By Jean Chatzky with reporting from Arielle Gowen
June 03, 2008
Credit scoring, by default, is confusing, and in these times, it can really throw you for a loop. Whether your credit is determined "good" or "bad" depends on a simple three-digit number called your FICO score—the higher your score, the lower the interest rates.
Generally, a score of 680 and above is considered good enough to get you loans and cards at the best interest rates. But because the economy is experiencing a crunch, lenders are setting the bar even higher, meaning you now want to shoot for a score of 720 or greater, says John Ulzheimer, president of consumer education for credit.com.
So how do you do it? Start by pulling your report. You're entitled to a free report from each major credit bureau once a year, so three total. Unless you're a victim of ID theft, I suggest you spread them out, pulling one every four months or so. Go to annualcreditreport.com and get yours, then pinpoint what exactly is dragging your score down. Some possibilities?
A high debt to credit ratio. "You want to get your revolving debt to no more than 10% of the credit limits on the cards you have," Ulzheimer says. If you're a good customer, a fast way to bring that ratio down is to call up your lender and ask for an increased limit. Tell them you want a policy increase, which means they raise the limit without looking into your credit file.
Late payments. The due date on your bill isn't flexible, and one tardy can hit your score hard. Pay a couple of days early just to be safe.
Shopping around. Store cards may seem like a good deal—15 percent off!—but that savings will be negated later when they bring your credit score down and your interest rates up. Every inquiry into your score has a negative impact, so just say no.
No credit. Maybe you never took out a card, and now that you want one, you don't have a credit score or even a report. That's considered risky to lenders. Start building credit with a secured card, which basically accepts a deposit in exchange for a line of credit in an equal amount. Just be sure that the card you choose reports to all three credit scoring bureaus so you're not wasting your time.