January 12, 2010
WHAT'S MY CREDIT SCORE AND WHAT DOES IT MEAN???????
Your past is never really behind you. Or so it seems when it comes to credit reports.
As you prepare to shape up your finances in 2010, you'll find that improving your credit score is among the more complicated tasks. You may be bewildered by what helps or hurts your score, by how much and for how long. Regardless of whether you understand how it's calculated, the number you're tagged with can play a big hand in your financial fate.
Banks use credit scores to help decide whether to extend loans, and if so, at what price. A lower score will likely mean higher interest rates on credit cards, student loans and mortgages. In the latter scenario, the difference could amount to hundreds of dollars a month.
Generally speaking, a score below 620 is considered poor; 620-659 is fair; 660-749 is good, and 750-850 is excellent. It currently only costs $15.95 to get your score at MyFico.com.
Here are some actions you can take, now and over time, to raise your number.
WHAT TO DO NOW. One of the fastest ways to improve your score is to pay down your balances. How much of a lift you'll get will depend on your overall credit profile. But, paying off all balances could push someone in the 650-range into the 700-range. This is because the portion of your credit line that you're using---your so-called credit utilization----is a big component of your score, accounting for about 30%.
If you buy the standard FICO score package at MyFico.com, you can access a simulator that tells just how much certain actions will lift or lower your score. For some scenarios, you can see how your score would change over one month, versus six months or two years.
In the case of paying down your balances, note that it provides a one-time benefit. You don't get any extra points for keeping your credit usage at a low level.
Also, keep in mind that your report could reflect a high utilization even if you pay your bills on time. This could happen if your lender reports your balance to the credit bureau before you pay your bill. To avoid this scenario, pay off charges as soon as you can---don't wait for due dates.
Another way to have a short-term impact on your score is to make payments on time. If you've been chronically late in the past several months, paying all your bills on time for just one month could boost your score by as much as 20 points.
You'll also want to check for any mistakes on your credit report, since your score is calculated based on the information it contains. You're entitled to ONE FREE CREDIT REPORT A YEAR from each of the credit bureaus---Equifax, Experian and TransUnion. To get your free reports, go to http://www.annualcreditreport.com/ (beware of sites with similar names).
To correct any information, contact the credit bureau and the lender that reported the error. The Federal Trade Commission provides a sample letter on http://www.ftc.gov/ (click on "Credit & Loans" under the "Quick Finder" tab, then "Credit Reports & Scoring" and scroll to the bottom).
DIGGING IN FOR THE LONG HAUL. Once you pay down your debt, improving your score becomes a game of long-term vigilance. "One week's good behavior isn't indicative of future risk", says Craig Watts, a spokeman for FICO. "To improve a poor score is a long-term project".
The key is keeping your report free of any negative marks, which can take years to recover from. For someone with a score of 680, for example, a foreclosure can zap away as much as 105 points, while a bankruptcy can shave off 150 points. A single late payment of 30 days or more can drop your score by 80 points.
The negative marks, including late payments, appear on your credit report for seven years. Chapter 7 bankruptcies, which wipe clean unsecured debt such as credit card bills, remain for 10 years. And the repercussions recede only over time, assuming you stay current on all your payments.
Applications for new credit ding your score too, although to a lesser degree---usually around five points. Those can add up if you are applying for several different credit accounts while shopping to get discounts.
Finally, think twice before closing any accounts. The length of your credit history counts for about 15% of your score, so it's a good idea to hold onto any cards you've had for a long time. Those older cards, coupled with a steady history of prompt payments, should provide a good path to an improved score.