Secrets For Improving Credit Score Revealed

You’re saving to buy a house in a year or two. Meanwhile, you know it's important to have a good credit score to get a desirable mortgage rate. Perhaps you already know your credit score. But do you know how to improve it?

Now you can get some tips directly from Fair, Isaac and Co., the creator of FICO, the most widely used credit-scoring measure. The company describes its latest innovation at its www.myfico.com Web site as part of its long-term initiative to demystify credit scores for consumers. In years past, your FICO — or the predictor of your credit behavior based on computer modeling — was sold to lenders but unavailable to you. But in March 2001, Fair, Isaac responded to consumer complaints and a new state law and began offering consumers the ability to learn their credit scores.

Since that time, for $12.95 visitors to the Web site have been able to obtain their scores within minutes, get copies of their credit report from Equifax (one of three major credit reporting agencies) and read explanations of their scores. In its first year, the site attracted 1 million users, far more than expected.

“We were dazzled,” says Craig Watts, a spokesman for Fair, Isaac. But visitors wanted more, he says. “Consumers from Day One have been saying, ‘What you're not telling me is how I can improve my score.’ ”

Now, for the same price, the package also includes an interactive tool the company calls the FICO Score Simulator. Once you've received your credit score and learned your strengths and weaknesses, you can experiment with some interesting — though limited — “what if” questions. What if you paid off all your credit cards tomorrow? What if you didn’t pay your bills for three months? You can only explore one scenario at a time, but the results can be illuminating. Let’s take my own due-for-improvement case.

FICO scores range from 500 to 850, with 720 being the median. My own paltry 670 - nothing you’d want to take to a mortgage lender - was due to two negative factors: the proportion of balances to the limits on my credit cards was too high, and I had too many credit cards.

I plead guilty to both. In the first instance, a large expense check had gotten hung up. As for the second, it’s true I have seven credit cards, four to retail stores that I never use. The average, according to the FICO site, is four or five. My positive attributes included a relatively long credit history going back more than 24 years, and no evidence of seriously late payments on my credit accounts.

Before cranking up the Score Simulator, you’ll see a caveat. The simulation exercise provides an approximation of the impact on your FICO score, which is made up of complex information that is changing daily. And because you can only test one factor at a time, you can't gauge the result of taking two positive actions.

So what could I do to put vitality back in my FICO? I had six possible actions to take for a test drive: pay bills on time; pay down the balances on all credit cards; miss payments; max out the credit cards; seek new credit; and transfer credit card balances. Clearly the place for me to start simulating was with my high balances.

I asked the simulator to pay off 10 percent of my total balances. The approximate impact: my score could range from 670 to 710 — about the same or slightly better than my current score. If I paid off half? It could go from 710 to 750. If I paid it all off? A nifty 740 to 780, with no questions asked about my improved cash flow.

Just out of curiosity, I asked what would happen if, instead, I completely maxed out the cards? A possible 620 to 670 — that is, the same or somewhat worse than my current score. Then I went to a second category. What if I applied for new credit? How about an auto loan for $18,000? My score could take a slight hit, dropping to a possible range of 655 to 675. I also tried a third category. What if I missed the payments on all my accounts for the next three months? My score would stay the same or drop to 635.

You should come away from the simulator, as I did, with the impression that the things you could do in the short run, such as taking out a car loan or missing some payments, are likely to affect your score incrementally. Getting your score to move in a big way, however, such as by paying off your balances, usually takes some time.

Watts compares trying to raise your FICO score to trying to improve your cholesterol level — hard to move in the short term, but your behavior can make a significant difference over the months and years. That's why anyone contemplating the purchase of a home — as many visitors to the FICO site are — should start planning to polish scores well in advance.

The site itself offers some motivation — a loan savings calculator — that provides current auto and mortgage loan rates from your state and shows just how dramatically rates can differ depending on FICO scores. On the day I visited the site, consumers with the highest scores of 720 to 850 averaged 6.812 percent for a 30-year fixed-rate mortgage, while those with a 675 to 699 score averaged 7.486 percent, and those with the lowest scores, 500 to 559, averaged 10.198 percent. The calculator allows you to plug in your current FICO score, your target score and your projected mortgage amount and see the difference in your future monthly house payments. Not surprisingly, it's hundreds of dollars per month.

So don't get mad at your FICO. Just take charge of it.