If you're thinking about buying a house or a car, your credit score is a very important number.
The interest rate you'll pay for the money you borrow will be determined, in large part, by this three-digit number that's generated from the information in your credit report.
Most lenders have carved-in-stone rules about handing out the best terms, and those rules almost always place a major emphasis on your credit score. If their best rates are offered to borrowers with a score of 700 or higher and yours is a 698, those two points could cost you thousands of dollars.
According to www.myfico.com, the consumer Web site of the Fair Isaac Corp. that created the FICO score (the most commonly used credit score), the interest rate difference between those two scores is about one-third of a percentage point.
On a $165,000 30-year fixed rate mortgage, that third of a point could cost you more than $11,172 in interest charges, assuming 629 percent is the lowest rate available (see Bankrate's calculators). Fall below a 660 and the rate goes up another .81 percent.
Keep in mind that these are averages. Most lenders today practice tiered pricing, with interest rates rising as scores go down. Each lender chooses its own "break points" between tiers. Lender A may bump up the interest rate if a score falls below 700, while Lender B doesn't charge higher rates until the score is 690 or below. So if you stick with one lender, and that lender's break point is 700, raising your score from 698 to 701 can be vital.
This underscores the importance of not only doing all you can to improve your score, but shopping thoroughly when looking for a mortgage. From the perspective of a mortgage broker, who can choose among a sea of many lenders, there are no sharp break points. Consumers should do what a good broker does -- look for a lender that offers the best rate for a specific score.
But that's jumping ahead of ourselves. First things first: You can take steps to improve your credit score. The number of variables that play into an individual score make it impossible to say that one particular action will increase a given score by a certain number of points. But there are some good guidelines.
"The mantra for getting a great score is pay your bills on time, keep account balances low, and take out new credit only when you need it," says Craig Watts, consumer affairs manager for Fair Isaac Corp.
"People who do that faithfully have very high scores. It usually means you're being conservative and cautious about credit. It's not a toy and it shouldn't be a hobby."
Speedy upgrade
That's good advice, to be sure, but these actions take a long time. What if you're house hunting and you just need a few extra points to bump you over the line to the great rates?
Start by pulling your credit report and your credit score to see where you are. To get an estimate of your credit score, check out our Credit Score Estimator. If your score is above a 760, you're golden. Improving your score from 760 to 800 won't get you better terms.
What you're looking for on your report are factors that could be affecting your score. Look for errors in the report, such as accounts that aren't yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that shouldn't be reported any longer (negatives are supposed to be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years).
After repairing errors, the fastest route to a better score is paying down balances on credit cards, says Watts.
Though it's not an instant cure, paying down credit lines over a two month period can boost your score a substantial amount, and may be enough to put it over the edge if you're lurking just beneath the next tier of loan pricing.
Had a few late payments in your past?
Even if you've paid your bills late in the past, you can improve your credit score by paying every bill on time from now on, says John Ventura, a consumer law attorney and author of "The Credit Repair Kit."
"Forget about grace periods," he says. "If you want to have a really good record with the credit agencies, pay your debt before it's due and keep your balances low."
A big no-no One thing you shouldn't do if you're just trying to boost your score is close unused accounts, Watts says. "If someone tells you to close unused accounts to improve your score, they're pulling your leg," he says. "It won't help you and it can hurt you."
Closing unused accounts without paying down your debt changes your utilization ratio, which is the amount of your total debt divided by your total available credit.
"You appear closer to maxing out your accounts," he says. "That's why your score can drop. It doesn't mean people shouldn't close them, but don't close them to improve your score."
If you do cut up cards, though, leave the oldest one open, says Steve Rhode, former president of Myvesta.org, a national nonprofit financial crisis center.
The length of your credit history is another factor in your score. If you close the account of the credit card you got when you were a freshman in college and leave open the ones you just got within the last couple years, it makes you look like a much newer borrower.
"Keep a couple of the oldest open; I don't care what the interest rate is," he says. "Creditors don't care what the rate is."
Working with credit card balances
Another strategy for bringing up your score: Transfer balances from a card that's close to being maxed out to other cards to even out your usage, says David Chung, managing director for Maryland-based CreditXpert Inc., which provides credit tools to lenders. Or just spread out your charges between a few cards.
"Try to get the usage on all of them at 20 to 30 percent instead of a bunch at zero and one at 80 percent," Chung says. "You're not spending less, you're just shifting it around to different cards."
It could work, Watts from FICO says. "Transferring the balance to a card with a lower utilization could help," he says, "but it's much better to actually pay down the debt if you have the cash kicking around."
If you're really into finessing the system, check your credit report to see what day of the month your creditors send updates on payments to the credit bureaus, Chung says. They're rarely on the same cycle as your payment due date. That's why you can pay off your card every month and your credit report will show you carrying a balance. Then, make your payments several days before the reporting date.
All of these strategies generally take at least 30 days because lenders don't report payments more than once a month.
Rapid rescoring
If you're in the throes of qualifying for a mortgage and need a score boost in a hurry, you can speed the process along with rapid rescoring. If you've got legitimate negative information on your credit report, such as late payments or accounts in collections, you're out of luck. But the process of rapid rescoring can help increase your score within a few days by correcting errors or paying off account balances.
You can't do this one yourself; you'll need a lender who is a customer of a rapid rescoring service. Generally, the service will run roughly $50 for every account on your credit report that needs to be addressed, but it could save you thousands on your loan.
If a consumer can find a lender who is a customer of a rapid rescoring service, new information can be posted within 72 hours, Watts says.
Some nifty online tools are available to find out which strategies could have the most impact on your score. Fair Isaac's www.myfico.com site offers a credit score simulator when you purchase a credit score. It offers seven simulated scenarios, such as how paying down your account balances -- or not paying any of your bills on time this month -- would affect your score.
CreditXpert's "What-If" simulator lets you play with several variables, such as buying a car, paying off a student loan and opening a department store account, all at the same time. They don't sell the simulator directly to consumers, though. You can get a list of places that do sell it on the consumer page of its Web site.
The bottom line, the experts say, is that you're not powerless when it comes to your credit score.
"There are a lot of things you can do to improve your score," Chung says. "You need to understand what your credit is like now and what's influencing your score today. Then you can take an objective look at the different options available."