Improving Your Credit Score

Tue, October 21, 2008

NEW YORK (CNNMoney.com) -- Lenders are boosting the credit scores they require to lend consumers money.

Just last week, GMAC, the finance arm of General Motors (GM, Fortune 500), said it would require a score of 700 in order to lend to borrowers buying cars.

Here are some changes and strategies on how to improve your score.

1. Know the challenges

The landscape is changing. Banks are getting pickier about who they are lending to.

Consider this: Two years ago, to get the best loan terms, you would need a FICO score of 720 to 750. But today you'll need a score of 750 to 780 to get the best terms.

2. Increase your score

Here's what a person with a credit score above 750 looks like:

Generally, he/she will have a long history of making payments on time. This person will also have a mix of credit - from a mortgage to a student loan to a credit card.

He/she won't spend more than 10% of their credit limit. There will be no retail store credit cards in his/her wallet.

If perhaps you don't fit this image, here are some things to look at if you want to improve your score:

Payment history: Payment history is 35% of your credit score.

Lenders look at your payment history as far back as seven years, but the older the data the less impact it has. They really scrutinize the last 24 months.

Naturally, a 30-days-late payment performance hurts your score in the first year, but the one thing to really stay away from is 90-days-late - that is considered severely derogatory.

Credit mix: You need to handle several types of credit successfully to get the very best scores. Credit cards are part of the picture, but certainly not the only thing.

Having a mortgage improves your rep with credit bureaus and can enhance your score if you pay it faithfully on time. You should also have and pay on time an installment loan, like a car loan.

Application for credit: People who have credit scores in the 760-780 range aren't applying in the department store for a credit card. In fact, they aren't applying for anything.

Another key if you want the best credit - use only 10% of your available credit limit on any credit card and don't cancel old cards.

3. Watch those limits

More and more credit card issuers are cutting your credit limit - in fact, 62% have cut back the lines of credit they make available to consumers - that's according to a report out this year by Javelin Strategy & Research.

When a credit card company cuts your credit limit, it makes your debt look bigger by comparison - and that makes your credit score take a hit.

So, make sure you keep on top of what your credit limit is. And if it is cut back, make sure to call your credit card issuer and reinstate it.

Source: http://money.cnn.com/