How to hit a credit score home run
By Dawn Papandrea
April 1, 2016
Baseball’s opening day has arrived to the delight of die-hard fans across the country, but it’s a long, 162-game season to get through before your team’s playoff run can begin. The journey is a lot like building a credit history and trying to get into a first-place FICO score standing.
“You can’t win the World Series in the first month of the season. Likewise, there’s no immediate gratification when it comes to building credit,” says Mike Foguth, founder of Foguth Financial Group in Howell, Michigan.
The key to improving and maintaining your credit score, he says, is playing to win over the long term. Apply these three baseball fundamentals to your financial activities to achieve big-league credit score success:
1. Play like the scouts are watching
A lot of practice will lead to a strong credit game so that your lender scouting report — aka, your credit score — is stellar.
“Your score is important because it’s one of the major things lenders are looking at when you apply for a loan or try to open a new account,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling (NFCC). Like a batting average, it measures your financial performance over time, factors in if you struck out in the on-time payment department, and evaluates if you’ve responsibly managed each account.
“You can’t win the World Series in the first month of the season. Likewise, there’s no immediate gratification when it comes to building credit.”
— Mike Foguth,
Foguth Financial Group
“If you’re maintaining a healthy score, you’ll end up saving money because you’ll pay less interest on what you borrow,” says McClary. Your score can even impact things such as auto insurance rates, getting approved to rent an apartment, or a job offer, adds Foguth.
2. Figure out what type of player you are
Improving your credit score begins with knowing where you stand.
Pull your credit reports and get a score from all three reporting agencies, Equifax, Experian and TransUnion, says McClary. That way, you’ll be able to see which areas you need to work on since the credit report will highlight negative items and make suggestions on how to turn your season around.
Take a look at this lineup to see where you fit in:
Bottom of the order: Generally speaking, any FICO score (scores range from 300-850) below 630 would put you in the “bad credit” category. It might just mean you’re a credit rookie, says McClary, meaning you have little or no credit history, which doesn’t give the lender much to go on. Or, a low score can indicate that you’ve had a significant problem maintaining timely payments with an issuer; the damage to your score is most severe if those payments were missed very recently.
“This type of consumer is considered to be toxic to lenders, and they are not going to want that person as a customer. If lenders do work with this type of consumer, they will apply high interest rates and maximum fees to offset their risk,” says McClary.
Lead-off batter: As of April 2015, the national average FICO score reached an all-time high of 695. People with mid-range credit scores are considered to have fair credit (650-699) or good credit (650-699).
“There may be some problems they had in the past with missed payments here and there. Or it may be a situation where they have some account balances they are carrying month to month which may eat up a large portion of their available lines of credit,” says McClary. While a lot of creditors are willing to work with such a person, he or she won’t have access to the best rates or products.
Clean-up hitter: With scores in the mid-700s up to 850, all-star credit players have a near-perfect history of on-time payment to creditors, says McClary. They are managing their debt responsibly and keeping balances low. They also have a strong credit mix, from credit cards to loans to mortgages, and managing all of these accounts effectively.
With an outstanding credit score, not only will this person qualify for the lowest interest rates, but also the best credit products and larger lines of credit (assuming that income is strong).
3. Cover all your bases
Now that you know what caliber of credit user you are, it’s time to get to work to improve your stats. Here are the three biggest ways to give your FICO score a boost:
“Your score is important because it’s one of the major things lenders are looking at when you apply for a loan or try to open a new account.”
— Bruce McClary,
for Credit Counseling
Pay on time: Making payments on time accounts for 35 percent of your total FICO score. “You can be doing fine with the other factors, but one missed payment can cause serious problems,” says McClary.
To be reported for a missed payment, usually you have to be approaching two months late, so don’t panic if you’re a day off. “Make sure you’re working with your creditor to resolve any issues before it gets to that 60-day mark,” he says.
Don’t owe too much: Credit utilization — that is, how high your balances are in relation to your available credit — is the second most important factor, coming in at 30 percent of your score.
“You want to have a healthy level of utilization, so you shouldn’t max out all of your accounts. Keep your balances low, or pay them off before they roll over,” says McClary.
A good rule of thumb is to stay below a 30 percent utilization, says Foguth. Therefore, if you have $10,000 in available credit, try not to carry a balance above $3,000. Paying down a higher-utilization account will likely result in a score increase.
Watch those errors: The quickest route to score improvement could be correcting errors on your credit report, says Foguth. The Federal Trade Commission reported in 2013 that 1 in 4 consumers had errors on at least one credit report; 13 percent who made corrections saw their credit score change.
“Incorrect items could be negatively impacting you. You’ll see some quick results once you correct them,” he says. To do this, look very carefully at each line item on your credit report. If you spot a late payment that you know is false, for instance, you can dispute it with one of the bureaus (which will alert the other two).
Creditors have 30 days to investigate and make corrections if necessary once you initiate an investigation.
Discovering an account that you never opened could signal a larger issue — identity theft. In that case, you’ll need to report the fraud right away to limit and reverse any damage.
Whether you’re a rookie new to credit, a player coming back from the disabled list (rebuilding credit after a bankruptcy, for instance), or a bench player vying for a starting position, improving your credit score will benefit you in the future. Remember, it’s a long season, so make every play count.
SEE ALSO: 16 ways to improve your credit in 2016