Q: We keep hearing everywhere that interest rates are "historically low," but no one I know seems to be able to qualify to get the 4.4 percent we keep hearing and reading about. How do you qualify to get the lowest rates? What do you advise a financially fit person to do to increase her credit score or make herself a more attractive buyer?
A: Last week, we discussed what it takes to qualify for the very best interest rates. Now we turn to tips for increasing your credit score, even if you’re already pretty fiscally fit.
I’ve found that people asking about how to qualify for the best interest rates is similar to people asking me how to lose weight: I tell them the truth, then their eyes glaze over when I give them the straight dope, sans magic bullets.
No one wants to hear: eat vegetables, cut the sugar, and exercise; similarly, they don’t want to hear: pay your bills on time, every time. But I’ve been asked this question a lot recently, so here goes, anyway!
1. Pull your reports online — get them for free, no strings attached, at the government-authorized website AnnualCreditReport.com. This doesn’t get you your actual FICO scores, but it does get you the content of your report.
Look for errors that could be depressing your score, like accounts that don’t belong to you, balances that are actually lower than reported, old debts that are paid off that should have been removed entirely (seven years for credit cards, 10 years for bankruptcies).
2. Consider reopening accounts you thought were open but have been closed because you haven’t used them in so long — it will help boost your utilization ratio, one element of your credit score that is dependent on how much available credit you have.
3. Pay down some debt. This both decreases your debt-to-income ratio (36 percent is the goal, including the proposed mortgage payment) and increases your credit score, if you do it right (see the next tip).
4. Don’t close any accounts. Instead, spread your debt out. The ideal utilization ratio is about 20-30 percent of your available credit overall, and on any given account. Closing accounts reduces the amount of credit that is available to you, so it makes it look like you’re closer to being maxed out.
So if you have one card that’s near its max and several others that have zero balances and you’re trying boost your score a bit, quickly, consider balance transfers to spread our your debt more evenly, aiming for 20-30 percent of the available credit on each card.
5. Use your credit regularly — and pay it on time, every time. FICO scores are not simply about making sure you have no debt. They are meant to be a measure that shows that you have a history of responsibly using and managing and repaying your debt.
6. Finally, check in with your mortgage broker. Have the broker pull your report and score, as the report she pulls is the one she’ll have to go by in the final analysis. If you’re really close to a score level that would empower you to qualify for a lower rate, the mortgage broker can actually run a credit diagnostic on your score and generate some recommendations for which actions you could take to raise your score by the needed few points.
Also, many mortgage brokers can do what’s called a "Rapid Rescore" — once you’ve paid that bill off, they can actually submit a request directly to the credit bureaus to update that information and your score in just a few days.
None of these tips will get someone with a 500 credit score to a 700 (other than a massive debt reduction program). But if you’re trying to get a little boost to get you over a credit score hump, these can be potent and save you beaucoup bucks in interest.