The bar has been raised for the three-digit number lenders use to determine your worthiness to borrow money.
“Three years ago, a creditworthy borrower was someone with a 680 to 700 score. Now, to get the best rates, that score needs to be 760 and up,” says Greg McBride, senior financial analyst at Bankrate.com. Your three-digit credit score generally ranges from 300 to 850. The higher your score, the better credit risk lenders deduce you are.
|What’s in the Mix|
|Each credit reporting agency uses a scoring system that calculates your number using slightly different variables based upon the credit data they have on you. Because they use differing numerical scales, your score could vary from one credit bureau to another.These percentages used by Experian PLUS Score provide an example of how each agency determines your score:
Payment history and bankruptcy 31%
Credit card debt 30%
Length of credit history 15%
Type and number of credit cards 14%
Credit card applications, inquiries 10%
The sobering news is 60% of all Americans have a score below 750, according to data compiled by Minneapolis-based Fair Isaac Corp., which runs theFICO scoring system most lenders rely on.
Why should you care about your credit score? Lenders use it to determine your interest rate and whether to even lend you money. Many insurers use it to set the size of premium you pay on auto and home insurance. Landlords may use it when deciding whether or not to rent to you, while some employers review it when deciding to hire you.
Fortunately, you can improve your score and have an easier time getting credit by following these six strategies.
1. Review your credit report. One of the biggest factors swaying your credit score could be a mistake on your credit report, including outdated data, paid-off loans listed as due and money owed by relatives or strangers with names similar to yours.
You can stay on top of your information by going to AnnualCreditReport.com every 12 months to request a free credit report from each of the major three reporting agencies — Experian, Equifax and TransUnion. Your credit score isn’t included in the report. You’ll have to pay the agencies around $15 for it.
For unlimited access to both your credit report and score throughout the year, consider signing up forCreditCheck® Monitoring offered through USAA.
If you have disputes on your report, you’ll need to work with the individual credit agencies. Be prepared: Errors could take up to six months to get fixed.
2. Stabilize your credit. “If you know you’re going to buy a new car or be in the market for a home in three to six months, don’t open new accounts, close accounts or transfer balances.” advises Maxine Sweet, vice president of public education for Experian.
Also, stop applying for credit cards you don’t really need. For example, say no when a department store offers you 10% off the purchase if you open a new credit card account. You can be docked 10 points just for applying for a store credit card.
3. Use the credit you have. “Your credit history is your credit reference when you go for a loan. You need to show that you know how to manage credit by paying balances and making payments on time,” advises Sweet.
4. Get a handle on your bills.
- Never miss a payment or due date. “That’s the ultimate rule,” says Sweet. All it takes is one late payment to crush your score and make lenders wary. If you’re 30 days late with a payment and your creditor reports that delinquency to one of the big three credit bureaus, your score can dive about 100 points.
- Trim your credit card debt to below 30% of the available credit limit from your lender. If possible, eliminate credit card debt entirely.
- Always pay at least the minimum amount due, preferably more.
5. Don’t co-sign for a credit card or other consumer loan. When you co-sign, the debt is also considered your debt. If the borrower misses payments, it will be reflected in your score.
6. Save. To get the best loan for a house or car, you’ll probably need a sizable savings for a down payment, which can be as much as 20% in some cases. For most home loans, lenders are eyeing an overall debt (including total mortgage and housing costs, recurring monthly car and college loans) to gross income ratio that falls at or below 36%.