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Improving credit score can reduce loan cost

June 06, 2008|By LYNN LITTLE

Consumers with credit scores of 700 or higher typically get the best interest rates on loans. Low-scoring individuals with a credit score in the 400 to 500 range might have difficulty obtaining a loan, might be required to make a larger down payment and might have to pay a higher interest rate on their loan.

Payment history, debt-to-credit ratio and the types and amounts of credit available factor into credit scoring. Your credit score changes over time to take into account current financial behavior and past debt and payment history.

While it is virtually impossible to improve your credit rating instantly, there are several things you can do to help your score. Tips for building a solid credit history and improving one's credit score include:

· Pay bills on time, even if only making the minimum payment.

· Mail payments early to ensure delivery before the payment deadline.

· Reduce overall debt.

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· Maintain a checking account responsibly. Watch your balance so as not to overdraw and run up costly fees unnecessarily.

· Apply for a credit card with the local store, bank or credit union. Request a low limit for manageable monthly payments. Use the card regularly and make payments promptly.

· Apply for a small loan from a reputable source. Make payments regularly to clear the debt.

· If you anticipate making a late payment, contact the creditor. Most will typically work with you if they know that a payment will be coming.

· Do not apply for new credit unnecessarily.

· Establish a pattern of responsible credit behavior over time, as it takes time to see significant changes in your credit score.

Inaccuracies on your credit report due to mistakes or identity theft might also adversely affect your score. Request a credit report annually to verity your credit history by calling 877-322-8228 or going to www.annualcreditreport.com.

By federal law, consumers are eligible to receive one free credit report from each credit bureau (Trans Union, Experian and Equifax) during a calendar year. Requesting one report from each agency at four-month intervals should provide a good picture of one's credit history over a year's time.

If you find inaccuracies on your credit report, you can lodge a dispute to have them fixed or removed from your financial records.

The Fair Isaac Corporation developed the FICO scoring system, which is used by the three major credit reporting agencies. FICO scores provide a guide to future risk based solely on credit report data. The higher the score, the lower the risk for a lender, although no score is able to predict whether a specific customer will be a good credit risk or not.

Lenders often use additional factors to determine whether to give credit and which interest rates to offer, and each lender has its own strategy to assess risk.

Scores range from 300 to 850, and most people score in the 600s and 700s. The higher your score, the lower the risk for a lender. Credit scores are just a guide for lenders who use them in a variety of ways and with other information.

Credit scores change over time, taking into account both current and past financial performance. To give you an idea of the amount payments can change based on your credit score, visit www.myfico.com and review the information on how interest rates and monthly payments on a 30-year, fixed-rate mortgage, a 15-year home equity loan, and a 36-month auto loan are affected by the FICO credit score.

Not all debt is bad. In fact, a certain amount of debt can actually work to your advantage. Using credit responsibly and establishing and maintaining a strong credit history demonstrates to lenders, creditors, employers and landlords that you are financially responsible and trustworthy. Debt from certain things, like a mortgage on a house, for example, can show creditors that you are invested in your financial future and can use large amounts of credit responsibly.

Actions speak louder than words, and your credit and debt history can tell volumes to creditors about your potential credit success in the future.

Be patient. Improving your credit history and score may take several years, but it is well worth doing.

Web sites can provide additional information regarding your credit and your credit score. Two good examples are www.practicalmoneyskills.com and WhatsMyScore.org.

Lynn Little is a family and consumer sciences educator with University of Maryland Cooperative Extension in Washington County.

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