It’s not just a number. Failing to take steps to improve your credit score could cost you hundreds or thousands of extra dollars on a home loan, a car payment or a credit card or insurance bill.
Sure, you know your credit score can affect everything from whether you qualify for a mortgage to whether an employer hires you, but have you ever made a plan to consciously improve your score? If not, it can be costing you dearly.
“When it comes to mortgages, auto lending and credit cards, the higher your score, the lower the interest rate you’re going to pay,” says Barry Paperno, manager of customer service for credit-scoring company Fair Isaac, which created the widely used FICO credit score. So the time and effort it takes to improve your credit score could save you hundreds of thousands of dollars over the course of your lifetime.
Loans and scores
For most people, a mortgage loan is where they’ll reap the greatest rewards from an improved credit score.
“For the past two or three years, mortgages have been the lowest in 30 or 40 years, but that doesn’t apply to everybody,” says Janette E. Jones, mortgage consultant for American Home Mortgage in Bethesda, Md. “That applies to people who have excellent credit. Someone who has excellent credit can actually get a fixed-rate loan for 5.5%. However, for people who have less-than-excellent credit — and I would say that’s anything below 650 (on the FICO scale of 300 to 850) — they’re looking at an interest rate that’s 1% higher, at the bare minimum.”
Want to improve your score and keep it high? Think of credit as a privilege to be used sparingly.
- Don’t apply for lots of credit cards. A credit inquiry can deduct five points from your credit score. However, multiple checks made when you’re shopping for a mortgage will count as only one.
- Asking for your personal report won’t hurt your score. Neither will requests made by credit card companies that offer preapproved cards, or requests by prospective employers.
- Avoid applying for credit cards from companies that don’t set a spending limit or won’t report your limit to the credit bureaus.cancel multiple credit cards. That can suddenly lower your available credit and can hurt your credit score. Keep old accounts open to ensure a long credit history.
- Limit the percentage of available credit you use to no more than 30%, even if you pay off your balance each month. Your credit report will show the amount you owed, even if you subsequently paid in full, and excessive spending will ding your score.
- If you don’t have a credit history, start one by obtaining a secured credit card and managing it responsibly.
It pays to pay on time
The No. 1 way to raise your credit score? Pay all of your obligations on time. Your payment history constitutes 35% of your credit score.
- That includes library fines and parking tickets. Municipalities are more aggressive about turning over delinquent accounts to collection agencies, which will drag down your score.
- One late payment reported to a credit bureau can drop your score by 100 points, particularly if you had a high score.
- Late payments can remain on your credit report for seven years. Bankruptcies appear for 10 years.
- Consulting a credit counseling service to manage excessive debt will not damage your credit score.
If you find an error in your credit report, ask the creditor to correct it, then notify the credit bureau by sending a certified letter and copies of documents that support your claim.If the error isn’t fixed, the bureau must identify the person who investigated your claim, and you can request a second report.
- If the error is corrected, the bureau must send you a copy of your new report and, at your request, a copy to everyone who obtained your credit report within the previous six months.
- If it’s not corrected, you can include a statement in your credit report.
- Faced with a faulty credit report when you’re about to obtain a mortgage? Mortgage companies can engage a rapid rescoring service to correct errors within days.
- Paying a service to monitor your credit is not worth the fee, unless you’ve been the victim of identity theft and have reason to believe you’re still at risk.
