Credit Score

If you’re thinking about purchasing a house, your credit score is very important. The interest rate you’ll pay for the money you borrow will be determined, in large part, by this number that is derived from the information in your credit report. Lenders have established rules about who gets the best terms, and those rules are usually based on your credit score. If their best rates are for borrowers with a score of 700 or higher and yours is a 698, those two points could cost you thousands of dollars. According to the Fair Isaac Corp. the creators of the FICO score (the most commonly used credit score), the interest rate difference between those two scores is a half percentage point. On a $165,000 30-year fixed rate mortgage, that half point could cost you more than $19,000 in interest charges, assuming 6 percent is the lowest rate available. Fall below a 675 and the rate goes up another 1.2 percent. The good news is that you can take steps to improve your credit score. The variables that act upon a score make it impossible to say what one particular action will increase a given score by a certain number of points. But there are some good guidelines. The secret for getting a great score is to pay your bills on time, keep account balances low, and take out new credit only when you need it. People, who do that faithfully, have very high scores. It usually means you’re being conservative and cautious about credit.

But I need a good score as soon as possible.

Th advice above is good, but these actions take a long time. What if you’re looking for a house need a few extra points to get a better rate? Get a copy of your credit score to see where you are. If your score is above a 720, you’re in good shape. Improving your score from a 720 to a 740 won’t get you better terms. Look on your report for factors that affect your score. Errors in the report, such as accounts that aren’t yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that shouldn’t be reported any longer (negatives are supposed to be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years). After repairing errors, the fastest route to a better score is paying down balances on credit cards, it’s possible to increase your score 20 points by paying down your credit lines.

Late payments

If you find yourself in some financial difficulties, you can protect your score by making sure your payments don’t go 60 days past due, some lenders don’t usually report 30 days past due, but they all report 60 days past due. Even if you’ve paid your bills late in the past, you can improve your credit score by paying every bill on time from now on. Do not use grace periods, if you want to have a good record with the credit agencies, pay your debt before it’s due and keep your balances low.

A big mistake

One thing you shouldn’t do if you’re just trying to boost your score is close unused accounts. If someone tells you to close unused accounts to improve your score, they are giving you erroneous information. Closing unused accounts without paying down your debt changes your utilization ratio, which is the amount of your total debt divided by your total available credit. You appear closer to reaching the top limit on your accounts. That’s why your score can drop. It doesn’t mean you shouldn’t close them, but don’t close them to improve your score. If you do cut up cards, though, leave the oldest one open.

The length of your credit history is another factor in your score. If you close the account of the credit card you got when you were a freshman in college and leave open the ones you just got within the last couple years, it makes you look like a much newer borrower. Keep a couple of the oldest accounts open no matter the interest rate, creditors don’t care what the rate is.

Working with credit card balances

A strategy for bringing up your score: Transfer balances from a card that’s close to reaching the credit limit to other cards to even out your usage. Or just spread out your charges among a few cards. Try to get the usage on all of them from 20 to 30 percent instead of a bunch at zero and one at 80 percent. You’re not spending less; you’re just shifting it around to different cards. Transferring the balance to a card with a lower utilization could help, but it’s much better to actually pay down the debt if you have the cash kicking around. If you’re really into finessing the system, check your credit report to see what day of the month your creditors send updates on payments to the credit bureaus. They’re rarely on the same cycle as your payment due date. That’s why you can pay off your card every month and your credit report will show you carrying a balance. Then, make your payments several days before the reporting date. All of these strategies generally take at least 30 days because lenders don’t report payments more than once a month. There are things you can do to improve your credit score. If you understand what your credit looks like now and what affects your score, you can take the necessary actions to improve your credit score.