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Five steps to financial fitness |
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Written by asap
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Tuesday, 06 March 2007 |
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For most of us, buying a home is not an impulsive decision. We mull it over a bit.
Which means there’s no reason to wait until the eve of your purchase to find that an unpaid parking ticket or library fine has wrecked your chances to qualify for the best mortgage rates. Yet that’s exactly what a lot of people do, said Liz Pulliam Weston, author of “Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number that Shapes Your Financial Future.”
To avoid feeling ambushed, you’ve got to know your own score. But unlike your credit report, you can’t get these crucial digits for free. There are about 100 different scoring formulas, but most lenders still use the classic FICO score developed by Fair Isaac Corp., Weston said. The best rates and terms go to consumers with scores of 720 or higher.
Weston recommends purchasing credit reports and FICO scores from all three major reporting agencies: Experian, TransUnion and Equifax. You’ll have to shell out about $50 to get all three scores from www.myfico.com, but that’s a small price to pay for knowing where you stand. To get yourself into peak financial shape, follow these tips:
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1) FACT-CHECK YOUR DATA
Don’t worry if your name is misspelled or the report lists an old address for you, Weston said. What you want to look for are really serious errors: accounts that aren’t yours, old negative items, inaccurate late payment or collection actions dated to a debt more than 7 years old. Paging through your credit reports is also a good way to find out you’ve been the victim of identity theft.
“You don’t want to find out about a bogus collection when you’re in the process of getting a home loan,” Weston said. “You want to find out about these things in advance so you can dispute the hell out of them.”
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2) DON’T BE LATE
A single 30 day late payment can knock 100 points off your score, so be extremely diligent about all your bills when you know you’ll be applying for a home loan. Consider making payments with automatic debits.
Your payment history accounts for about 35 percent of your score, Weston said, and how much credit you’re using is 30 percent. That means the two most important things you can do to improve your score is paying your bills on time and paying down your debt. Which brings us to...
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3) GIVE THE PLASTIC A BREAK
Pay your credit cards off, or whittle them down as much as you can. Credit scorers care deeply about “credit utilization,” so Weston suggests you avoid using more than 30 percent of any card’s credit limit. For example, if you have a card with a $5,000 limit, don’t charge more than $1,500.
“Pay it down, pay it off and use it lightly,” Weston said. “That can have a surprisingly dramatic effect on scores.”
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4) NO MORE NEW CARDS
In the months leading up to your purchase, and throughout the lending process, avoid applying for new credit. Wait until your loan has closed and you’ve moved into your new home to apply for a new credit card or buy a new car. Applications for new credit, and even inquiries, can ding your score — maybe by just a little, but even a few points can make a difference to your mortgage rate.
“Ignore those 10 percent off deals ... they’re not going to help your credit score and could hurt it, so it’s not worth taking the risk,” Weston said.
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5) DON’T CANCEL CARDS
This may seem counterintuitive, especially if you’re a reformed spender looking for closure — but shutting down an account can never improve your credit score, and it might lower it.
Credit scorers like to see a big gap between the amount of credit you have available and the amount of credit you’re using, both in individual accounts and overall. If you suddenly close an account, you bring your credit ceiling down. If you have a good credit score, closing a minor account might not hurt, but you don’t want to experiment with this when you are in credit-improvement mode, Weston said.
This can be confusing, since sometimes people are told by credit monitoring services the reason their score isn’t higher is because they have too much available credit.
“Once you’ve opened the account, you’ve done the damage,” Weston said. “You can’t undo it by closing the account, and you might make matters worse.”
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asap columnist Meg Richards is an AP business writer based in Washington, D.C. | Only registered users can write comments.
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