Keeping Your Credit Score Above 620
Having a good credit score is important because it helps you get better terms and interest rates on loans and credit. It's also good because you'll typically have more loan options available to you. That's why, even if you don't have excellent credit, it's important to keep your score at least above 620.
According to Quicken Loans Chief Economist Bob Walters, "Recent changes in the mortgage market have caused mortgage lenders to tighten their credit standards. This has meant that folks with impaired credit, who were able to get home financing in the past, may find that getting a mortgage now may be more difficult. This is all the more reason why improving one's credit score is so important."
In the past decade or so, lenders have expanded the number and type of loans available to people with credit scores as low as around 525. These are known as "sub-prime" loans because those whose scores are that low are considered a higher credit risk. Lenders are less willing to extend credit to people with lower credit scores because they tend not to manage their finances as well as those with better credit scores. This is why sub-prime loans come with more expensive fees and higher interest rates to help offset the risk of borrower default to lenders.
But now, the so-called "credit expansion" is beginning to take many lenders under. Lenders who focus mainly on sub-prime loans are usually under-capitalized and are not faring as well. And while lenders whose primary focus is non-sub-prime loans are not that affected, the number of loans available to people with credit scores below 620 is beginning to diminish.
What Can You Do to Improve Your Score?
The best way to raise your credit score is to pay your bills on time. The more you do that, the better your credit score will be. If you pay your bills on time, it proves to lenders that you've learned to manage your finances wisely. Lenders will then be more willing to give you better mortgage interest rates and loan terms.
There are other ways you can improve your score:
Pay off your debt, rather than move it around. The amount of overall debt you have is reflected in your credit score, so moving it from one place to another does nothing. It's better to just pay if off to prove to lenders you can be financially responsible.
Having a good credit score is important, but it's even more important to keep your score above 620 so that you aren't excluded from loans and mortgages that may work more to your advantage than a sub-prime loan.
Managing credit cards wisely. Don't run up high balances and don't close accounts to remove them from your report.
Resolve any discrepancies or errors on your credit report. You may find your name is misspelled or you may find an account you closed still being reported as open on your report. Make sure your credit report is reporting accurate information.
By Diane Tuman
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