How-to Monday: Improving your credit
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So you now know oodles about how credit scores work -- or you do if you read last week's How-to. On to the more practical Part II: Improving your score.
This matters a lot if you're in the market for a home loan and don't want to get stuck with a 10 percent interest rate. Lenders are much, much pickier than they were before being hit by rising foreclosures.
Two years ago, a 620 FICO score was enough to get you the best rate for a 30-year fixed mortgage, says John Ulzheimer, president of consumer education for Credit.com, a financial services and consumer education firm. Nowadays? The 700s.
His top recommendation for a healthy score is this: "Never ever give a lender a reason to say anything bad about you to the credit bureaus."
In other words, pay on time. Really on time, and not a day afterward. A 30-day-late ding on your credit report means you were late by as much as 30 days or as little as one, he says. A lender might choose not to report you for day-late behavior, Ulzheimer says, but why take that chance?
Ulzheimer, who used to work for Fair Isaac Corp., developer of the FICO scoring formula, also offers this advice:
--Aim for balances of no more than 10 percent of your credit-card limits. Better yet, pay off your cards every month, he says. You look like a riskier proposition to lenders the closer you creep toward your credit limit.
--Don't apply for credit cards willy-nilly, particularly store cards, never mind the "10 percent off your first purchase" come-ons. Every time you apply, the company asks for your credit report, and those inquires count against you for the next 12 months, he says. "Don't ever use your credit report as a 10-percent-off coupon at the mall," he says.
--On the flip side, don't avoid credit entirely or you won't be building a credit history. He also suggests against shying away from holding several cards merely in the hopes of improving your score. "You should have as many cards as you need to operate efficiently," says Ulzheimer, who has six. The older your credit history, the less your score will be negatively affected by multiple credit cards, he says, and the more you're able to vary your usage based on what cards are offering the best terms at the time.
Yes, yes, you say, but what about people who already have black marks on their credit reports -- late payments, tax liens, repossessions, foreclosures, bankruptcies?
The more recent that black mark, the more it affects your score, says Barry Paperno, consumer operations manager with Fair Isaac. Eventually, it disappears altogether.
"Negative information, by law, for the most part cannot stay on your credit report for more than seven years," Paperno says.
Under federal law, you can get a free copy of your credit report once a year from each of the three national credit-reporting agencies. Go to AnnualCreditReport.com for more information. (The agencies are Equifax, Experian and TransUnion.)
Those reports won't tell you your credit score, but they will show you what information is influencing it. If you want the score, you'll have to buy it. Fair Isaac, for instance, charges $15.95 for a FICO score from one of the credit-reporting agencies (that's $47.85 for all three). The company's myFICO site has more details.
Buy one or all three? Up to you. Ulzheimer suggests you look at your free credit reports and, if they're very similar, buy just one score.
He recommends against using credit-repair companies to try to improve your standing. It's not worth the money, in his opinion. If there's inaccurate information on your credit report, you can dispute it for free to the credit-reporting agency in question, which must investigate promptly, usually within 30 days. The Federal Trade Commission has more details.
If the negative information's accurate? Time -- and better money-management strategies -- should heal your score.
Comments
Unfortunately, the title improving your credit is a misnomer. What the article does give the reader are helpful hints in maintaining a good credit score. Improving one's credit is a bit more complicated and unique to each individual situation. A blanket statement that all credit repair entities are a waste of money is not correct. The process is time consuming and the credit bureaus, credit grantors, collection agencies are not your friends. As a matter of fact they often make it diffucult, cumbersome and time consuming for the average consumer to correct errors and mistakes.
Posted by: Ed Henson | August 11, 2008 3:00 PM
I see where you say that negative history is suppose to go off your report after 7 years, but what happens when even after the 7 years the debt is bought by another company?
Posted by: glynda | August 11, 2008 3:11 PM
Glynda, the FTC (in the link provided above) has this to say:
"A consumer reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. There is no time limit on reporting: information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you’ve applied for more than $150,000 worth of credit or life insurance. There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the event took place."
Posted by: Jamie Smith Hopkins | August 11, 2008 3:20 PM
I pay off my only remaining credit card in full every month and have always done so. (Closed my others over the years). However, my FICO score got dinged because of the high balance. They did not see that the credit card balance was paid off each and every month -- they just looked at the balance. Since I had just come back from vacation at the time of a refinance, there were lots of charges on my card. My FICO score was still high, but it could have been even higher but for that.
A better bet might be to not only pay off your credit balance in full, but charge very little in the few months prior to going for a mortgage or other large loan.
Posted by: jk | August 11, 2008 4:40 PM
Thanks for that tip, jk.
Posted by: Jamie Smith Hopkins | August 11, 2008 5:05 PM
jk,
They look at revolving credit as a % of total available is use. Meaning if you have $10,000 in capacity and you are using $9,000 then you are using 90% of available. It is recommend to never exceed 10% and to try and stay under 5% of revolving credit (credit cards). Also store charges cards you are actually penalized just for having them, DING!. Also NEVER close old credit cards, unless you've had credit over 10 years and can maintain at least 10 years of history even after closing. If you close an old credit card it reduces your account history. Also dont have to much credit avaiable. Plus dont get the no interest financing from the mattress store, furniture store, etc.. Every time you apply for credit, DING!, your score goes down. Its best to keep a credit card or two with a lot of history and rather negotiate the rate lower with the credit card company. Dont apply for new credit just to get a deal or miles, etc.. The exception might be a car, but it isn't probably wise to finance a depreciating asset, but then again, who follows elementary finance these days.
Posted by: Kevin | August 11, 2008 11:26 PM
Well, my sister and I have a lot of cards because our business has successfully played the zero balance transfer game for several years, (never paying a balance transfer fee), and I am sure I have screwed up my credit score, but, in our case, it is worth it, as we are not looking for a house, and, we still get credit every time. Also, I canceled a lot of cards simply because it got too complicated, and when you closed out cards with Citibank, they would make available the credit limit for an ADDITIONAL no interest balance transfer. Yes, we have $50,000 balances, and we are paying the minimum only til the zero percent ends, and it is time to roll it over. I guess my point is that having a high credit score is great, but what is most important is what works for you. My parents rack up a ton of airline miles and charge everything. Credit cards have financed our business at no interest, and we are slowly, but surely catching up and paying down our debt, but never paid a penny to a bank,.
Posted by: Rich | August 13, 2008 12:13 AM