Many Underestimate Credit Score Importance

Source: Boston Globe (07/11/08)

While the nation's credit-scoring program is a critical factor in determining what individual borrowers pay in interest on credit cards and mortgages — and even how much they pay for insurance — new research suggests that most Americans still do not understand how the system works.

Respondents to a recent Consumer Federation of America/Washington Mutual Inc. survey largely did not know that credit scores are derived from payment histories, with many participants mistakenly believing that the number is influenced by such factors as income, age, education, and marital standing.

According to Anthony Vuoto of Washington Mutual Card Services, if all consumers took steps to boost their credit scores by at least 30 points, they together would realize as much as $28 billion annually in savings.

5 Factors That Decide Your Credit Score

Credit scores range between 200 and 800, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score:

1. Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filing, liens, and collection activity also impact your history.

2. How much you owe. If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits.

3. The length of your credit history. In general, the longer you have had accounts opened, the better. The average consumer's oldest obligation is 14 years old, indicating that he or she has been managing credit for some time, according to Fair Isaac Corp., and only one in 20 consumers have credit histories shorter than 2 years.

4. How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.

5. The types of credit you use. Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example.

Improving your FICO® credit score

It’s important to note that raising your FICO credit score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time. See how much money you can save by just following these tips and raising your credit score.

Payment History Tips

Pay your bills on time.Delinquent payments and collections can have a major negative impact on your FICO score.

If you have missed payments, get current and stay current.The longer you pay your bills on time, the better your credit score.

Be aware that paying off a collection account will not remove it from your credit report.It will stay on your report for seven years.

If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.This won't improve your credit score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

Amounts Owed Tips

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.

Don't open a number of new credit cards that you don't need, just to increase your available credit.This approach could backfire and actually lower your credit score.

Length of Credit History Tips

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. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

Do your rate shopping for a given loan within a focused period of time.FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

Re-establish your credit history if you have had problems.Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.

Note that it's OK to request and check your own credit report.This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

Apply for and open new credit accounts only as needed.Don't open accounts just to have a better credit mix - it probably won't raise your credit score.

Have credit cards - but manage them responsibly.In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.

Note that closing an account doesn't make it go away.A closed account will still show up on your credit report, and may be considered by the score.