How to Boost Your Credit Score
by Ann Kadet
FICO score: Definition: A credit rating score given to a mortgage applicant based on data contained in their credit report.
Do you know your FICO score? No, it’s not your dog’s IQ. It’s the number most lenders use to decide whether to give you a loan and to determine what interest rate you’ll pay.
You can purchase a peek at your score at www.myfico.com for $12.95. the price includes a copy of your credit report.
But it’s not enough to know the three-digit number. You should monitor your FICO and make sure it works for you.
Scores fall between 300 and 850. The formula for determining these rankings was devised by credit-analysis firm Fair, Isaac & Co., thus the name.
If your score is at least 720, the national median, you’ll probably qualify for the lowest interest rates. If you’re below that, there are ways to boost your score before you apply for a loan. Here are the main factors to consider.
Your Payment History
Don’t pay late, and you’ve got this area covered. But if you do have a late notice on your credit report, you can take the following steps:
- Ask the lender who reported the item to remove it—a “good will adjustment,” in industry parlance. Be polite, explain the special circumstances behind your slip-up and tell them it will never happen again.
- Dispute the notice, this means writing to the lender to demand evidence supporting the bad credit report.
- While the item is in dispute, it will stay on your credit report but won’t factor into your FICO score. If the lender examines your credit report and notices the dispute, however, it may refuse to make you a loan until the issue is resolved.
Current Credit Use
FICO scores reward customers who use very little of their available credit.
- Never use more than 50% of your credit limit on any single credit card—even if you pay off your balance every month.
- Find out what day your credit card issuer reports to the credit bureaus. It’s usually the day after your statement period ends. To run up your score temporarily, pay the balance off before that date. This creates a zero “balance-to-credit-limit ratio,” a big score booster.
- Think twice before closing an account. Losing the line of credit will increase your overall credit usage ratio.
New Applications
The older your average account, the better for your score.
- If you have too many credit cards, close the newest accounts first. And to increase the score-boosting power of the older ones, use them at least once a year. Dormant account don’t count for much.
- Hold off on applying for smaller loans or credit cards within a year of applying for a big loan, like a mortgage.
- Find a friend or family member willing to add you as an authorized user on an old credit card account in good standing. The account will appear on your own report and boost your score.
- Avoid credit inquiries. Every time you shop for credit, the lender will peek at your credit file, creating an inquiry on your report. Multiple inquires will hurt your score.
So if you’re just sniffing around for a rate quote, supply your own copy of the report to the lender.
Mix of Loan Types
The FICO formula rewards a diverse debt portfolio. It’s far better to have a mortgage, an auto loan, and several credit cards all in good standing than to have credit cards alone.
And when it comes to cards three to five is often hailed as the optimum number. Loans from finance companies, however, can drag down your score. So avoid them.
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About the author: Anne Kadet is a staff reporter for SmartMoney magazine.
Copyright © Anne Kadet. All Rights Reserved.
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