Like credit card debt, a credit score, a figure between 350 and 800, can be intangible, but only for so long. That credit card debt feels like it’s not really there, until the repo man pays us a visit or a loan officer slaps a “rejected” sign on our application.
We’re not in the habit of checking our credit score as incessantly as, say, fantasy sports statistics on ESPN.com or our weight on scale. But even though it’s not in our face, how we manage our daily finances affects this almighty triple digit score, which in turn further affects our daily finances.
Right now, banks are using this score as the bottom line when evaluating loan applications. If you don’t have a figure in the 700s, you may not get the best interest rates. As of October 10, a 760 or better scores you the lowest rate on a 30-year fixed mortgage of $300,000, according to Fair Issacs, the company that invented the FICO credit score. For the best rate on a 3-year $25,000 auto loan, your FICO score needs to be 720 or better.
The median FICO score in this country, meaning the midpoint, is 723. Fifty percent of consumers are falling below that number, which means there’s work to be done. Here’s how to nourish your score.
BE ON TIME
The first key to raising your credit score is (duh) paying your bills on time. Thirty-five percent of your score is based on payment history, according to FICO. Falling behind on your monthly student loan or failing to pay your cable bill can knock the score down by 10 or more points. Consider automatic payments which can help bill payers keep current.
GET THE RATIO RIGHT
Thirty-percent of your credit score is based on your debt-to-available credit ratio. That gibberish basically means how much you owe versus your credit allowance. If you have a $10,000 limit on your Visa (Stock Quote: V) and you owe $8,000, that credit ratio is way too high (80%!). Experts preach keeping your ratio below 30% lest your credit score take a hit.
AVOID APPLYING FOR MORE CREDIT
Each time you apply for a credit card, whether through one of the big credit lenders like Mastercard (Stock Quote: MA), American Express (Stock Quote: AXP), or at a store, the lender issues an inquiry on your credit history. The act of “inquiring” doesn’t look too hot on your records –even though you did nothing wrong, so don't apply for every card out there. This makes up 10% of your score.
AVOID CLOSING ACCOUNTS
If you have a credit card you opened in college and you’ve paid it off, don’t close the account. Why? Keeping the account open will boost the denominator in that debt-to-available credit ratio. Best advice: Pay off the card. Keep it open. Don’t use it again. (So you’re not tempted, throw it away but don’t tell anyone, especially Visa or the Gap (Stock Quote: GPS).)
Sometimes, though, store credit cards break up with you for lack of attention. Years ago I got a letter from Pier 1 Imports (Stock Quote: PIR): “Due to the inactivity on your card, we’re closing your account.” (Yet another reason it’s so hard to win with store credit cards). But my friend Lisa gave me great advice for next time. A financial advisor told her to write letters to the banks or stores that issued the credit cards saying: “After reviewing my finances, I have decided that I do not need the credit card at this time." The key phrase is "at this time" so they are under the impression you might be a client again in the future, which makes them less likely to close your account. Keep copies of the letters, too.
KNOW THAT TIME HEALS
Time can work on your side. If you’ve been bad with debt in the past, know that recent events can have more impact on your score than previous missteps. Be good. The older you get the more opportunity to boost your credit score, too. The length of your credit history accounts for 15% of your final score.
You should regularly monitor your credit activity regularly. The Federal Trade Commission lets us get a copy of our credit report from each of the three major credit-reporting agencies each year, which you can do by visiting annualcreditcreport.com, the only authorized site to obtain your free credit reports. You can also call 877-322-8228 to order. This report will include summaries of your credit record to which lenders and employers have access: Your credit activity, your payment and default histories, etc.
But the credit report doesn’t give you your actual credit score. That you will have to buy from one of the credit reporting agencies directly: Experian.com, Equifax.com or Transunion.com. Know that if your credit report is problematic, your credit score will likely be affected, too.
Best to stagger the free offer for a free credit report from each of the agencies and get three reports throughout the year. Not only does this help you stay on top of your credit report and score, it also helps you frequently monitor your accounts for signs of ID theft.
Catch more of Farnoosh’s advice on Real Simple. Real Life. on TLC, Friday nights at 8 p.m.