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Maintaining Your Credit Score: More Important Now Than Ever!  |
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It’s always a good idea to be serious about your credit score. And even if borrowing loosens up in 2009, you should still do everything you can to keep your credit score high.
Right now, FICO is busy working on a new version of the credit scoring method. The changes they make may have serious consequences for anyone looking to borrow for a home or trying to establish any new credit in 2009.
The new FICO focus is going to be on your current balances, not just your on-time payment records. That means your new priority is to pay all balances down.
Now its about your credit utilization and the amount of credit you use relative to your actual credit limit. From the lenders view, high balances mixed with tough economic times mean a much higher risk.
So what is a good target utilization rate for your credit accounts? No more than 50 percent of you credit limit. Lower is better. But 50 percent should be your personal limit.
If you don’t meet that 50 percent goal, you shouldn’t be applying for new credit for a while. But rather than complain about your chances to get a new car or to get a new home, focus on fixing your credit so position yourself to to get that credit six months from now. Here are some ideas:
You’ll need at least a 740 score for the best rates: You’ll often hear that credit scores of 700 and up will get you best customer status with lenders. You should aim higher. For the lowest rates and best terms, you need to get your credit score above 740 (the top credit score, by the way, is 850), so keep that target in mind.
Budget: If you’ve never reviewed your spending and picked out areas where you can cut, you’ve never done a budget. Start tracking your spending either on paper or with financial planning software and start pinpointing what spending you can shift over to paying off debt.
One more time -- get those balances down: Get all your non-deductible debt under 50 percent of your credit line in each account. Go after your balances with the highest interest rates first, and once you hit 50 percent...keep trying and get those balances down further.
Get some advice: It might not be a bad time to sit down with a tax professional or a financial adviser – such as a Certified Financial Planner™ professional -- to talk about the way you're going to manage your debt going forward.
Keep an eye on your credit reports: Remember that you have the right to get all three of your credit reports -- from Experian, TransUnion and Equifax -- once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. By staggering receipt of each of your credit reports, you'll get a continuous picture of how your credit picture looks because the three bureaus feed each other the latest information. You’ll also be able to clean up errors as you find them -- errors can drag down a credit score – and you’ll also keep an eye out for identity theft. Oh, and by the way, keep in mind that all “free” credit report sites are not free – if they ask you for a credit card number, remember they’re doing that because they want to charge you. Just go to the site above and you’ll be fine.
Get on time and pay more than the minimum: Yes, we indicated above that you might get a bit of a break on late payments with the new FICO system, but that’s a break you should consider only in a dire emergency. Electronic bill payment will allow you to save on postage while guaranteeing on-time postage, and the budgeting advice mentioned above will allow you to put a few more bucks toward getting that loan or credit card bill paid off.
Once you’re paid off, don’t close the account: In the world of credit scoring, closing accounts (even those that have not had balances for years) is a lousy idea. Lenders want to see a long record of credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.
Information for this article provided by the financial Planning Association (FPA).
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