Before the credit crisis and subprime meltdown hit, you probably could get the best interest rates on a mortgage or loan with a credit score of 720 or more. But times have changed. The "new reality" of today's economy says a 760 credit score is the new 720.Your credit score is one of the most important numbers in your financial life. A credit score is a three-digit number that shows credit card companies, auto lenders, mortgage lenders, and even some landlords and prospective employers a picture of your creditworthiness. The higher the credit score the better.
Now there's a new "high," and for some consumers, it may be tough to make the grade.
A FICO credit score--used by many lenders--ranges from 300 to 850. If you have a favorable debt-to-income ratio and a score between 650 and 850, it's likely you'll qualify for a home loan with no problems. But the best rates are now reserved for those near the top tier of that range.
To improve your credit score, use common sense and start with three simple changes:
* Pay on time. About one-third of your score is based on whether you make on-time payments to creditors. Late payments will come back to haunt you and can cost you tens of thousands of dollars in higher interest payments over the life of a mortgage. Regardless of the amount, one late payment will take 24 months to restore your credit.
* Pay down balances. Know your total line of credit, which is the top limit or ceiling amount you can charge without paying over-the-limit charges. Try not to charge more than 25% of that total line of credit. By keeping your utilization rate below 25%, you'll ensure that lenders likely will see you as a good credit risk.
* Don't cut up old cards. About 15% of your credit score is based on length of your credit history. Canceling those cards cuts short your history of responsible credit usage, and it also increases your utilization rate when your total credit line drops.
A few other actions that will hurt your credit score include:
- Maxing out your credit card
- Shopping for credit excessively
- Opening up numerous trades in a short time period
- Having more revolving loans in relation to installment loans
- Borrowing from finance companies.
