How to Play the Credit Game
Whether you're starting a business or splurging on a Ferrari, if you want to get the lowest interest rates, you'll need to pump up your FICO score.
(Business 2.0) – Unfair as it may seem, one number has a lot to say about whether you can play in the big leagues. The number is a measure of your creditworthiness called a FICO score, and in the real game of moneyball, it goes a long way toward determining where you can afford to live, what you can drive, even whether you'll snag that bridge loan you need to get a new business off the ground.
Created by the Fair Isaac Corp. for use by the three main credit-rating agencies (Equifax, Experian, and TransUnion), FICO scores range from 300 to 850. If yours is above 720, you qualify for the absolute lowest interest rates; let it fall below 500 and lenders start thinking you're a candidate for bankruptcy. Even a drop of just 25 points can make a big difference. As of mid-October, a 700 FICO score could get you a $300,000 30-year mortgage at 5.72 percent. But for a score of 675, the rate went up by more than 0.5 percent—a hit that would cost you $37,260 over the life of the loan.
The first step is to play by some basic rules: Pay your bills on time, don't sign up for too much plastic, and comb your credit reports for errors. But there are also lesser-known tricks to the game. Just don't expect to hit it out of the park right away; it'll take about a year to start seeing results.
Shop in sprees. The more requests for credit you make, the worse for your score—even if you borrow nothing. Robin Holland, senior vice president for consumer services at Equifax, says lenders interpret frequent credit shopping as a sign that you're in financial trouble and want to borrow your way out. Luckily, though, there's a loophole: Since lenders assume that multiple requests during a tight time frame are related to the same transaction, you can look for as much credit as you want in a 30-day period with no more impact than a single request. So if you need to trade in your car and refinance your mortgage, do both in the same month.
Save old accounts. Remember that credit card you got in college, the one you haven't used in years? Contrary to popular wisdom, closing that account won't help your score. In fact, it might hurt. That's due to the importance lenders place on your credit history: The longer, the better. Close a long-standing account and you erase a history of faithful payment-making that could offset a blemish or two elsewhere.
Say no to retailers. Many stores try to persuade customers to sign up for in-house credit cards by offering discounts of 5 to 10 percent on their initial purchases. That might sound like a great deal, especially if you're buying a big-ticket item. Wrong, says John Ulzheimer, business development manager for the Fair Isaac website Myfico.com. Sure, you might save 50 bucks that day—but to Fair Isaac's computers, seeking more credit signals higher risk, which will hurt your score and cost you more in the long run.
Beware transfers. Consolidating balances from multiple credit cards into a single account with a lower rate is the easiest way to lower your monthly payments. Unfortunately, as with all miracle cures, there are side effects—in this case, a severe hemorrhaging of your FICO score. Why? A key factor in determining your score is "credit utilization." If you owe $10,000 on four cards with a combined credit limit of $50,000, you've utilized just 20 percent of your available credit card debt. Put that $10,000 on a single card with a $12,500 credit limit and your utilization jumps to 80 percent, making you look like a deadbeat. — DUFF MCDONALD
The FICO Scorecard