RISMEDIA, January 19, 2011—(MCT)—Sherelle Villacorta had a good credit score, but like many people, she wanted a higher score. Her strategy was to pay down her debt and keep current on her bills, but increase the amount of available credit. It worked. Within seven months, her credit score went from 697 to 758.
“I just recently graduated from college, so because of that I was relatively new to credit scores and having a lot of credit,” the 22-year-old University of California-Berkeley graduate said. “If you have credit available but you don’t use a lot of it, you’ll have a higher credit score. I started paying down my debt and making sure I was spending only what I could afford.”
Credit scores have a huge effect on your financial life. They can determine the interest rate you will pay on a mortgage or a car loan. For that matter, they make the difference in qualifying for a loan or being approved for a credit card.
After checking her credit score on CreditKarma.com in June before renting an apartment in Emeryville, Calif., Villacorta used some credit score tips she found on the website.
She added two retail credit cards at stores where she liked to shop to the two bank cards she already had, increasing and diversifying her credit limit while keeping her balances low.
“There is a difference between having a lot of credit versus having a lot of credit and using it and being in debt. People often confuse the two. They think, ‘If I have five credit cards, it means I’m probably carrying a lot of debt,’ but the reality is if you have five credit cards and use them very sparingly, that is actually a great credit attribute,” said Ken Lin, chief executive officer of San Francisco-based CreditKarma.com, which provides visitors with free access to credit scores.
A FICO score is the credit score used by most lenders in making these decisions. The higher the score, the lower a consumer’s future credit risk.
Payment history—the biggest factor in setting FICO scores—accounts for 35% of the calculation, followed by amounts owed at 30%. So it’s not surprising that the key recommendation to raising credit scores is paying off existing debt and keeping current on bills.
“In the majority of cases where people have poor credit, they need to get caught up. The next thing they need to do is make sure going forward is that all of those are paid on time,” Lin said.
How much of a difference does a great credit score make compared to a poor one? Consider this: A consumer with a score of 760 would have a monthly payment of $750 on a $25,000 auto loan over a three-year period based on a 4.9% interest rate. Someone with a poor credit score of 600 would have a monthly payment of about $900 based on an interest rate of 17.7%, according to http://www.myfico.com.
Having a low balance compared to your actual credit limit, whether it is on a single or several cards, helps raise scores. A credit balance should be no more than 25-35% of a consumer’s available credit, experts advise.
It is import to check your credit report periodically to make sure there are no errors that can lower your score, such as not getting acknowledgment for a paid bill. Consumers can check for mistakes by going to http://www.annualcreditreport.com or calling 877-322-8228 to order free copies of credit reports from the three major credit reporting bureaus.
Scores are also helped by a credit history that includes keeping current on a mix of credit card payments and installment debt such as car loans and mortgages.
“Having a mix of credit is important to show you can be a reliable borrower,” said Shon Dellinger, vice president of San Rafael-based www.myfico.com, which has both free and subscriber-based tools to help consumers manage credit.
Having three to five credit cards used responsibly can help improve a credit score, Dellinger said. Before adding a new credit card, it’s a good idea to first know your credit score, he added.
Consumers who want a free estimate of their score can go to http://www.myfico.com/ficocreditscoreestimator. It will not provide the exact FICO score, but it will offer an estimated range based on answers to questions such as when they last missed a payment or added a new credit card.
Adding cards may or may not help your score, depending on your situation, but dropping a card generally is not a good idea. Dropping a card, especially an older one, will shorten credit history. Longer credit histories help improve scores. “So if you had a card for 10 years since you graduated from college but are not using it as much, don’t cancel that credit card and lose all that long credit history. You will negatively impact your credit score. The best thing to do is keep your account open as long as you can,” said Schwark Satyavolu, co-founder and chief executive officer of Bills.com, a Redwood City, Calif.-based personal finance website.
Consumers should also think twice before transferring high-interest credit card debt from different cards up to the maximum credit limit of a single card that offers introductory zero-percent financing. “Effectively, you are maxing out this card because you have put on as much of a balance on this card as it can take. You will save some money on interest in the short term, but in the long run you will probably end up getting a hit on your credit score,” Satyavolu said.
Credit score range
Credit scores, which can range from 300 to 850, are based on a number of factors, but primarily come down to how well you pay off your bills.
-760 or higher: Excellent. Your score is well above the average score of U.S. consumers and clearly demonstrates to lenders that you are an exceptional borrower.
-725 to 759: Very good. Your score is above average and demonstrates to lenders that you are a very dependable borrower.
-660 to 724: Good. Your score is near the average. Most lenders consider this a good score.
-560 to 659: Not good. Your score is below the average. Some lenders will approve loans with this score.
-Lower than 560: Bad. Your score is well below the average and demonstrates to lenders you are a very risky borrower.
Tips for improving credit scores
-Keep balances low on credit cards and other “revolving credit.”
-High outstanding debt can affect a credit score.
-Pay off debt rather than moving it around.
-The most effective way to improve your credit score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
-Don’t close unused credit cards as a short-term strategy to raise your score.
-If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.
-New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information.
(c) 2011, Contra Costa Times (Walnut Creek, Calif.).
Distributed by McClatchy-Tribune Information Services.