Do you know what your credit score is? Most people don’t, but the Fair Isaac Corp. (FICO) credit score is one of the most important numbers in our lives, because it’s the number lenders use to assess the risk involved in loaning you money. The score ranges from 300 to 850. If your score is over 720 you’re considered a good risk and will get a good interest rate – but even in the highest range, a better score means a better deal.
Put simply, the higher your FICO score, the easier it is to borrow money, and the better the terms you’ll get (like lower interest rates). And lower interest rates can mean saving tens of thousands of dollars over the life of a mortgage or any other loan for that matter. So, how can you improve your credit score and be able to get those low rates? There are a few simple things you can do right now that will improve your score.
Pay Off Those Cards
The simplest thing anyone can do to improve their FICO score is to pay off the balances on credit cards. Clearing up credit card debt can have an almost-immediate effect on your FICO score, bringing the number up in as little as one month. Also try to reduce the number of credit cards you have – your score is penalized for every open credit line, because they represent the risk of getting into more debt than you can handle in the future.
Calculate the Ratio
Like everything else having to do with money, your credit score involves equations and formulas. The most important is your debt-to-limit ratio. This refers to the ratio of your debt to the upper limit of the credit extended to you; if you have $10,000 in debt on $100,000 of credit lines, your debt-to-limit ratio is 10%. Keeping your ratio at 10% or lower can get your credit score up into the 800s.
Also, consider using charge cards instead of credit cards. Because charge cards (like American Express) require you to pay the balance off every month, they’re not used in calculating your debt-to-limit ratio.
Every time you apply for credit, whether it’s a credit card or a home loan, the lender will check your credit report and score – and every check actually lowers your score, albeit temporarily. Resisting offers that come in the mail can help keep your score higher.
Your credit score is the single most important factor in determining the terms that you are offered. While this score might seem mysterious and arbitrary to some, the truth is that you have a direct and immediate influence over its calculation.