By Wendy Mihm | Thursday January 27, 2011
Everyone knows that credit scores are important, but now that we’re living in the post Great Recession economy, these three digit numbers, called FICO scores, are more important than ever. Plus, banks and other lenders have become pickier than before the recession, so if you’re planning to borrow a big chunk of money any time soon, now is the time to work on your score. The new number to beat is 740, up from 720, to qualify for the best (lowest) mortgage rates.
Higher Credit Scores Mean More Power
If you have a good credit score, you have the power to borrow money at the best rates. This doesn’t just mean good mortgage rates, as mentioned above, it also means the best credit card rates. By contrast, credit card companies can charge much higher interest rates in return for the risk they’re taking on by lending money to someone with a less-than-stellar record of paying it back. But it doesn’t stop there. Landlords use credit scores too, and if they see that you’re a riskier tenant, they may charge you more in rent and security deposits to compensate them for taking on that risk. A potential employer may also look up your credit score before he or she hires you and assess that score as part of your overall assessment, and so on.
Ready to get your credit in tip-top shape?
Here are five ways to raise your credit score to 740. All of these steps assume that you are not currently in a major credit card debt crisis. If you are, you need to address that first. For help with that, subscribe to Level 1 of our free FinancialRx series “Conquering Credit Card Debt.”
1. Use credit cards moderately and pay them off in full each month.
The credit bureaus rate your “creditworthyness” on how well you use credit, not on how well you can stash credit cards in a drawer. Again, if you are in a credit card crisis situation, this advice is not for you! Use them moderately and pay them off in full every month. You do not need to carry a balance to earn a good score, nor do you need to pay a penny of interest, so don’t.
2. Put your credit cards on automatic bill pay.
You can do with using the online bill pay feature on your checking account. If you don’t have an online bill pay feature with your checking account, you need to graduate into 2011 and get one. Just about the worse thing you can do for your credit score is to habitually pay your bills late. Don’t do it.
3. Check your credit report with all three credit bureaus.
They are Experian, TransUnion and Equifax. In my experience they are, what shall I say… not very good. They make lots of mistakes and no one can correct them but you. You can get reports free from annualcreditreport.com once a year. You can also pay to get them from any number of online sources, as many times as you need them, whenever you want. Just Google “credit report” and a zillion results will come up. For more info on how to correct these errors, subscribe to Level 1 of our free FinancialRx series “Conquering Credit Card Debt.” There’s a lot of good stuff in there, even if your credit card debt isn’t in a total freefall.
4. Spread out your debt.
Credit bureaus like to see debt spread out fairly evenly across cards, and then they like to watch you pay it down consistently, on time. So if you have a huge balance on one card from a major purchase, spread it out over several cards and attack the pay-down on those cards with gusto.
5. Aim for 10% credit utilization.
What does that mean? Suppose the limit on your credit card is $5,000. Try not to spend much more than $500 on that card in any given month. Why? Because credit bureaus love to see plenty of leftover credit that you’re not using – specifically 90% of it leftover. That makes you look really non-risky and they reward non-risky behavior with higher FICO scores.
Just like building wealth, it takes time to improve your credit score, so don’t be disappointed when your score doesn’t jump to 740 (or higher!) overnight. But with time and effort, when consistently applied, these strategies really can help boost you into the highest levels of creditworthiness.