Do you need to raise your credit score? Most people don’t think about their credit scores until they are actually involved in trying to get a loan of some kind, such as for a home or a car. But it may surprise you to know that your credit score affects many other areas of your life.
For example, did you know that your auto insurance company uses your credit score to set your premium? You may have never gotten a ticket or been in an accident, but a low credit score will still cause you to pay more for coverage. Life insurance is the same way. Apparently people with lower credit scores tend to die younger than people with higher scores. Who’d have thought that raising your credit score could actually prolong your life? (A credit point a day keeps the doctor away? Hmmm…)
And with unemployment rising, companies failing, and people suddenly and unexpectedly finding themselves in need of a new job, you should know that more and more companies are using credit reports to screen applicants. Surveys are showing upwards of 35% of companies now use your credit report for hiring decisions.
Higher mortgage rates, higher credit card rates, higher insurance premiums, fewer employment opportunities – these are some of the areas where not paying attention to your credit score can cost you money.
What Determines Your Credit Score?
Your credit score is determined by five categories:
35% is based on your payment history.30% on your “balances-to-limits” ratio.15% on how long you have been using credit.10% on your applications for new credit.10% on your “mix” of credit.
Mostly everybody understands that you help your credit score by making your payments on time, but
from the above list you can see that this is only 35% of the story. If you don’t pay attention to the other scoring factors, you’re ignoring about 2/3’s of your credit score.
The Balances To Limits Ratio
Your “balances-to-limits” ratio works like this. If you have a credit card with a $1,000 spending limit and you owe $1,000 (maxed-out balance) on it, you will actually lower your score, even if you make the monthly payments on time. You should never allow your balances to get higher than 30% of the limit (even mid-month because you don’t know what day the credit card reports your status to the credit bureaus).Check Your Credit ReportCredit Reports Do Not Mean Credit Scores
By law, you are allowed one free credit report from each of the 3 credit bureaus per year. However, these reports do not include your score. You must pay between $10-$15 per score from each bureau. A few things to note:
For a mortgage, financial institutions will use the middle of your 3 scores to factor your eligibility. Therefore, it is best to pay for all three scores.Only Equifax will provide you a FICO score. Experian and TransUnion will provide you with a “consumer score”, which can be quite different from your FICO score. However, many types of loans other than mortgages use this score.
You need a copy of your credit report before you can know where to begin to raise your score. It is critically important that you know where you’re at before you just start “fixing” things. It is surprising that so many people have no idea where their scores are. Many applicants hesitate to apply for a mortgage because they believe their credit is horrible only to find out they have scores in the high 700’s. Other applicants confidently apply for a mortgage, thinking how good their credit is, and leave with a declined application as they realize their score is in the 400’s.
Regardless of where you go to get your report (and at least one of your scores) you need to have this info before you start attempting to raise it. I don’t know of a single surgeon who would operate on a patient before he/she saw the problem on an x-ray – so don’t you start operating on your credit before you find out what the problem is for sure.
Time To Raise Your Score – Careful!
Once you get your credit scores, you’ll know how much work you have to do. If your scores are over 700 – congratulations! A perfect FICO score is 850, but anything over 700 is excellent. If this is yours – relax. You qualify for the best loan programs out there. You’re not going to get a better loan if your score is 800+ (there are minor exceptions to this rule, but for the vast majority of people – it doesn’t matter at all).
A word of caution: There are too many sources of bad advice, and many people who try to “fix” their scores themselves end up doing the wrong thing with disastrous results. Here are some wise and legitimate ways to raise your score:
make all your payments on time, pay down your balance, watch your balances to limits ratio, use the S.P.F. formula to pay off debt wisely, open good credit accounts if you don’t have some (you can’t raise your score unless you have good credit).Freebie Bonus – To Opt In or to Opt Out?If You Have Good Credit:
Here’s a free way for you 700+ scorers to get a few more points. Go to www.OptOut.com and put your name on this list. By Opting Out using this list, you prevent credit card and other companies from obtaining your information from the credit bureaus that they use to send you all those “Pre-Approved” offers.
This will significantly reduce the amount of junk mail you’ll receive, and for some reason, it will raise your credit score a few points. I have no idea WHY it does – it’s not supposed to, but I’ve had many clients tell me it did – so somehow it works.
If You Have Poor Credit:
If you have poor credit or limited credit – DO NOT OPT OUT!!! Don’t get this confused with the “Do Not Call List” for telemarketers – you can get on that list if you hate sales calls during dinner time.
But you don’t want to be on the credit bureaus’ Opt Out lists because you WANT those credit card offers coming in – for awhile at least. This gives you the ability to be approved, and gives you the chance to pay your bills on time, improving your score. Once your score is where you want it – go ahead and Opt Out.
We’ve provided many additional articles to help you start raising your credit score. Some of you may be able to find easy solutions and quick fixes to a variety of common problems, whereas others may require many months or years of hard work and even the help of a professional to get you back on track. Having a good credit score makes life so much less expensive, and your efforts to fix this area of your finances has far reaching implications for your cost of living.