Why Is it Important to Raise Your Credit Score?

The sub-prime mortgage crisis caused lenders to tighten their credit criteria. A credit score that once had lenders beating a path to your door and offering their keenest rates may no longer have the same effect. If you want to obtain low interest rates and the most competitive prices across a range of essential services, you may need to raise your credit score.

Lenders

Whether you are applying for a mortgage, a new credit card or an auto loan, your lender will check your credit score. Lenders also check scores when reviewing interest rates on existing accounts. Scores from FICO, the major U.S. credit scoring developer, range between 300 and 850; the higher your score, the lower the risk you pose to lenders. Experts at Bankrate suggest that, while a score of more than 700 once guaranteed you the keenest rates, mortgage lenders now reserve their best deals for customers with scores of 740 or more. Although individual lenders use different score triggers when deciding whether to grant credit and at what rate, in September 2010 MSN Money recommended its readers aim for a score of at least 740.

Other Score Users

Insurance providers will pull your credit score to assess the level of risk you pose. The cheapest premiums will be reserved for those with the highest scores. Cell phone companies will check your score before setting up a contract, and your score may also influence the terms of your utility contracts, including deposit requirements and price plans. Landlords will pull your credit score to assess whether you are likely to pay your rent on time; a low score may result in higher rent, a request for a larger security deposit or insistence on a co-signature. According to MSN Money, 35 percent of employers ask to see the credit scores of job applicants, using the score as a measure of responsibility.

Costs and Savings

Experts estimate that an individual with a score of 650 will pay $60 per month more interest on an $8,000 credit card balance than someone with a score of 750. Similarly, a borrower with a 650 score will pay $5,400 more on a $25,000 auto loan than those with scores of 750 and above. Add the likely cost differentials of mortgage borrowing, rent, insurance and utilities, and it is apparent that your credit score is more than a three-digit number; it has a serious influence on your financial prosperity.

Considerations

Discover your current score before you decide what, if any, improvements you need to make. If you buy a copy of your FICO score, you will also receive details of any factors that may be dragging it down. Work on addressing those issues and use the free score estimator on the myFICO website to see if there is anything else you can change to improve your score (see Resources). Be sure to order your free annual credit reports from AnnualCreditReport.com and fix any errors that may be affecting your score.