Tracking, repairing and boosting your credit score can be tedious, but over the long run it can save you tens of thousands of dollars.
Think of it like researching and picking a winning S&P 500 stock. A better credit score pays big dividends and gains compound over time.
To keep your credit healthy, you'll need to manage it like you do the rest of your portfolio. Check it regularly and follow solid advice — like our do's and don'ts from experts.
"Consumers should keep a very close eye on their credit reports and question anything that doesn't make sense," said Jim Kemish, president of Sky Blue Credit, a credit repair service in Boca Raton, Fla.
"If you're getting ready to make a major purchase, check your score three months ahead of time, fix any errors and pay down debt to increase your credit score," said Carolyn Warren, author of "Repair Your Credit Like the Pros." She's a former mortgage broker and a former credit repair specialist.
What Is A Good Credit Score?
Most lenders use so-called FICO scores to rate individual's credit. Most FICO scores fall somewhere in a range of 300 to 850. The higher the better. What should you shoot for in a FICO score? Warren says 740 a "great" credit score. And she says it's the minimum lenders of conventional mortgages are looking for to give you a good rate.
Here are the five factors Experian says are used in creating your credit score, and how much each one counts:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Who scores your credit? Three credit reporting agencies, Equifax, Experian and TransUnion, feed consumers' credit scores and information to banks, insurers, credit card companies, employers and landlords. Fair Isaac Corporation created FICO, which is the method used by the credit reporting agencies to create your credit score.
Other credit services, like FreeScoreOnline and Credit Karma, help customers gather scores from the agencies and provide other services. Credit Karma only works with Experian and TransUnion. Some banks, like Wells Fargo, provide your credit score to you within their banking apps.
Do Boost Your Credit Score, Save Thousands On A Mortgage
Mortgage lenders can help you boost your credit score before you lock in an interest rate. Kemish says to ask your mortgage broker or loan officer about a rapid rescore.
Only lenders are allowed to apply for a rapid rescore from a credit bureau. To apply, the homebuyer pays down debt to boost his or her credit score and the loan officer then submits documentation of the pay down to the credit bureau.
Credit bureaus sometimes do a rescore for a lender in just 48 hours, though it can take up to five days.
"Any good mortgage broker should be offering their clients that opportunity," said Kemish.
How much is a rescore worth — $68,000 or potentially much more. Use a mortgage calculator to estimate payments at various interest rates.
For a modest $300,000 mortgage, at a fixed rate of 5% for 30 years, your payment would be $1,610 a month. At 6%, you'd pay $1,799 monthly. Your reduction per month is $189 and over a year that's $2,268. Over the 30-year life of the loan that's $68,000, which could fund your child's college education or boost your retirement.
"That 1% change in your mortgage rate could be accomplished with a 50-point change in your credit score, which might mean just paying down a credit card," said Kemish.
Do Track Your Credit Score
Kemish say you should check your credit monthly. "If there is a change, you want to know why," he said. And he recommends consumers use credit monitoring services. Two examples are Experian's IdentityWorks and myFICO, but there are many others.
"Collections are very remiss about updating the credit bureaus in a timely manner and collections should be questioned by consumers," said Kemish.
He says sometimes he can repair a client's credit simply by "fixing duplicates." This is when two or more collection agencies are reporting to the credit bureaus on same debt collection.
"If there are duplicates and we remove them, you could see an increase of 50 points in a credit score," Kemish said.
Last week, credit score errors got attention. Equifax revealed that a coding problem caused it to send out inaccurate credit reports to lenders between March 17 and April 6. The company has now been named in a class-action lawsuit.
Equifax said the error resulted in a reduction in scores of "25 points or more" for roughly 300,000 consumers. Consumers who think their loan decision might have been affected should contact their lender.
But Warren says it's lenders who should be reaching out. "Lenders should look at all the customers who applied for loans during those dates, see if their customers got the rates they deserved and make it right for them," Warren said.
Don't Run A Credit Card Up And Don't Close It
Several factors in credit card usage impact your score. First, and most obvious, don't miss a payment or make a late payment. Second, don't use the full amount of credit you're offered. Kemish says to keep your usage under 80%; Warren recommends under 50% or even as little as 30%.
"I had a client who was never late on his credit card, but he had a subpar credit score, because he had high balances all the time," said Warren. Sometimes this happens because people use up to their limit for business travel.
Warren says to use two cards and keep balances down, thus your available credit is high and your usage is low. She also says use your secondary card enough to keep it open. Inactive cards can get shut down, which will reduce your credit score.
Do Vet Credit Repair Services
Should you get help repairing your credit? Yes, but choose a credit repair service wisely.
Warren says find one with at least five years of experience. Make sure the service discloses all fees and spells out procedures and cancellation rights.
"If you have a really excellent credit repair service, they're worth every penny," she said. "They can do a better job than you can do and do it faster and more efficiently."
Kemish recommends checking a service out with the Better Business Bureau. He says call three different services and interview them. If they try to sell you before assessing your needs, that's a bad sign.
"You want to deal with a company that puts you first," Kemish said.
