scores is an essential 21st-century skill.
The good news is that it's possible to boost your numbers if you have a handle on your finances and you know how credit scores work. After all, the median credit score is 720 on the 300-to-850 FICO scale, meaning half the adult U.S. population has a higher score and half has a lower score. Forty percent have scores over 750, and 13% have scores above 800, according to Fair Isaac, the company that created FICO scoring. (You can get an idea of your relative standing with MSN Money's free credit score estimator; it uses Experian's Plus score ranges, which roughly align to FICO.)
Plenty of folks are handling their credit well enough to earn good scores. You can, too. But first you need to recognize that:
- You can't raise your scores if your finances are still in free fall. If you're unable to pay your bills, you certainly can't fix your credit. Real credit score repair will have to wait until your financial crisis has been solved and you have enough money to cover your expenses, plus some extra to begin paying down your debts.
- You can't raise your scores if you don't use credit. Credit scores try to predict how well you're likely to use credit in the future by how well you've used it in the past. So while living a cash-only lifestyle may do wonders for your wallet, it won't boost your scores -- in fact, without continuing use of some type of credit, eventually your credit reports won't even generate credit scores.
- You don't have to pay credit card interest to achieve great scores. "Using credit" is not the same as "carrying a balance on your credit cards." Carrying a balance is expensive, bad for your finances and completely unnecessary. Many of us who have achieved 800-plus scores pay off our balances religiously, and we know you can build and keep great credit scores without ever paying a dime of credit card interest.
- You can't expect overnight results. You're likely to see improvement in your scores within 30 days if you pay down significant chunks of your credit card debt. But otherwise, credit repair takes time, and how much time depends on the many details of your credit reports. If you have serious black marks, such as bankruptcies or foreclosures, you can see significant improvement in your scores as time passes but you may have to wait until those negatives drop off your credit reports before you can join the 700-Plus Club.
Now that you understand the basics, you can use the following techniques to get your scores over 740.
You have to nail the basics
Patrol your credit reports. Your credit scores are based entirely on the information in your credit reports on file at the big three credit bureaus: Equifax, Experian and TransUnion. If the information is wrong, your credit scores could suffer. You can get your reports once a year for free from the government-run AnnualCreditReport.com; you can buy subsequent copies directly from the bureaus or from myFICO.com. Dispute any serious errors, such as:
- Accounts that aren't yours.
- Reports of late payments when you paid on time.
- Bankruptcies older than 10 years or accounts that were wiped out in bankruptcy but are listed as still due.
- Other negative information that's older than seven years. (The seven-year clock typically starts 180 days after the account first went delinquent.)
Get a major credit card. Retail cards and gas cards can help you build your credit history initially, but to get your scores into 700-plus territory you'll want at least one big kahuna: Visa, MasterCard, Discover or American Express. If you can't qualify for a regular card, consider a secured version, for which you make a deposit with an issuing bank. You can find offers at CardRatings.com, CreditCards.com, LowCards.com and Index Credit Cards, among other sites. Just make sure the card reports to all three bureaus, and try to get a card that converts to a regular credit card after 12 to 18 months of on-time payments.
VIDEO ON MSN MONEY
- Avoid bankruptcy.That is one of the worst things if you want to increase your credit history.It will stay for 7 years on your file and it will destroy your score.
Don't use a checking account or a debit card. Get a Visa, MasterCard from a Major bank. Use this like you would use checks. Pay it off every month. DO NOT, DO NOT carry a balance. Once you carry a balance you have overspent, if you cannot avoid this, do not have a credit card.
In less than 6 months you can raise your score over 100 points depending on where you started. Keep using this credit card and the practice of paying it every month for the rest of your life.
I went bankrupt 5 years ago and with a single visa now have a 750 credit rating.
Do not use a credit counselor, over 80 percent of people that use them go bankrupt and have wasted 3-4 years of their credit before they hit the skids. File for bankruptcy yourself, its possible to get all the forms for free, but spend the 200.00 and have a kit sent to you.
My credit score is "bad" but I only owe less that $2000 as far as all three reports say. How can I get it up in 6 months or less? I hope it's not impossible because I am just getting back on my feet and have much to like getting a car, a home, etc. True, there are judgments but ALL have been paid. There were old cards and late payments but ALL are either paid up (thanks to using up savings) or "pays as agreed". So the standstill is, now that I have been blessed with employment, how can I get back on my feet and be financially productive?
I HOPE SOMEONE ON THIS SITE CAN HELP OR GIVE USEFUL ADVICE.
I have a question.It is a new business venture. I want to know how to get a '0' credit rating. At this point '0' is my goal. I'll call it a reverse credit score. It may possibly aid in keeping your identity safe
. It could also lead to the reinvention of 'cash' with little or no fees, also more personal privacy after all the fine details are worked out
This is as far as I got in my business plan today. Anyone have anfe suggesstions?
More broadly though, although having no debt is certainly not a bad thing, having some debt is not necessarily a bad thing either, as long as it is the right kind of debt. Good debt is debt that helps you get ahead in life: reasonable amounts of student loans, for example, or an affordable mortgage. Bad debt is debt that holds you back or is unreasonably expensive, like credit card debt.
I certainly sympathize with your situation as well as with the thousands of others who are in a similar predicament. It was scenarios such as yours, and those faced by potential home-buyers across the country who need to hit a specific score in order to qualify for a home loan, that led our company, MFI Credit Solutions, to develop a product we call Credit Mapping. Using proprietary analytics and industry knowledge, we analyze a person's credit report to give them a "mapping", which will list the specific steps they need to take to hit their target credit score within the time period desired and with the resources available. We are not a credit repair firm. We're simply trying to educate the consumer to be able to manage their credit to achieve their goals.
Please go to our website, mapyourcredit.com, if you would like to learn more.
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