Credit scores are so important today that it’s hard to believe that they are a relatively recent invention. “Twenty years ago, a student asked me about credit scores, and it was the first I had heard that term,” says Harlan Platt, professor of finance at Boston’s Northeastern University. “For the first 40 years of my life, during which time I bought a house and one car on credit, I didn’t even have a credit score.” Today, just try borrowing for a house or a car without a credit score.
Prior to the 1980s, credit cards were far less common, and personal loans were generally made by lenders who knew their customers. “Today, credit worthiness is determined almost entirely by computers based on credit scores,” says Platt. “Unless you use all cash, there’s no way around it … You need a credit score—the higher, the better.”
Your credit, or FICO, score determines not only whether you can obtain a credit card or borrow money to purchase a home, it also dictates what interest rate you’ll be charged. The higher your score, the lesser a risk you pose to creditors, so the lower your interest rate.
Want to boost your credit score? First you need to know what it is. To see just your credit report—what prospective creditors see when considering extending a loan—log on to annualcreditreport.com or call 877-322-8228. You can find out what each of the three major credit report companies—Equifax, Experian, and TransUnion—say about you. What you can’t get without paying extra is your numeric credit score, which runs from a low of 300 to a high of 850. You can get that number from creditkarma.com or creditsesame.com without paying a dime, though.
Scores are based on several factors, from your credit history to the amount of money you owe—essentially your track record of paying off past debts. For example, if there’s a delinquent payment on your record, it’ll certainly bring your number down. That’s why it’s essential to check your report every so often. If there’s a problem, you’ll see it and be able to contest it.
A score above 650 is widely considered good. If your score is 720 or greater, you are a candidate for the best credit deals. You don’t need to shoot higher than that; raising your score to 800 or above may give you pride, but is unlikely to lower your payments by much. Any score under 620 makes you a “subprime” borrower; as such, you may have a tough time getting credit and will certainly have a hard time getting the best rates. Want a higher score? The surest, quickest way is to clear away existing debt. “Pay off as much of your credit balance as you can, and your score will rise,” says Ken Lin, CEO of Credit Karma. “It isn’t the only factor, but it is the single biggest.”
Myths abound about getting a higher score. For example, the amount of money you earn doesn’t enter into the calculation. “Making six figures, winning the lottery, or inheriting a fortune will not give you a good credit score,” says Lin.
Also, it won’t necessarily raise your score to close old credit cards, as has been reported elsewhere. According to Lin, having a large amount of credit available to you may make some lenders nervous, but, on the other hand, having an account or two that’s been open for many years may actually work to your benefit.
What’s the best strategy for bringing up your numbers? Lin suggests that you shoot to apply for one new card each year, taking advantage of the juiciest perks you can find—free mileage, cash back, or zero-percent financing. “Do this until you have five or so cards,” says Lin. “Then start to cull your older cards with lesser perks, so that you’ll have three to five open credit cards in good standing with the oldest card giving you at least four years of history.”
Raising your credit score is something of a game, true. But it’s a game you can win.