Personal Finance: Bettering your credit score
Recently, with a surge of identity theft cases in the news, consumers have been urged to routinely check their credit reports, which are maintained by three major credit bureaus: Experian, Equifax, and TransUnion.
Yet consumers still don't grasp the importance of checking—and improving—their credit scores, which are derived from information in their credit reports. In fact, half of all consumers don't understand what credit scores measure, according to a recent survey by the Consumer Federation of America.
For the record, your credit score is a numerical assessment of your creditworthiness. You actually have several scores (depending on what service the lender uses). But typically, each score will range from about 300 to 850 or so—and the higher the number, the better. The difference between scoring very well (say, above 750) and poorly (typically, below 630 or so) might mean the difference between getting a loan or being rejected. Or, at the very least, it could mean the difference between getting a mortgage with a 5.5 percent interest rate versus one charging 7 percent.
So how do you stack up? Experian, one of the leading credit bureaus, recently put out a study with the following national averages for its so-called Experian Plus credit scores:
- 18-29 years old: 637
- 20-39: 654
- 40-49: 675
- 50-59: 697
- 60-69: 722
- 70 or older: 747
As the numbers indicate, scores tend to improve with age. That's not because we're earning more money in our golden years. Rather, it's largely because of silly mistakes we make in our youth.
So how can you improve your score as you age? Consider these basic steps:
- Start paying all your bills on time. The most common—and one of the most damaging—errors you can make as a borrower is to be late with routine debt payments. Yet the average 30-something has missed 1.4 payments over the past 12 months.
- Keep track of your debt-to-credit-limit ratio. It's not necessarily how much money you owe in loans and credit cards. It's how much you owe versus how much lenders are willing to lend you. This may explain why 70-year-olds score the best: They tend to use the least of their credit lines.
- Don't open unnecessary lines of credit. The more credit cards you open, the more other lenders think you need to borrow.
For more information on how to improve your score, consumers can go to www.myfico.com, a site run by Fair Isaac, a California company that maintains credit scores called FICO scores; or www.consumerfed.org, the site run by the Consumer Federation of America.