There are lots of fixes for a bad credit score, such as lowering your credit utilization ratio. But the most effective thing you can do? Pay your bills on time and be patient.
Sometimes getting ahead feels more like a herd of turtles than a rabbit. That’s especially true when it comes to credit scores.
Check out this reader question, and see if you can relate.
Hi! I have a question for you. I’ve been working on improving my credit score for about three years now, but I cannot seem to raise it above 640. I have a few credit cards, with decent limits, not as high as I would like, and low utilization, a car loan, and nothing in collections for a few years. My credit reports say that low credit limits and time limits are hurting me, as well as the collection from a few years back (settled). What can I do? — CZ
Here’s your answer, CZ!
There are all kinds of things that can impact a credit score. Before we begin, here’s a video about the fastest ways to raise a credit score.
Why is my credit score so low?
Several years ago, FICO, creator of the most commonly used credit score, revealed how certain actions impact credit scores. Here’s a list of some of the most common score busters.
- 30-day late payment — 60-110 points.
- Debt settlement — 45-125 points.
- Foreclosure — 85-160 points.
- Bankruptcy — 130-240 points.
- Maxed-out card — 10-45 points.
The higher end of the ranges above would generally apply to those with the highest scores (780-plus) and the lower end to those with lowest scores (below 680). Keep in mind that a perfect FICO score is 850, and to get the best possible interest rates, depending on the lender, you’ll need at least 730 to 760.
Why does it matter?
CZ is right to be concerned about her credit score. Bad scores mean less access to credit and higher interest rates when an application is approved. Less access to credit can lead to lost opportunity, and higher rates can cost a ton of extra money.
Consider the mother of all debt: a mortgage. Say you’re borrowing $200,000 on a 30-year fixed-rate mortgage. Show up at the lender’s office with a 620 to 639 credit score, and at today’s rates you’ll pay 4.954 percent. If you make minimum payments, your total interest bill over 30 years will be $184,490.
But if you waltz in with a 760 or higher score, you’ll pay only 3.365 percent, and your total interest bill declines to $117,911.
So over the life of this loan, the lousy score will cost a borrower an extra $66,579. That’s enough to finance your own business, put a kid through college, or maybe retire a year or more earlier.
(By the way, the information above came from a calculator from FICO. Check it out for yourself.)