January 13th, 2015 11:16 AM by Jackie A. Graves, President
Olympic divers and college-bound test-takers
have a valuable lesson to teach U.S. borrowers: Getting a higher score can
really pay off.
Lenders make well over $1 trillion in loans
every year based in large part on credit scores developed by Fair Isaac Corp., a firm based in San Jose, Calif., that attempts to
quantify which borrowers are most likely to repay the money on time. Borrowers
with higher FICO scores are generally eligible to get bigger loans at lower
But turning a good score into a great one can
win you an even lower interest rate, and save thousands—even tens of
thousands—of dollars for borrowers who take out a mortgage, buy a new car and
use credit cards, experts say. In addition, consumers with sterling credit
often have their pick of lenders and can sometimes use that leverage to pay
lower loan fees.
Tens of millions of Americans carry credit
scores that are just under the highest range. Some 32.8 million people have
FICO scores between 700 and 749, on a scale of 300 to 850, and another roughly
36.4 million people have scores between 750 and 799. About 38.6 million are in
the 800-to-850 range. Roughly 1% of the people with FICO scores, or around 2
million individuals, have a perfect 850.
Most lenders consider people with FICO scores
of at least 720 to be prime borrowers, and generally charge them interest rates
that are low—but not the lowest available.
When the best deals kick in can vary by lender
and type of loan. But the benefits can be substantial.
For example, home buyers with FICO scores
between 700 and 759 could get an interest rate of 3.983% on average on a
$400,000, 30-year fixed-rate mortgage with a 25% down payment, as of Jan. 6,
according to Informa Research Services, a market-research company based in
Home buyers with FICO scores in the 760 to 850
range could get an interest rate of 3.821% on average under the same
circumstances, which means they would pay $6,194 less in interest in the first
10 years and $13,366 less over the life of the loan. On “jumbo” mortgages,
which are common in pricier real-estate markets, the savings could be greater.
Borrowers who want to boost their scores can
take certain steps that will pay off within a month or two, and others that
will raise their scores over many months or even years.
Here’s how to make your score stand out to
How FICO Scores Work
The first step is to understand how FICO
scores are calculated—and the role your score plays in lending decisions.
Five factors go into a FICO score. The most
important is your payment history, which accounts for 35% of the score. If you
want a high score, the first piece of advice is the simplest: Pay your debts on
The second factor is the overall amount of
money you owe—including how close you are to the limits on your credit
cards—which accounts for 30% of the score.
Another 15% of the score depends on the extent
of your credit history, which favors borrowers with a long track record, while
10% is determined by whether you have shown an ability to manage different
types of credit. The remaining 10% depends on whether you have applied for
The three main credit-reporting
firms—Equifax, Experian and TransUnion—then plug the information they have in your
credit reports into the score calculation. The information each firm has may
differ, so your scores from the three firms may vary.
Cody Goebel, who is 51 years old and lives in
Silver Spring, Md., says he found out in late December that his FICO scores
were 795, 806 and 807 when he applied to refinance his mortgage.
“I just try to manage my finances carefully,”
says Mr. Goebel, a financial-markets policy analyst. He maintains a variety of
loans, including credit cards, mortgages and private student loans he has
cosigned for his two sons. And he regularly checks his credit reports to make
sure there are no errors or fraudulent accounts that have been opened in his
name—a problem he encountered about a decade ago.
Checking scores is getting easier. FICO has
reached deals with a growing number of lenders to show their customers
whichever of the FICO scores the firms use in lending decisions, at no charge.
Later this month, for example, Citigroup will begin showing customers who have Citi-branded credit
cards their FICO scores. Lenders who already provide the service includeDiscover Financial
Services and Barclaycard, a unit of Barclays.
Consumers in such programs also can see brief
descriptions of what is holding their score down. In some cases, they can see
when their score went up or down.
It also is possible to get access to your FICO
score by paying a fee. Experian began offering that service in December, and
Equifax already does, as does FICO through its consumer website, myFICO.com.
Prices vary by company and can range from
$14.95 to $21.95 a month, and often include related services. For example,
Experian also lets customers run scenarios which show how their scores might
change if they pay down credit-card debt or take other similar steps.
Several firms run ads saying that they sell or
give consumers credit scores free. But many don’t provide FICO scores, instead
offering ones that are rarely, if ever, used by lenders. The scores can be
significantly different from their FICO score, which can catch consumers off
guard when they apply for a loan and find out they aren’t as creditworthy as
they thought they were.
Keep in mind that the FICO score isn’t the
only factor lenders consider when deciding whether to offer you a loan or what
interest rate to charge. The size of a down payment or the extent of your
relationship with a lender also can play an important role. Many lenders also
have their own proprietary credit scores.
A Quick Payoff
Two fast ways to boost your FICO score are to
spend less on your credit cards and to pay off card balances. In some cases,
those moves can help raise a borrower’s score within as little as a month, says
Ethan Dornhelm, principal scientist at Fair Isaac, also known as FICO.
If you want a FICO score of 800 or above, you
should aim for a “debt-to-limit ratio” of no more than 10%, says John
Ulzheimer, president of consumer education at CreditSesame.com, a credit-management
site, and a former FICO manager. For example, if your total spending limit on
all credit cards is $50,000, try to use no more than $5,000 at any one time.
