The Increased Importance of Great Credit ScoresThursday, January 29, 2009

Due to the massive changes in mortgage lending, credit scores are now more important than ever before. What was once considered excellent credit has changed, and lenders are offering different rates in smaller and smaller scoring tiers, often times the tiers are in 10 point ranges. What does this mean to you? Slight improvements to your credit could save you big money on your interest payments. Check your credit, see where improvements can be made, and make them as quickly as possible.

What to look for:
Look at your credit usage. Lenders have recently cut credit limits on credit cards down to the current balance owed to limit their exposure to higher losses. The credit bureaus that generate your credit score use your current balance weighed against your available credit as a major factor in determining your credit worthiness. If your balances exceed 50% of your maximum borrowing limit, this will lower your credit score. One way around this is to request a higher maximum borrowing limit and/or to pay down your balance below 50% of your borrowing limit on that account. Many lenders will not allow the increased limit, so another tactic is to open a new credit card and transfer the balance over to keep both card balances below 50% of the max limit. Having lots of credit cards is not what we are shooting for, but for the short-term it can really help improve your score.

The big and obvious thing you need to do is always pay your monthly payments on ANY loan on time. About 35% of your credit score is determined based on your payment history, so be sure to pay them on or before the due date. Do keep in mind however, that you can be a full 29 days late on the payment before it is reported to the credit bureaus and thus adversely affect your score. Clearly you want to stay on track, but if cash is tight, be sure to pay credit card payments on time to avoid a large hike in your APR, where payments like auto or student loans can wait longer and will only incur small, one time late fees.

Another item to focus on is keeping your accounts open and active. It is a good idea to keep all credit accounts open if possible, as long as the account was and is in good standing. By keeping them open, the good credit history will keep your score going up and up. If you close them, the good history diminishes in time and will not factor in to your overall score. If you fear you will use the credit if it is available, try cutting up the card or keeping them in a safe out of sight and out of your pocket book. That way you can avoid the temptation without closing the account.

You are legally entitled to one free credit report per year. You can obtain it at http://www.annualcreditreport.com/. If you have further credit related questions, feel free to write me.