A real estate broker friend stopped by recently and we talked for a little while about the housing market. I’m not looking for a new home, but I’m still interested in the condition of the market and in mortgage rates.
He told me that while mortgage rates were the lowest he had seen at 4.5 percent for a 15-year fixed-rate mortgage (this was in April), lenders were getting picky. A credit score of 680 that might have been just fine a year ago was now just barely acceptable.
So, what’s a credit score, anyway? It’s a standard tool lenders use to predict how likely you are to pay back any money you borrow – for a mortgage, car loan or just about anything else. Credit agencies calculate credit scores using a complex mathematical formula that considers various factors in your credit history.
If your score needs help, you can take a variety of steps that are guaranteed to help. Some are pure common sense; others may surprise you.
What hurts your score?
Your credit score is important because it affects whether you can borrow money and, if so, how much interest your lender will charge. Over time, a good score can save you a great deal of money. On the other hand ... well, you know. Five main factors go into the credit score calculation:
Payment history: 35 percent. What concerns lenders most is whether you pay your bills. The more recent the delinquencies, the more they hurt your score.
Credit utilization: 30 percent. If you owe little money relative to your credit limits, that’s to your benefit. The closer you are to your limits, the lower your score. Ideally, you should keep credit card balances below 30 percent of your credit limit.
Length of credit history: 15 percent. A long credit history tells lenders more of what they need to know about your spending habits.
Mix of credit: 10 percent. Diverse accounts show lenders that you can manage multiple kinds of credit. If you’ve spread your good credit around – in home loans, car loans, credit cards and other borrowing, that’s another plus.
Inquiries: 10 percent. Each time you apply for credit, an inquiry is added to your credit report. If lenders see too many credit applications, they take it as a sign you are building up debt or are in financial trouble.
Having an impact
The typical credit score range is from 300 to 900. What’s a good score? Most people fall between 600 and 800. To get the best rates, you generally need a score of 720 or higher. With a score of 520, you might pay 3 or 4 percentage points higher interest than someone with that 720 score.
So, if your credit score has taken a hit, what can you do about it? Well, you can’t change it overnight. It probably took time to damage your score, and fixing it will take time, too. A search around the Internet reveals some ways to “move the needle”:
Be timely. If you haven’t been making all your payments on time – start, and then stay current. The longer you pay your bills on time, the better your score. Understand that simply paying off a collection account will not clear that item from your credit report. It will stay on your report and affect your score for seven years.
Use credit cards responsibly. It’s good for your credit score to have credit cards as long as you stay in control. Lenders look at someone with no credit cards as riskier than someone who uses them and pays regularly.
Watch those balances. Keep balances low on credit cards and other revolving credit. If your balances are high, stop using the cards for a while and pay them down. Don’t try to deal with debt by spreading it around. Owing the same amount but having fewer open accounts may lower your score.
Don’t close, don’t open. Opening credit cards just to increase your available credit could actually hurt your credit score. Also, surprising as it seems, closing credit accounts will not necessarily raise your score. In particular, don’t close a credit card on which you still have a balance, your only credit card with available credit, your one and only credit card, or your oldest credit card.
Keep your credit report clean. It’s a good idea to get copies of your credit report from the three major credit reporting agencies (Experian, Transunion and Equifax). If there is incorrect information on your reports, you can get it removed. The credit reports will tell you how to dispute inaccuracies.
Work with your creditors. If you’re behind on payments, contact the companies you owe and explain your situation. Many have hardship programs that can cut your monthly payments for a while. Using such programs is better than letting accounts go delinquent.
Get professional help. Make use of resources like consumer credit counseling. You can find a credible counseling agency through the National Foundation for Credit Counseling (www.nfcc.org).
