How to Improve Credit Score - From Fair to Good
What is a good credit score? There is no standard definition, but credit reporting agency Experian defines "good" credit as a FICO score ranging from 670 to 739. What is a fair credit score? That definition includes FICO scores from 580 to 669. You can reap huge benefits when you raise your credit score from fair to good, and we'll show you how to do that right here.
What Is Fair Credit?
While FICO and Experian say that fair credit begins at 580, many creditors, including most mortgage lenders, don't see it exactly that way. For most practical applications, fair credit begins at 620 and ends at 679. Many mortgage programs set 680 as the cutoff for better interest rates and less-restrictive guidelines. If you're currently in the low range of "fair," you can open up a lot more credit opportunities just by raising your score to 620. That's 40 points at the most -- a completely reachable goal.
How Much Can You Save When You Raise Your Credit Score?
If you have improved your score from "poor" to "fair," congratulations. You are probably already seeing the benefits -- more credit opportunities and lower costs.
According to myFICO's Loan Savings Calculator, going from poor to fair can save you $796 on a five-year new car loan. Your interest rate drops from 16.9% to 15.7%.
But moving into the "good" range benefits you even more. The average rate for borrowers with good credit is currently 10.9%, saving you an additional $3,703!
And how about mortgages? Most mortgage lender don't even consider mortgages for people with scores under 620. However, there are non-prime lenders who do - at about 6.25%. For fair credit, you'd pay 4.9% with a 620 -639 FICO as of this writing.
But borrowers with good credit can get loans at 3.8% today. The difference between 4.9% and 3.8% over 30 years for a $300,000 mortgage is a whopping $69,950!
Your credit score really impacts your personal loan interest rate because the loan is unsecured. A person with fair credit is 28 times more likely to be delinquent then someone with a credit score of 800 and above. As a result, you can expect to pay a higher rate of interest - from 24% to 36% for most personal loan vendors. Personal loan rates today vary between 6% and 36%. The better your credit, the lower your rate.
Borrowers with "good" credit pay on average a rate between 14% and 24%. Upgrading from fair to good can save you almost $4,000 for a $10,000 personal loan over five years. That's assuming the "fair" borrower gets a 24% rate and the "good" borrower gets 14%.
Credit Card Interest Rates
The best credit card rates for fair credit run, as of this writing, between 21% and 27%. While the best rates for good credit drop to 14%. If you carry a $10,000 balance and make a minimum payment of 4% of that balance, it will cost $7,608 in interest at 21%. That drops to $4,034 at 14%.
By raising your credit score from fair to good, assuming that you have a $20,000 auto loan, a $300,000 mortgage and $10,000 on a credit card, you could save just under $80,000 over the lives of those loans. About what you'd earn with a part time job.
How to Raise Your Credit Score
Now that you see the value of raising your credit score, it's time to make it happen. Here's your action plan:
- Pull a free credit report at annualcreditreport.com. You're entitled to one from each of the three biggest credit reporting agencies every year.
- Look for inaccurate credit history or balances and the "reason codes" that tell you why your score is less-than-perfect.
- Dispute incorrect information. About one-fifth of credit reports contain errors serious enough to get the consumer denied credit or cause him or her to pay more for borrowing, so this step is important.
- Address the problems - in most cases they are bad credit history, using too much credit or insufficient credit history.
Now it's time to tackle these issues.
How to Correct Your Credit Report
Items like these can harm your score:
- Balance reported is higher than actual balance.
- Accounts discharged in bankruptcy are still showing as delinquent.
- On-time payments are reported as late.
- Account was wrongly sent to collection.
- Account brought current still showing as delinquent.
- Derogatory item reported belongs to another consumer.
- Derogatory history is result of identity theft.
First, contact the creditors that reported your account incorrectly. This may be all you have to do. Corrections from the original creditor should hit your report in a few days or weeks.
Alternatively, you can dispute inaccuracies in writing with the credit bureau(s). Send a letter or report the error online on the TransUnion, Experian or Equifax web site. Supply any documents that prove your case. For instance, an automated bill payment on your bank statement. And keep copies of any letters or documents sent.
Fixing errors can raise your credit score in a few weeks. The credit bureau has 30 days after receiving your dispute to investigate and verify information with the creditor. It must also report the results back to you within five days of completing its investigation.
How to Fix Bad Credit History
The most important factor in your credit score is your payment history. So if you can't begin improving your FICO score as long as you are not current on all accounts. That's because as long as you're behind, creditors will report you as late. Even if you're making a payment on time each month.
Try contacting your creditor and explain that you can make your monthly payments but just can't catch up the past-due amounts. If you have a decent payment history, your creditor may re-age your account for you. That means you don't have to catch up. The creditor adds your past-due amount to your balance and marks you current with credit bureaus. As long as you make your payment on time in the future, your credit history and score will improve. Re-aging can raise your credit score very quickly.
What about other missed payments? You might get some relief from these creditors as well. It can't hurt to ask. Write the creditors a goodwill letter explaining the circumstances that caused you to pay late. Apologize and ask them to please remove the late payment from your credit history. You have a better chance of success if you are current on your account, have a long-standing relationship with the creditor and can document a good reason for being late.
Sometimes, the only cure for bad credit is time. Every month that passes makes a late payment less important. Keep making your payments on time for six months to a year and you'll see marked improvements. Don't increase your account balances. Just devote yourself to paying on time and owing less. Monitor your credit and improving score.
Use Less Credit
If your credit card balances increase every month, you've created an unsustainable spending pattern. You can't spend more than you earn forever. That's why credit scoring models pay close attention to the amount of available credit you have, and how much you use. The relationship between the amount of credit you have and the amount you use is called utilization.
If you have $10,000 in available credit and use $6,000, that's a 60% credit utilization ratio. Most consumers with good credit scores have utilization of 30% or less. You can decrease utilization if you:
- Pay down your account balances.
- Increase available credit (by applying for more cards or by asking your existing creditors to increase your credit limits)
- Zeroing credit card balances with a personal loan (personal loans are installment loans, so paying off your credit cards drops your utilization ratio to zero, even though you still owe the same amount)
Don't consolidate your debt with a personal loan unless you are confident that you won't run your credit card balances back up.
How to Build or Rebuild Your Credit History
You can bulk up what lenders call a "thin file" by opening a few accounts, charging small amounts and paying off the balances each month. The catch, however, is that it can be hard to get credit if you haven't had credit. Here are a few workarounds:
- Phone a friend (get a co-signer).
- Tailgate on your established friends or family with an authorized user account.
- Borrow from yourself with a secured credit card.
Borrowing with a co-signer may help you get a better interest rate. Don't borrow more than you can easily repay. Try a small personal loan and pay on time every month. Remember that your late payments harm your co-signer's credit report - and your friendship.
Authorized user accounts are safer. Your friend with good credit can help you by making you an authorized user on one or more credit cards. You don't actually use the card. You don't even need to know the number. But when the account-holder pays the monthly bill, that good history shows up on your credit report and helps improve your score.
Secured credit cards are not really credit. The card issuer does not have any money on the line. That's because you deposit money to cover your limit with the card issuer, and it can keep that deposit if you don't pay your balance. But you do get a card that looks like a regular credit card. And if the issuer increases your limit, the increase is actual credit. You may eventually even get your deposit back if you manage the account responsibly. Look for a card with low fees, and make sure the issuer reports to all three major credit bureaus.
Once you have taken care of the most serious reason codes on your credit report, keep making your payments on time and reducing your balances. You'll keep raising your credit score until you blow through the "good" range and hit the holy grail - excellent credit.