What is a good credit score and how do you get -- or keep -- one?
bySep 4th 2009 9:00AM
Since the economic crisis killed off all of that easy-to-acquire credit that flourished like so much financial kudzu a few years ago, Americans are more concerned than ever about their credit scores. Although scores can go as high as 850, very few people ever attain that "perfect" credit. You're not alone if you're wondering: What is a good credit score, anyway?
Well, for starters, it's a lot higher than it used to be. Earlier this decade, you could easily get credit with a score of 650 or so, and 720 was top-of-the-line. Today, the "new" 650 is around a 720. For big loans such as a mortgage or car loan, lenders may want to see a score of 750 - a full 100 points higher than the norm that characterized the borrowing spree of the boom years.
Now that having a higher credit score is necessary if you want to borrow money at less-than-onerous terms, Walletpop talked to a few credit experts to get their top tips on how to get - or keep - a gold star-worthy score. Here's the inside scoop from Evan Henricks, author of the book Credit Scores & Credit Reports: How the System Really Works, What You Can Do; Gail Hillebrand, financial services campaign manager at Consumers Union, and Craig Watts, public affairs director of FICO.Don't pay your bills late. The first thing all of our experts mentioned was the need to make your payments on time. It seems like a "well, duh," piece of advice, but this is far and away the biggest component that goes into creating your credit rating - it counts for 35 percent of your entire score. If you blow off a bill, you could get a double-whammy on your credit score: once, when the vendors lists you as late-paying, and a second time if they send your account to a collections agency.
While credit cards and other installment payments (like home, car and student loans) are what people usually have in mind when they think about bills due, don't think you can waffle on other financial obligations. The bad news is that while you don't get any credit for paying other bills, such as utilities, on time, failing to pay them could impact your score, especially if the company you owe takes you to collections. Yes, it seems unfair to only have the negative count, but that's how credit-scoring works.
One related note: While paying bills late can get you in trouble, paying them early doesn't help you out. Yes, if you're paying via good ol' mail, you might want to give yourself a couple of weeks as a buffer to make sure your check gets there by the due date, but the credit bureaus don't raise your score for paying early.
Basics for Credit Cards
- Basics of Card Rates
- Using Reward Cards
- Applying for Cards Online
- Calculating Card Interest
- Credit Card Fees
- Dealing With Card Offers
- Consumer Credit Laws
- Checklist of Features
- Credit Cards From the Blog
Keep your balances well below your credit limit. In a perfect world, you'd carry balances of no more than 25 percent of your available credit limit on your credit cards or any other lines of credit you keep. Experts call this a "utilization ratio." In the current economic climate, you might find this difficult; card issuers are cutting the credit limits of customers, even those with good credit scores who always make their payments on time. If one or more of your credit limits has been chopped, it's not necessarily your fault, but it can impact your score.
However, this isn't a license to call your credit-card company and try to wheedle a higher credit limit out of them. Yes, this could boost your score if you're successful at getting all of your limits boosted (which is an unlikelihood in today's economy anyway), but experts say that for most consumers, the temptation of those higher limits is too hard to resist, and soon you'll be over that 25 percent threshold again. It's much smarter to keep or pay down your balances so they only add up to 25 percent of your available credit. Basically, lenders want to see that you have credit but don't use it. Sounds counterintuitive, but that's the way the system works.
Don't open a lot of new accounts at once. It raises a red flag when you open a lot of accounts, because the conventional wisdom is that you're going to use all of those new cards to borrow a lot of money, which makes you a statistically higher risk. Whether or not you do borrow to the hilt or manage to pay it off doesn't matter; it's going to lower your credit score either way.
Try to limit balance transfers to once annually, and don't open more than three cards (retail-branded ones count, too) in a one-month period. If you're planning a big buying spree - say you're moving from a teeny apartment to a spacious house with little more than a futon and a mini-fridge - secure that all important mortgage first before signing up for credit cards at the furniture outlet, the electronics superstore, etc.
Don't have too many credit cards - or too few. Credit ratings agencies look askance on anyone awash in credit cards, but only having one for emergencies - or non at all - can also lower your score. It's not a good idea to have more than six cards, not including store-branded cards. While we're on the subject, a word about those store cards: They're not so hot. It's certainly not going to kill your credit score if you have a couple, but you don't want those to be your only credit cards, because the ratings agencies rank them lower than a conventional credit card.
If you only have a few credit cards, closing even one could lower your score. Hang onto it and just use it occasionally, or set up an automatic payment for one monthly service (such as your car insurance or your TV service) and pay it off in full every month.