People used to obsess over frequent-flier miles. Now, with lending standards getting tighter, they're applying similar energy to improving their credit scores.
Jeffrey Sheldon, a computer-systems administrator from Purcellville, Va., has an enviable credit score of about 740. But he's planning to refinance his adjustable-rate mortgage and knows that lenders will be taking a particularly close look at his credit record.
So when Sheldon, 36, was shopping for an auto loan last fall, he first compared rates online. Then, he allowed only two lenders to pull his credit report because he knew that lots of inquiries could drag down his score. Now, he's making extra payments so he can pay off the five-year auto loan in 31/2 or four years. He figures the lower debt level will boost his score, which already is near the upper end of the 300-to-850 range of the FICO score, the widely used measure of consumer creditworthiness.
“It's a game you have to play,” Sheldon said. Once every few months, he charges something on one of his lesser-used credit cards because he fears that issuers will close inactive accounts, reducing his total available credit and damaging his score.
The behavior of credit-score strivers can appear bizarre to the uninitiated. Many rejoice over joining the “700 club,” feverishly apply for new credit cards they don't need, keep drawers full of old credit cards they barely use and fight for the removal of the smallest blemish on their credit reports.
Even consumers with good credit, like Sheldon, are pushing to improve their FICO scores – and with good reason. Whereas just a year or so ago a score of roughly 680 to 720 would qualify for the best rates from many lenders, that bar has now been raised to 720 to 750, credit experts say.
Many lenders are demanding higher scores because they've been burned by rising delinquency rates. In the fourth quarter, consumer credit delinquencies hit their highest level since 1992, according to the American Bankers Association.
“The rules have definitely changed,” said John Ulzheimer, president of consumer education for Credit.com. “Back when they were giving money away to anyone who could fog a mirror, you didn't have to have those stratospherically high scores unless you were going after something really high-end.”
At the same time, new scoring systems may complicate consumers' efforts to monitor and improve their scores. Fair Isaac Corp., the developer of the FICO score, is introducing a scoring model, dubbed FICO 08, that the company says will do a better job predicting the likelihood of a borrower defaulting on a loan.
These days, a clean credit record isn't important just if you're shopping for a loan: It could even affect your career. Potential employers, landlords and insurers routinely examine credit reports. “Having a good credit score is far more important now than it ever has been,” said Ken McEldowney, executive director of Consumer Action, an education and advocacy group based in San Francisco.
Yet many consumers battling to improve their credit score have found the fight frustrating, costly and even futile. Some pay hundreds of dollars to credit-repair services or adopt strict credit regimens, only to find that their scores won't budge.
The basic steps to build and maintain a good credit score haven't changed: Pay your bills on time and don't max out your available credit. Payment history accounts for about 35 percent of the FICO score, while the amounts you owe – including the number of accounts with balances and the fraction of available credit used on credit cards – accounts for an additional 30 percent. Other factors include the length of credit history and the types of credit used.
Another key step: Get a copy of your credit report. At annualcreditreport.com, you can get a free report from Equifax Inc., Experian Group Ltd. and TransUnion LLC, the main credit-reporting companies that provide records to lenders. (Consumers generally must pay to get their actual FICO scores.) Search reports for mistakes – more than a quarter of reports contain errors, according to a survey by the U.S. Public Interest Research Group, a Washington-based advocacy group. Dispute errors with the credit bureau as well as the lender. If the lender can't verify the information within 30 days, it will typically be removed from the report.
Also note whether credit card issuers are reporting a credit limit for your account. Issuers don't always report these limits, and that omission may cause your highest balance on the card to be treated as your limit. That can make it appear as if you're using most of your available credit, dragging down your score.
Consumers shopping for a loan can protect their credit score by moving quickly. The FICO system, aiming to distinguish between a search for lots of new credit and comparison shopping for a single loan, ignores all mortgage and auto-loan inquiries made in the 30 days before scoring. If you find a loan within that period, the inquiries won't drag down your score while you're rate shopping.
Some popular strategies to boost credit ratings can actually backfire. While some consumers assume that applying for new credit will raise their available credit and boost their score, “You don't want to increase your limits in a short period of time because that can be a great sign of risk,” said Rod Griffin, senior manager of public education at Experian. And though it may seem prudent to close old credit cardaccounts that you're not using, that can also sink your score.
Some consumers are discovering that all their tinkering is having little effect. Darrell Booker, 30, a database administrator in Richmond, Va., has tried all sorts of strategies to boost his score. Over the past year or so, he has tried to get some late payments removed from his credit report, disputed a paid account that showed up on his credit report as unpaid and paid hundreds of dollars to a company that promised to help him clean up his credit. But the only real boost to his score came when he focused on paying off his credit cards.
“Let me focus on things I know I can totally control,” he said, “and that's reducing my debt.”
