Published August 02, 2011
If you want to save big money on a big loan, do your homework, say the experts. Raising your credit score by as little as 40 points could qualify you for a lower interest on a home mortgage or an auto, student or personal loan.
Think of it this way--if you take out a $50,000 loan for 15 years with a 7% interest rate you will pay nearly $5,000 more in interest than if you borrow the same amount at 6%.
Check these seven action steps to help ensure that you have the best credit report before applying for a loan.
Pull your report
Amber Stubbs, managing editor of CardRatings.com, says that future borrowers should get a copy of their credit report from the three major credit bureaus and take a glimpse at what their lender will see.
"You want to pull those three reports and make sure that everything is 100% accurate," Stubbs says. "We did a poll recently where 75% of respondents found errors on their credit report."
Errors, Stubbs adds, can range from minor mistakes to full-on identity theft and can take anywhere from 30 days to years to remedy.
Future borrowers can nab one free report from each of the three major crediting bureaus at AnnualCreditReport.com, but will have to pay a small fee to pull their credit scores.
The easiest way to lose points on your credit score is to not have enough credit, says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling. "[You need] a minimum of three active lines of credit for credit scoring models to have enough data to create your score," she says.
FICO, the firm that created the FICO credit scoring model, reports that not having enough credit can hurt you in two ways--by reducing the length of your credit history, which counts for 15% of your credit score, and by preventing you from having a mix of revolving and installment credit accounts, which accounts for 10% of your score. Those with little credit may not qualify for the best credit card deals, but can start by getting a standard platinum card or a secured card.
Eliminate the collections
According to FICO, payment history makes up the largest chunk of your credit score--a walloping 35%. Paying your bills consistently and on time will have a tremendous impact on your score, but so will unloading negative credit history, says Jeannine Moore, director of marketing and communications for Consumer Credit Counseling Service of San Francisco.
"If you have an account that's gone into collections, you're going to have to pay it," Moore says. "...The more you can pay those off, the further in the past they're going to be and the better your score will look." After you've eliminated factors bringing your score down, Moore advises consumers to be vigilant about their bills to build positive history.
Pay down debt
Even if you're paying off your cards each month, you could still lose points on your credit score if your balances are high. "Paying your credit card balance down can give you a big impact very quickly," says Amber Stubbs.
Since nearly one-third of your FICO score is determined by amounts owed, keeping your balances in check is crucial. To qualify for the lowest interest rates and best credit card deals, Stubbs says that card holders should keep their balance to no more than 10% of their credit limit. If you can't pay off your debt, you can spread your debt out over several cards, keeping the balance for each card as low as possible.
In some cases, the best remedy for your credit score could be to do nothing. While small blemishes like credit inquiries will fall off of your report within one to two years, Jeannine Moore says that larger mishaps like bankruptcy can take seven years or more.
"The past two years will have the most impact on the credit score," says Moore, adding that borrowers should ensure that their last few years of history are squeaky clean before applying for a loan.
Pay bills immediately
If you're trying to make up for past credit mistakes, pay your bills immediately, especially if you're receiving them by mail. Credit card issuers are required to give you 21 days to pay your bill (in accordance with the Credit CARD Act of 2009), but they're not required to factor in how long that bill might languish in the mail.
"We always admonish that [consumers] should allow 7 to 10 days for snail mail," says Gail Cunningham. "If the bill arrives in my hand on day 10, I better pay it quickly so that it arrives in their hands by day 21."
Ask for help
If you need help, ask for it. All the best credit card companies offer hardship programs that can reduce your payments and get you out of credit trouble faster. If you have a one-time slip-up but maintain good credit history overall, Stubbs recommends asking for a pass.
"If things haven't been going well one month, call [your credit company] and say 'Hey, I've brought my account to current. Can you report that to the bureau and take that 30 days late off?,'" she explains. "Sometimes that works."
Since even one late payment can reduce your credit score, taking the time to ask for help can help you save big bucks when it comes loan time.
Don't rush into a major loan without giving your credit history a thorough checkup and taking care of business. Minimizing any black marks on your credit could save you a bundle down the road.