Do you know your credit score? If you don't, you're not alone. Forty percent of Americans have never obtained their score, according to a survey commissioned by the Consumer Federation of America and Washington Mutual. That means a lot of consumers don't know anything about the number that affects their ability to get a mortgage, a low interest rate on a credit card, and even a job.
"Credit scores have become one of the most important numbers in the lives of Americans," says Stephen Brobeck, executive director of the Consumer Federation of America. Employers, for example, increasingly look up prospective employees' credit scores to judge their level of "personal responsibility," he says.
That's why Brobeck is concerned that so many people still don't know how credit scores are calculated and how to get a good one. People often incorrectly assume that income, age, and race influence the score, he says, which may make them less motivated to try to improve it. (Scores are based only on credit history.) According to the survey, most people also don't know that cell phone companies, landlords, and home insurers often use the scores as part of customer background checks.
Just one late payment can cost a person thousands of dollars over the following five to 10 years because credit card companies base interest rates on credit scores, says Anthony Vuoto, president of Washington Mutual card services.
The bank has developed a score simulation test to show how different factors would influence a score of 670. If a payment is missed on an otherwise up-to-date account, the score could drop 25 to 60 points. Six months of on-time payments would be likely to improve the score by 20 to 50 points. Paying down 90 to 100 percent of revolving balances could cause as much as a 100-point improvement.
Even small increases can generate significant savings. Washington Mutual estimates that raising a credit score by 30 points would save an average consumer $76 a year in credit card finance charges. That same 30-point increase would save about $20 a month on a 36-month car loan. Brobeck says once customers' scores fall below 660, they are no longer considered good candidates for prime interest rates.
Borrowers with scores below 620 will find it very difficult, if not impossible, to obtain a mortgage with a respectable rate. Borrowers with a 620 or better score have a much better chance. The difference in the interest rate on a mortgage loan for someone with a score below 620 and someone with a score above 620 could be as much as 2%.
What are some of the factors that affect your FICO score?
Your FICO score is a credit rating produced by Fair, Isaac and Co. It's used by most lenders to help them decide whether you're a good credit risk. Fair, Isaac crunches the numbers from your credit report, and spits out a score somewhere between 300 and 850.
A low score says you're a bad credit risk, a score of 750 or higher puts you in the catbird seat. Here are the factors considered when calculating your FICO score and an estimate of how heavily each factor might be weighted.
- Past payment history (35 percent): bankruptcies, late payments, past due accounts and wage attachments
Amount of credit owing (30 percent): amount owed on accounts, proportion of balances to total credit limits
Length of time credit established (15 percent): time since accounts opened, time since account activity
Search for and acquisition of new credit (10 percent): number of recent credit inquiries, number of recently opened accounts
Types of credit established (10 percent): number of various types of accounts (credit cards, retail accounts, mortgage)
Who checks my score and what can I do to improve it?
You can find out why your score is so low. A credit reporting agency must tell you which factors negatively affected your number. For example, your report might note that you have several late payments on your credit report. Knowing what you've done wrong can help you change your behavior and improve your score.
It's not only lenders who check you out. Some insurance companies use your number to set your premiums. Phone companies, landlords and employers may also look at your score to decide if they should give you a cell-phone contract, rent an apartment to you or hire you.
It's never too late to improve. Credit scores can change daily, so now is the time to act! First, you need to correct any errors in your credit report. Pay your bills on time and keep your credit card balances low (preferably below 70% of your high credit limit). Instead of transferring debt to a less expensive card, pay it off. Finally, apply for new cards only when you need them. We never recommend opening a department store charge card.
To boost your score: Don't charge anything for at least 60 days before applying for a loan. That way it's likely that all the payments you've made to date will be reflected in your credit score by the time a lender requests it. If you can't pay off your total balance in full, at least keep it under 30 percent of your total credit limit.
Your credit score can cost or save you thousands of dollars a year. Knowing your scores is the first step to developing a game plan to raise you scores. Repairing your credit and raising your credit score is not quick fix, it is a process - one that you must be committed to doing. The amount of time it will take will depend solely on how low your score is and/or how damaged your credit is as well as how determined and persistent you are during the restoration process. Even though it can be frustrating at times, the end result will save you thousands and give you the peace of mind you have been missing. Think about it - how much is your credit score costing you right now? Not just the missed opportunity to buy a home while the prices are so low, but in higher premiums on your auto insurance, or maybe for better employment? Here's a good Bankrate.com article about how much your credit score could be costing you, right now, without you even knowing it.