Your credit score—or FICO score—is that magic number that determines whether banks will lend to you and at what rate. The higher the score, the lower the rate (and the better your chances of securing a loan). If you have a 760 FICO score, for example, you could probably qualify for a 4.9 percent mortgage. Drop 100 points (after one skipped or late credit card payment) and you’d be lucky to get 5.5 percent.
The three bureaus that issue your credit score factor in when you last paid an account late, how often you pay late, and by how many days. Set up automatic payments to guarantee you’re never late.
- Paying off your bills in full and on time is the best way to earn a good score, but even if you carry a balance you can boost it. One thing lenders look at is your “usage ration”—how much debt you owe on credit cards compared with the total amount you could borrow. Say you owe $100 apiece on five credit cards, each of which would let you borrow up to $1,000. Your overall usage ratio—debt ($500) divided by credit limit ($5,000)—is 10 percent. Cancel all but one card and your debt is still $500 but your available credit drops to $1,000. Your usage ration is now 50 percent, enough to lower your score. A lot.
- The longer you’ve had an account, the better. A late payment on a two-year-old account will hurt your score more than if you’d had the card for two decades. Avoid opening new accounts unless necessary, and keep your oldest cards active (assuming you pay any new charges in full). Says Frank Remund of Seattle’s Credit IQ, “If you don’t use a card, you lose it.” To keep that from happening, use any cards not in regular rotation to automatically make one utility payment every month.
- Multiple requests for credit means you’re a greater risk. Your FICO score is determined in part by the number of new accounts that you have opened as well as the requests or inquiries (there are two kinds) for your credit report. The best way to protect yourself is to squeeze your applications—whether for a mortgage or a car or student loan—into the same 45-day period so they’ll count as a single inquiry.
- Both the number and “quality” of each type of account is factored into your score. Revolving accounts (credit cards) tend to count more than installment loans (mortgages, car loans, student loans), because they’re better predictors of your debt management. If your mix is considered “off balance,” it can hurt you. Four or five credit cards is probably okay, says Adam Jusko of indexcreditcards.com, depending on how long you’ve had them.