Now, as we are trying to pick up the pieces of what is left of our financial lives, everyday is basically becoming a living “hell”, as the people who are supposed to help consumers get back on their feet, keep slamming the door to anyone who does not attain the minimum credit score. I hope people now realise the importance of keeping a good credit rating, as it will really come in handy when you really need it. The following is an article by Jim Desantis on how to maintain a good credit score, and the benefits that accrue because of this.
The economic meltdown in 2009 changed the consumer credit picture, perhaps forever. In 2008, a FICO credit score of 650 was a pass-key to favorable financing rates to buy a car, purchase a house or get a low-interest credit card. Not any more. While credit markets historically tank and boom, consumers who are wise with personal finances, will always ride the economic roller coaster with exhilarating confidence, because they know it’s a fast and short ride that they can survive.
In 2009, when credit markets froze and the economy bled out, consumers with a 650 maximum FICO score began to have doors slammed shut when they applied for credit. The new FICO scoring model quietly placed the minimum FICO score that lenders find safe at 750 or above. My wife and I were at 820 when this happened so the shift virtually has no effect on us. It was summed up by Todd Huettner, owner of the Denver-based financial firm Huettner Capital. Talking about the economy on Fox News said: “What used to be called good credit is no longer considered good enough. Prior to a few months ago, there was no difference between a score of 620 or 820 for most loans.”
How can you be immune to these economic boom and bust times?
Here are a few tips that, more than any other, will dramatically boost your credit score, and place you among the group of consumers who never worry about getting credit in tough times:
1) This first one might surprise you: Pay your bills well ahead of the due date.
One of the best ways we have found to dramatically improve your credit score, is not to simply pay your bills on time, it is to pay them within days of receiving them in the mail. This is absurdly powerful, because every lender will be impressed, and be eager to lend you even more when you need it. By the way, this includes your utility bills too, because these are tracked by the credit bureaus. We have done this for years, and we are of modest financial means.
Why do this? Up to 35% of your FICO credit score is based on how fast your pay back what you owe. Your credit report will reflect “paid as agreed”, but lenders will know how fast you pay your bills.
2) Don’t borrow up to your limits or take on more credit than you need.
In order to boost your credit score, avoid using excessive credit. You should use only one or two credit cards, and have only one or two other major debts. These are debts such as an auto loan, or home mortgage. Watching your debts will ensure you have the best credit rating.
Don’t be tempted to apply for a new credit line, or credit card just to have credit available in case of emergency. Borrow only when you need it, and make sure to make payments as soon as the bill comes. You should also know that signing up for lots of new credit in a relatively short period of time, can cause your FICO credit score to plummet, and it will appear to lenders that you are financially irresponsible.
3) Stop making new financial obligations and start paying down your current debts.
Pay down your debts so you use no more than 50% of your available credit. For example, if your credit card has a credit limit of $5000, pay the balance down to $2500, or less and avoid pushing the balance back up. If possible, reduce the debt to zero each month. If you can pay off your credit card in full each month, that is the way to go. It’s what we do. We make sure we have zero balances on the two credit cards we use because, frankly, we hate to pay interest! We have not paid a penny in interest in 13 years! What counts here is what percentage of your total credit limit remains outstanding – the less, the better.
4) Mix up the types of credit you have.
The types of debts you have are also a factor in calculating your FICO credit score. In general, lenders like to see that you are able to handle a mix of credit types well. This mix includes some form of personal credit, such as credit cards, and some larger forms of credit such as a home mortgage or motor vehicle loan. Such a mix is better than having only one type of credit.
Let me conclude with some encouragement. We used these tips (and others) to keep our FICO score between 810 and 830, which puts us in the top 2% of consumers. We have modest income. I am retired, and my wife is a medical billing clerk. Yet, we are still able to take a nice vacation each year, financed by credit, and fully paid off when we get the bill. In 2009, we took our two grandchildren and their parents to Disney World for a week. Sweet.