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Tighter Credit Looms for Everyone
The sub-prime lending fiasco has spread far beyond the borrowers who took out loans that they ultimately could not afford, and the lenders that wrote those loans. As a result of huge losses on everything from home foreclosures to credit card defaults, lenders are making it harder for regular people to get credit. In fact, CNN recently reported that in order to qualify for a loan, consumers may need a credit score as high as 720.
Your credit score can range from 300 to 850. It is based on your credit history, your outstanding debt, how long you have had credit and other factors. Simply put, it is the number that lenders use to determine how likely you are to pay back a loan – and therefore, how likely they are to give you a loan, and under what terms.
The most commonly used credit score is called the FICO score and comes from Fair Isaac & Co., a technology company that developed the credit scoring method. Credit scores also are available from each of the three major credit-reporting agencies: Experian, Equifax and Transunion.
Your first step should be to check with those agencies to see what your credit score is. If you apply for a loan, your lender will get your credit score and may share that score with you. But it is a good idea to check your credit score before you apply for a loan. You can get your credit report for free once a year from each of the three major credit-reporting agencies. But don’t go to the agencies’ Web sites. Instead, request your free report by going to annualcreditreport.com or calling 1-877-322-8228.
Once you get your credit report, check it carefully and report any errors you find. That alone may be enough to boost your score significantly. But you also can take other action to improve your credit score, including:
Always pay on time, even if you can only make the minimum payment. Paying on time is the single biggest factor in calculating your credit score. The more reliably you have paid off debt in the past, the higher this number will be. If you have paid bills late or not at all, this will lower your score.
Lower your outstanding debt. Potential lenders want to know how much money you already owe, so this is the second-largest component of your credit score. Your outstanding debt includes not only major debt such as your home mortgage and your car loan, but also the balance you are carrying on your credit cards. It hurts your credit score to have one or more cards that carry a high balance.
Hang on to old cards that you aren’t using, because they can improve your overall available credit. Potential lenders like to see that you have lots of credit you are not using, rather than that you are using most of your available credit.
Don’t open new cards. Resist the temptation to save 10 percent on today’s purchase if you open a store credit card, for example. When you apply for a new card, a credit check shows up in your credit report. If potential lenders see a lot of credit checks, they worry that you are in financial trouble and looking for ways to bail yourself out.