Proving you’re worthy of a low loan rate or a new credit card isn’t easy in today’s lending world. Two years ago, a 620 on the 300-to-850 scale could have snagged a reasonable mortgage rate. Now you need at least 760 to get today’s best rate of 5.6 percent or so. Here’s how to improve your score without having to win the lottery.
1. Get your current credit score. Most lenders use the so-called FICO formula, developed by banking consultant Fair Isaac Corporation, because it’s considered the most accurate. Head to myfico.com and order a score ($15.95), based on your report from any of the major bureaus — Equifax, Experion, or Trans-Union. You’ll get it immediately, online. When you receive the number, you will see personalized advice tailored to your debt history and credit habits.
2. Pay off all you can. Lenders like to see that you’re spending within your means, which translates to using less of your credit limit — the lower percentage the better, says Barry Paperno, a credit-scoring expert for Fair Isaac. Gradually paying off $2,250 of a maxed-out $2,500 limit could boost a 670 score to 750. Ask your card issuer for a credit-line increase, too. If you get the increase but don’t charge any more, this move will lower the percentage of your credit limit being used.
3. Don’t be late. “Make sure your credit card bills are paid on time, even if you can only afford the minimum,” says Liz Pulliam Weston, author of Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number That Shapes Your Financial Future. One skipped payment can knock 100 points off your score. Better still, keep track of your account online, and send in a check before the card’s cycle ends.
4. Piggyback on better credit. If your spouse has an account with a good, long history and a high limit, tell him to ask his card issuer to add you as an authorized user. Authorized users don’t share liability for the debt, but the positive payment history gets factored into their score, says John Ulzheimer, president of consumer education for credit.com.
5. Curb credit cravings. Applying for a new card can tell financial institutions that you’re intending to take on new debt. That can raise your risk as a borrower, says Ethan Ewing, president of bills.com, a money-management Website. There could be a 5- to 10-point credit-score drop soon after you get a card, so consider waiting a few months before applying for a mortgage or car loan.
6. Remove errors. Up to 80 percent of reports have at least one error, according to bankrate.com. You can get a free report annually from all three credit bureaus. Pull one from a different bureau every four months at annualcreditreport.com to regularly comb for mistakes. If you find any, send bureaus correct information.
7. Don’t go “cash only.” It takes good borrowing behavior to reduce the impact of bad things like maxing out on one card. If you hit your limit, your score could drop 30 points in one month, but if you get your balance below 10 percent of the limit on that card you can restore your score.
By Kelli B. Grant
from Good Housekeeping
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