Sun, February 22, 2009
Credit Tightening Means You’ll Need To Plan Before Borrowing
Now that lending money with wild abandon has ceased to be fashionable, consumers will have to work harder to get the best possible loan terms. That means that credit scores are even more important than they used to be. Here are a few quick tips on keeping your credit score as high as possible.
Understand that your score can’t be fixed overnight
These days, the best loan terms are given to consumers with FICO credit scores of about 760 or better; this is up about 20 points from a year ago, when credit was flowing freely. Working to improve your score should start at least six months before you want to apply for a loan, assuming your credit is already reasonably good. Also be aware that different credit bureaus may score you slightly differently.
Review your credit reports regularly
You’re entitled to obtain a copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and Trans Union) once a year. Access to your free annual credit reports is available through annualcreditreport.com. Instead of ordering all three reports at once, the best strategy is to get one from a different bureau every four months or so. This allows you to monitor your reports during the year for free and check for errors. Given enough time, the credit bureaus tend to pass information along to each other; by spreading your requests out over the course of a year, you still stand a reasonable chance of detecting new information. You can file a dispute with any agency whose report contains incorrect information.
You can obtain a free estimate of your FICO score here, or use the free trial option at myfico.com to get an actual report.
Pay down your balances
One thing that affects your credit score significantly is the degree to which you make use of your available credit. If your credit balances total $5,000 and your credit lines add up to $10,000, you’re using 50% of your credit capacity. Ideally, you should try to keep your credit utilization below this level in order to keep your score up.
Pay early and often
Avoid making your payments late and pay more than the minimum balance each month. Making more than one payment over the course of the month will lower your average utilization level even further.
Keep accounts open
People who’ve had trouble with credit often make the mistake of closing accounts after they’re paid off. This is a bad idea – creditors like to see a long credit history and accounts that have been open for years. Even if there’s no balance on an account, the presence of credit capacity that is unused works in your favor in the scoring system.