A credit score is a number that represents how likely it is that a person will pay back his or her debts. There are many credit scores used in the U.S., but the most commonly used is the FICO score, created by the Fair Issacs Corp. in 1958. The FICO score ranges from 350 to 850, with a median score of 720.
How can you find out what your credit score is? You can purchase your FICO score and credit report at www.myfico.com for $15.95, or you can get your FICO score quarterly as part of a credit monitoring service for $49.95 per year.
You can a get free credit report three times a year from www.annualcreditreport.com, but the FICO score does not come with those reports.
Why should you even care about your credit score? Because a good credit score will save you money.
For example, on a $300,000 mortgage, a person with an excellent credit score of 780 would be offered an interest rate of 4.728 percent (as of September) and would pay $1,561 per month. Meanwhile, a person with a below-average credit score of 630 would be offered a much higher rate of 6.321 percent and would pay $1,861 per month.
That’s an extra $300 a month — $3,600 a year — on the same house, just because of a lower credit score.
Let’s say I’ve convinced you that your credit score is important. Now, how can you improve your score?
First, don’t miss any payments. Missing more than one payment (for your credit card, mortgage, telephone and cable bills, etc.) will lower your score.
Second, have a low debt-to-credit ratio. For example, if you owe $1,000 and your total available credit is $10,000, then your ratio is 1 percent, which is very good. If you owe $9,500 and your total available credit is $10,000, then your ratio is 95 percent, which is very bad.
Third, the longer your credit history, the higher your credit score gets (with all other factors being equal).
Fourth, try to use different types of credit (mortgage, credit card, student loans). This will improve your score, compared with using just one type of credit.
Finally, avoid having too many credit inquiries, such as credit card applications, which can be bad for your score.
• Andy Su, M.D., is an emergency physician who works full-time at the Sutter Tracy Community Hospital emergency department and a board member of the Tracy Hospital Foundation.
Thank you for your response and an opportunity for a healthy discussion.
1 Of course there are other factors that are considered in the extension of credit to applicants but what I'm saying is that the average applicant with a FICO score of 800 gets much better rates (and actually get offers) than the average applicant with a FICO score of 600 and that is why it's beneficial to keep your score high.
2. We essentially agree.
3. This information comes from Fair Issacs so you may disagree with me (them) but I don't think it is absolutely false. Maybe the problem is that I was not clear. I'm saying (based on the information provided by Fair Issacs) that the average 50 year old with no debt and has paid their bills on time for 30 years has a higher score than the average 21 year old with no debt and has paid their bills on time for 1 year. It's fairly logical to me. Your anecdotal evidence does not make their methodology false.
4. Again, this comes from the company who provides the FICO score. A person with 3-5 different types of accounts and pays them all on time has a high score than a person with 1 account and pays it on time. I didn't make up the rule.
5. We agree.
About your tips
1. 33% is an arbitrary number. I think your balance should be as low as possible with 0% being idea.
2. Agree
3. Agree.
4. Agree.
5. Agree (similar to 4)
6. Disagree. I think the goal should be to never to have to pay interest. If I can't pay it off this month then I can't afford it.
If you have a credit limit of $30,000, you're saying it's OK to have a balance of less than $10,000 but if your rate is $9.9 percent, you are throwing away $990 a year on interest payments. I would rather keep that money.
Yes, a good credit score CAN save you money. However, there are other factors that play into the extension of credit to applicants, and a high FICO does not in and of itself guarantee that an applicant will be extended credit.
Other factors that are equally important are: job stability, length of employment, loan to value (LTV) and debt-to-income (DTI) ratios, liquid savings, credit history, and others.
Loan pricing may require adds for lower FICO scores, but may also include discounts for low LTV, loan purpose (no-cashout refinance, for example), lock period, and other items.
"Don't miss any payments".
That should go without saying. Pay your bills on time and don't be late. It really IS that simple. FYI: telephone and cable bills, while they should be paid on time, are not reported to the credit bureaus unless they remain unpaid and go to collection.
"Third, the longer your credit history, the higher your credit score gets (with all other factors being equal)".
No, and no. This is absolutely false. I've seen people with their first tradeline established 2 months prior to loan application with 800 FICO scores. Furthermore, all factors are NOT equal.
"Fourth, try to use different types of credit (mortgage, credit card, student loans). This will improve your score, compared with using just one type of credit"
No, doing so DOES NOT necessarily guarantee a higher credit score. A borrower should have at least two types of credit, such as a revolving credit card and an installment loan (such as a car loan. This helps demonstrate to lenders that they are able to make timely loan payments, and manage a revolving credit line wisely and with discretion.
Too many inquiries: YES. Inquiries will slowly eat away at your credit score. They stay on your credit report for 90 days up to a year.
My tips for keeping a higher credit score and using credit wisely:
1) Keep revolving balances no higher than 33% of your credit limit.
2) Make payments on time
3) Pay more than the minimum. In fact, pay as much as you can.
4) Ask yourself this: if you can't afford to pay cash, or pay something off within 12 months, do you really need it?
5) Live within your means. Make a budget. Don't buy unnecessary things, make do.
6) Even if you are debt-free (aside from mortgages), DO keep a balance on at least one card, and make payments.
***I have worked in the mortgage industry for 15 years as a mortgage underwriter.
Thanks for your comment.
I'm actually not recommending that people get more debt. Unfortunately, with only 400 words a month, I can't always explain things as well as I normally would like to.
In most instances, I believe people should try to pay off all of their debt and live debt free (I think that's what Dave Ramsey recommends although I have not read his book in its entirety.)
"Fourth, try to use different types of credit (mortgage, credit card, student loans). This will improve your score, compared with using just one type of credit."
This simply refers to the fact that if there are two people with the same amount of debt ($10000 for example), the one with the debt in 4 different accounts would have a better score than the one with 1 account because it demonstrates to the credit card companies an ability to handle different debt.
Andy Su
Here you go again telling people to go into debt.
If you owe $9500 to credit cards then you are in serious trouble. You need to rethink your credit usage. If you have a $10,000 credit line and you owe $1000 thank God you are not a slave to Master Card every month. Cut up that extra plastic, you don't need it.
Take what you would be paying off $9500 every month at 20% interest and build an emergency fund.
When you have 6 months worth of expenses in the bank then invest that money in your retirement fund. Don't spend your life giving all your money to Master Card and Visa.
You don't need to worship at the altar of the FICO gods. You will be able to get the things you need without going into debt.
Purchase "The Total Money Makeover" book by Dave Ramsey and stop reading this so called financial advice column. You'll be much better off in the long run.