The Real Secret to Saving: Raising Your Credit Score
Good credit is essential for getting loans, charge cards and more at interest rates you can afford. Use these fast fixes to give your rating a lift and you'll pay less and save big over the long haul.
Time for the cold, hard truth: To the big banks, you're nothing but a number. Having a job, family and white picket fence is very nice. Still, when it comes to borrowing money, all that matters is your credit rating, otherwise known as your FICO score. It's a number between 300 and 850 based on your financial history, and it helps banks decide whether you qualify for charge cards, car financing, a mortgage or insurance. The higher your score, the lower your interest rate. More than a third of Americans have ratings below 650; at the same time, lenders are tightening requirements for loans. "The situation is pretty scary," says John Ulzheimer, president of consumer education for smartcredit.com, an information website. "In the past 700 would put you in the top tier. Now you need at least 750 to be immune to the credit crunch." Don't despair. Take these steps to improve your score—and see results in as little as three to six months.
1. Pay down card balances.
This is the simplest quick fix for a flagging credit score—if you can afford it. Lenders pay special attention to your credit utilization ratio (CUR), the amount of debt you're carrying on a card divided by the total charge limit. If you have $1,000 of debt on a card with a $5,000 ceiling, your ratio is 20%. "Ten percent or less is ideal," says Gerri Detweiler, co-author of Reduce Debt, Reduce Stress (Good Advice Press). "Consumers with the best scores use below 7% of their available credit."
2. Automate monthly payments.
We've all paid a bill late or forgotten about one altogether—a mistake that can linger on your record for years. Put technology to work by having reminders sent to your smartphone, or set up automatic payments from your checking account. "You'll never have to worry about forgetting—and you'll have a more disciplined budget strategy," says Greg McBride, an analyst with personal finance site Bankrate.com.
3. Fix errors.
It's surprisingly common for errors to sneak onto your credit reports. You can double-check by buying your credit score from myFICO.com or by downloading a free report from each of the three major agencies—Equifax, Experian and TransUnion—at annualcreditreport.com. "If mistakes are having a detrimental effect on your score, get them removed as soon as possible," says McBride. Alert the agencies and the creditor in writing and by certified mail, sending along copies of supporting documents. They're required to investigate within 30 days, and corrections should be made within a few months.
4. Boost credit, but don't use it.
Your CUR and overall score will get a bump upward if you have access to more cash. Call your credit card company and ask them to raise your limit. Even paying off a portion of a monthly bill may allow you to qualify for a higher limit as long as there's also a steady source of income. Just don't go on a spending spree afterward. Similarly, if banks actively try to lower your credit limit—as some are doing, since they're in such financial trouble themselves and want to protect themselves from risk—complain and you may get the decision reversed. Otherwise that critical CUR will spike. "Call and see if you can persuade them to change their minds and raise your limit back up," says Detweiler, "or at the very least, split the difference."
5. Don't close old accounts.
It might be tempting to cut up a credit card once you've paid it off. Don't. Lenders like to see long-term relationships with your creditors, and if you shut an account down altogether, you're affecting your total available credit. The same logic holds for all the 'balance transfer' offers that clutter your mail-box. "It's perfectly fine to shift your debts to a lower-rate card; in fact, it can be a savvy strategy for getting those balances paid off," says Ulzheimer. "But leave the original card active too, or else you're lowering your overall credit rating."
6. Limit credit report inquiries.
Each time you apply for a credit card, the lender places a so-called "hard" inquiry on your account. Racking up three to five of these in a short time—whether you're renting an apartment, getting a life insurance policy, taking a car for a test drive or even applying for a new job—can knock down your score by as much as 50 points. "Companies don't have to get your written permission to run your credit, and some will do it without telling you, even when it's not absolutely necessary," says Detweiler. "So read the fine print on everything, and make it clear that you don't want it done."
7. Avoid debt-settlement firms.
You've probably caught the ads on radio and TV—firms claiming they can settle all your debts for pennies on the dollar (for a fee, of course). But going this route can tarnish your credit record, since these companies actively withhold your payments to lenders (with your permission) in order to force them to discount your debt, causing your score to sink lower. Instead, try eliminating the middleman. "You can do all these things yourself by getting in touch with your lender," says Ulzheimer, "and just working out a payment plan."
48%: The number of consumers who understand that a credit score mainly represents the risk of not repaying a loan.
Source: Consumer Federation of America, Vantage Score Solutions
Originally published in the October 1, 2011, issue of Family Circle magazine.