Credit & Money Management
Boost Your Score
Paying bills on time, and returning your library books, can improve a key credit number.
By Kimberly Lankford, Contributing Editor
From Kiplinger's Personal Finance magazine, March 2006
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Pop quiz: Which affects your credit score more, getting married or having overdue library books?
Surprise answer: A library fine that goes to collection can shave 100 points off your credit score -- and boost your annual interest payments by hundreds of dollars. But getting married doesn't affect your score at all unless you co- sign for a loan with your new spouse.
Your credit score -- the numerical summary of how much you owe and how promptly you pay your bills -- has a major impact on your finances and beyond. Score high and you can save thousands of dollars on your mortgage, car loan and credit cards.
A good score can also reduce your premiums for auto, homeowners and private mortgage insurance. Auto insurers use credit scores to assess your risk of getting into an accident because studies show that consumers with high scores tend to file fewer claims.
On the other hand, a low score can make it tough not only to get a loan but also to buy a cell phone, rent an apartment or get a job. It may reduce the size of the mortgage you qualify for, or require that you make a bigger security deposit when you open an account with a phone service or electric utility. "It's your GPA as an adult," says Craig Watts, of Fair Isaac, the company that created the so-called FICO score, the most commonly used measure of credit, although not the only one (get a rundown on other scores).
What number should I aim for? FICO scores range from 300 to 850, but only 13% of consumers have scores above 800. The median score is 723, and many lenders require a score of 760 or higher to get the best interest rates.
How does my credit score affect the interest rate on a mortgage loan? It can mean big savings -- or big penalties. Recently, for example, borrowers with a score of 760 or higher qualified for an average interest rate of 5.8% on a 30-year fixed-rate mortgage. But for borrowers with scores of 620 to 639, the average rate was 7.4%. That translates into $227 more each month, or $2,724 per year, on a $216,000 mortgage (see www.myfico.com for a list of average rates that correspond to each FICO score).
Your income, assets and employment, which aren't considered in your credit score, can also affect your mortgage rate and the amount of the loan. But lenders often start with a credit-score cutoff for certain rates. If the cutoff is 700 and your score is 697, you won't qualify no matter how good the rest of your file looks, says Bob Walters, chief economist at Quicken Loans.
