Do you enjoy paying more than other people for vehicles, for home remodeling projects or for the goods and services that you charge on a regular basis? That’s just what your doing if your credit score is in the average range. It’s people with the highest FICO scores—usually between 720 and 850—who benefit from the lowest interest rates on home mortgages, vehicles and other loans.
Will that really make a difference to you? Consider these examples from the My Fico website, based on national average interest rates:
- On a 30-year, $300,000, fixed-interest mortgage:
- A person with a FICO credit score of 760-850 (the highest tier) would be charged an interest rate of about 2.95%, for monthly payments of $1,257.
- A person with a FICO score of 690—around average in the U.S. these days—would pay an interest rate of 3.35%, for monthly payments of $1,322.
With the highest credit rating, you would save more than $23,400 over the lifetime of that loan—enough to buy a compact car in addition to a home, or several great vacations during those 30 years.
Five ways to bump it up
You can be one of the lucky (and careful) people who enjoy the benefits of a great credit rating. Here’s what you should do.
- Make payments on time. Always. Don’t be late, don’t put it off. If you need to, set alarms on your cell phone, make yourself a big calendar and circle payment dates, do it. Get in the habit of pre-scheduling your payments online as soon as you get your bills (whether via email or snail mail.) Late payments are one of the biggest factors in lowering your FICO credit score.
- Pay down your debt and then keep it well under control. Having a credit limit of $10,000 on a card doesn’t mean you have to spend up to that limit. In fact, you should avoid getting anywhere near that figure. The credit card bureaus are happiest—and they assign better FICO scores—when people keep their debt to limit ratio around 30 percent. In other words, if you have a $10,000 limit on your card, try not to charge more than $3,000 on it. (And keep your spending on all your other accounts under those limits as well.)
- Don’t apply for more credit than you really need. Credit card offers can be tempting, and there’s nothing wrong with applying for one occasionally if you find that it really fits your lifestyle (airline rewards if you love to travel, for example). But having too many credit cards, and especially applying for too many cards (or even too many loans) within a short period of time sends up warning signals to the credit bureau and impacts your score.
- Don’t close credit card accounts. Even if you don’t use them, it hurts your credit score when you close an account, because you’re decreasing your debt to limit ratio. (Read more: Think Twice Before Getting Rid of an Old Credit Card)
- Keep a close eye on your credit reports. Errors occur more often than you might think, and it can take time to get them straightened out. You’re entitled to one free credit report from each of the major reporting bureaus each year. Apply for one of those reports from a different agency every four months and review it carefully. Correct any errors you find immediately.
Raising your credit score from average to excellent will take some time and some discipline. But once you’ve achieved that lofty status, you’ll find your efforts rewarded with some very real financial benefits.