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.
Arrange automatic payments for every card or loan. Credit scores are extraordinarily sensitive to whether you pay your bills on time, so don't let travel, a busy schedule or a simple brain cramp trash your scores. Most lenders will let you set up automatic payments that take an amount you specify -- the minimum payment, a set dollar amount or the full balance -- every month from your checking account.
Don't let disputes go to collections. Yes, your insurance should have covered that bill; no, you shouldn't have to pay for a broadband connection that doesn't work. But if you let a commonplace problem like these escalate, your account will be turned over to collections and become a big black mark on your credit reports. Pay under protest and get your revenge in small claims court. (Don't get sued yourself, though: Lawsuits and judgments are also major stains on your credit reports.)
Give your limits a wide berth
Pay down and spread out your debt. More than a third of your FICO score depends on how much of your available credit you're using -- your so-called credit utilization. The FICO formula likes to see big gaps between your balances (whether you pay them off each month or not) and your limits, especially on credit cards. (You're rewarded for paying down installment debt, such as mortgages and auto loans, but your scores improve much more dramatically when you pay down revolving debt such as credit cards.) In short, it's better to have small balances on several cards than a big balance on one card.
A balance is a balance. You have to worry about your credit utilization ratio even if you pay your balances in full each month. The balance that's reported to the credit bureaus is typically the one on your last statement, not the balance that's left over after you pay your bill. So if you charge $9,000 on a $10,000 card, it's going to look like you're using 90% of your limit (which is really, really bad), even though you paid off the balance in full when you got the bill.
Shoot for 10%. The less of your available credit you use, the more FICO rewards you. Keeping your credit utilization below 30% on your cards is good; getting it below 10% is even better. If you regularly use more, ask for a higher limit, spread out your charges on more than one card or make two payments every month -- one just before your monthly statement closing date to lower the balance reported to the credit bureaus and a second one just before the due date to avoid late fees.
But don't let your cards gather dust. Overloading your cards is a bad thing for your scores, but so is not using them at all. The scoring formula prefers to see accounts that are being actively used rather than sitting on a shelf. Even a little activity is better than no activity.
Push back against lower limits. Credit card issuers are reducing limits right and left. In fact, one banking analyst estimated that by the end of 2010, risk-averse companies will have slashed in half the $5 trillion in credit limits that existed before the financial crisis. This can be awful news for your credit scores, but you can, and should, try to push back. If you can't get the issuer to reverse its decision, try to move your balance elsewhere.
3 ways to erase credit card debt
Move debt to installment loans. If you've got high balances that you can't pay down quickly, consider transferring the debt to a personal installment loan. The interest rate you'll pay is typically higher -- 13% or so for people with good credit, up to 22% for those with fair credit -- but the scoring formula treats installment loan balances more kindly than the same debt on credit cards.
Move debt off your credit reports entirely. You can make debt seem to disappear by paying it off with a loan from a friend, family member or retirement plan, none of which typically show up on your credit reports. If you're tempted to tap your retirement account, though, let me be clear: I am not a fan of 401k loans. Lose your job, and any unpaid balance can quickly become a tax nightmare. It's an especially bad idea if your finances are on the edge, because credit card debt can be erased in bankruptcy; 401k loans can't.
Play the home equity card cautiously. Moving a credit card balance to a home equity loan or line of credit may improve your scores but put you at greater overall financial risk. If you fail to pay the bill, you could lose your home. Also, as with a 401k loan, you're turning unsecured debt that could be wiped out through bankruptcy into secured debt that typically can't.
Walk a fine line on plastic
Don't close accounts or let them be closed. Closing accounts can't help your scores and might hurt them. Yet many issuers these days are slamming shut inactive cards rather than continue to carry these unprofitable accounts. If you've got cards you haven't used in a while, take them out for dinner or a movie, and pay the balance promptly. Better yet, use them to charge a regular expense, such as your electric bill, and arrange for automatic payments.
Apply for credit sparingly. Applications for credit don't ding your scores as much as some people fear; typically, you lose five points or less. But when every point counts, such as when you're in the market for a mortgage or a car loan, you don't want to squander any of your scores. Wait to apply for any other credit until you've secured the loan you want.
The lower your scores, the longer it will take to crawl your way back up the FICO scale. But progress is possible, and anyone can hit the 740 mark in time by using credit consistently and responsibly.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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- 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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