The FICO formula also penalizes individuals
who have too many credit cards with balances, Mr. Ulzheimer says. Instead,
consider using no more than two credit cards and choosing the ones with the
highest spending limits, he says.
Paying your credit-card bill in full when the
statement arrives isn’t good enough if you want to keep your debt-to-limit
ratio low, as the balances on your credit reports at Equifax, Experian and
TransUnion are based on the most recent month’s credit-card statements, Mr.
One trick: Pay the lender soon after you use
the credit card, well before the statement closing date. Online payments often
are processed in one to three days.
“I’ve been putting all my purchases [when]
possible on credit cards and paying them off every week,” says Andrew Colucci,
29, a doctor in Boston. “I’m paid weekly, so when there’s a direct deposit I
just send the payment.”
Mr. Colucci says his FICO score, which was 791
last summer, helped him to refinance approximately $120,000 of federal student
loans at fixed rates as high as 6.8% into a private student loan at a 2.63%
variable interest rate with Darien Rowayton Bank in Darien, Conn., in August.
Know Your Limits
As for increasing your spending limits, pay
attention to the pitches you receive from card issuers. More issuers have been
telling existing cardholders they are eligible for increases in the past year
or two, says Curtis Arnold, founder of CardRatings.com, a credit-card
But if you want to boost your FICO score,
don’t use that extra credit. Also ask the card company if it would make a
formal request to check your credit report before approving the increase; that
alone could lower your score, Mr. Ulzheimer says.
Beware of store credit cards, which tend to
come with relatively low spending limits. Consider using charge cards, such as
those issued by American
Express, as their balances often aren’t included in
the credit-card debt-to-limit ratio in certain FICO scores that lenders use,
says Mr. Dornhelm of FICO. Most charge cards don’t have a spending limit, since
cardholders must pay the bill in full each month.
Consumers can check how issuers report
charge-card activity on their credit reports, which they can access free once
every 12 months at AnnualCreditReport.com.
Lastly, try to use each credit card you have
at least once a year, says Mr. Ulzheimer. Card issuers sometimes shut down
unused cards, which can hurt your score.
Take the Long View
Other strategies can take months or years to
boost your score, which is worth keeping in mind if you are planning to make a
major purchase such as a house or a car down the road.
Building a credit history and demonstrating an
ability to manage different types of debt—such as credit cards, car loans and
mortgages—both take time.
The good news is that if you manage debt
responsibly, your FICO score should increase and the benefit should endure for
years. When borrowers successfully pay off car loans or mortgages, the
information stays on their credit reports for 10 years from the date of the
last payment, according to credit-reporting firms.
There is an important exception: If you miss
payments or default on a loan, that information stays on your credit report for
seven years. So if you encountered financial difficulties during the financial
crisis, say, waiting a little bit longer before taking out a new loan could be
The impact of missed payments is usually worst
in the first few years, but 96% of people with a FICO score of 785 or greater
have no late payments on their credit reports, according to FICO.
Time your loan applications wisely, as well.
Consumers should look for the lowest interest rates on mortgages, car loans and
student loans. Shop quickly: Such credit inquiries aren’t factored into your
FICO score within their first 30 days on file. They can affect the score after
that period but are treated as one inquiry if they occur within a 45-day
If you take more time, the inquiries could
count as multiple requests, which can lower your score, Mr. Ulzheimer says.
Inquiries can stay on your credit reports for
24 months, he says, though the FICO score factors in only inquiries up to 12
Once you boost your FICO score, make the most
of it. Some lenders don’t draw a distinction between a borrower with a score of
740 and a score in the 800s.
Find lenders that do. The payoff may come in
the form of lower interest rates or lower fees. For borrowers who are seeking a
$1 million mortgage with a 25% down payment and who have a FICO score in the
740 to 759 range, Salt Lake City-based Zions Bank, a unit of Zions Bancorp,
has recently been charging an origination fee equal to 1.375% of the loan
amount, or $13,750, and charging an interest rate of 3.625%, says Jeremy Lowry,
a senior vice president at the bank.
Borrowers with a FICO score of 760 or more pay
a 1% origination fee on the same loan.
Car buyers can benefit handsomely, as well. A
car buyer with a FICO score of 730 would get an interest rate of 6.837% on
average on a five-year loan to buy a new car, as of Jan. 6, according to
But borrowers with a FICO score of 800 could
get such a loan with an interest rate of 3.24% at Birmingham, Ala.-based
Regions Bank, according to Informa. That would result in $2,750 less interest
on a loan of $27,799, the average amount for new-car loans in last year’s third
quarter, according to Experian.
The larger the loan, the bigger the potential
payoff. Cincinnati-based Fifth Third Bancorp, for example, sometimes offers lower interest rates to
borrowers with FICO scores over 800 than to borrowers with FICO scores from 760
to 800 for jumbo mortgages—home loans that exceed $417,000 in most of the
country, or $625,500 in pricier markets such as New York and San Francisco,
according to Informa.
By: Annamaria Andriotis | This story was
originally published Jan. 9, 2015, on WSJ.com.
To view the original article click here