What Your Poor Credit Rating Is Costing You

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By Kelley Holland

The week after Christmas isn't just a time for cruising the post-holiday sales. For some, it's when the realization of all that spending over the last month kicks in.

After all, Black Friday got its name because in the past, it was the day when retailers first went into the black, thanks to all those shoppers.

Perhaps a look at the cost of a poor credit score will also help you mend your ways.

Experts estimate that a less-than-sterling credit score can cost you tens of thousands of dollars over the years, since you'll be paying higher interest rates on everything from mortgages to a Macy's (M) credit card -- if you can even obtain those things.

"If your credit score is high enough, you'll qualify for a lender's best rates and terms. Your mailbox will be stuffed with low-rate offers from credit card issuers, and mortgage lenders will fight for your business," personal finance expert Liz Weston wrote in her book, "Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future." "If your score is low or nonexistent, however, you'll enter a no-man's land where mainstream credit is all but impossible to come by."

That no-man's land may be closer than you think. The mortgage market is a case in point. According to Ellie Mae, an electronic network for mortgage origination, the average credit score for people taking out mortgages in November was 729. That's down from 750 a year earlier, but still high compared to historical averages.

The cost of a mortgage will increase the further your score falls below that level, said Rod Griffin, director of public education at Experian (EXPR). "If your interest rate increases by 1 percent or 2 percent on a mortgage over the course of a 30-year loan, that can cost you tens of thousands of dollars," he said. "A poor credit score can cost you several percentage points in a mortgage loan."

A truly low score can make it impossible for you to obtain credit at any rate. Insurance companies may refuse to issue you policies. %VIRTUAL-article-sponsoredlinks%And while Sen. Elizabeth Warren, D-Mass., has introduced legislation to make the practice illegal, for now employers can use credit scores to evaluate job applicants.

What can you do to keep your credit score up to snuff?

Start with a free annual check of your credit report, Griffin suggests.

"By some estimates, fewer than 10 percent of people eligible for a free annual credit report actually get it," he said. "Every credit score is based on the information in that credit report."

There is always a chance that you have an error on your credit report, and you should do everything you can to get that cleared up. The Federal Trade Commission issued a report earlier this year saying that 5 percent of consumers had errors on their credit reports that were significant enough to affect the rating itself.

If your report is accurate, and you don't like what it says, a few simple steps can make a big difference. First and foremost, "pay all your bills on time, every single time," Griffin said. He estimates that your bill-paying behavior accounts for 30 to 40 percent of your credit score.

Second, keep your use of credit in check. Roughly another third of your credit score comes from how big your balances are on credit cards and other credit lines, relative to your credit limits -- what industry people call your utilization rate. Griffin says zero balances are best, but it is essential to use no more than 30 percent of the credit available to you on credit cards and other credit instruments.

"Also look at your utilization on individual credit card accounts," he warns. "You may have a total utilization rate that's low, but if you have one card that's maxed out, that is a negative."

Big financial problems in your past like a bankruptcy or a short sale of a home can take years to clean up in your credit report. But if your history is generally excellent, and you've just had a few screwups, mending your ways may lift your credit score quickly.

"Scorers recognize that's an anomaly," Griffin said. "If you have a few late payments, catch up and start making payments on time. It could be a few months."

Now that sounds like a resolution you could actually keep.

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What Your Poor Credit Rating Is Costing You
Check your credit reports and correct errors. Of course, you want to make sure that everything is being accurately reported, from your current address to your closed accounts. (For more guidance on how to dispute an error on your credit report, look to this guide from the Federal Trade Commission.)

But you also want to check the details about what is being reported about your current accounts. For example, it can make a big difference to your score if your credit limit for a card is understated. Imagine that you owe $5,000 and your limit is $15,000. That means you owe 33 percent of your limit. If your credit limit is incorrectly listed as $8,000, though, it will look like you've borrowed 63 percent of your limit.
When you fix errors or take actions that should boost your score, make sure that all three of the main credit-reporting agencies (Equifax, Experian and TransUnion) know about it. By law, you can get a free copy of your credit report from each of them once a year -- do so, in order to spot errors and find other score-boosting opportunities.
One gambit few people think of is simply asking for what you want. In order to help you pay down your debt more quickly, you might ask your lender to lower your interest rate. If the lender refuses, see if you can find a lower-rate card and transfer the debt.

If you've got one or two glaring late payments on your credit record, you might ask your lender if they could be erased, in what's called a "goodwill deletion." Lenders are likely to be especially responsive to their best customers. And if you're dealing with a collection agency over some debt, see whether they'll delete it from your record if you pay it off. That can be well worth it.
If you're planning on closing some of your accounts, think twice. It's often a sensible thing to do to simplify your financial life, but closing an account can actually ding your credit score. One reason is that it actually reduces your available credit. Oddly enough, a host of seemingly sensible moves can hurt you -- such as using just one card for most of your charges. Even if you prefer using a newer card, keep older accounts open and use them occasionally to keep them active. Over time, that will give you a longer history and help improve that part of the credit score calculation.
Opening multiple accounts in a short period of time may boost your available credit, but it sends the wrong message to potential creditors, as it makes you look desperate to get credit from any available source.
Here's a valuable tip for anyone selling a home for less than they owe on it: What you're looking at is called a "short sale," and if you end up owing many thousands of dollars to your mortgage lender, you might get it in writing before the sale closes that the debt won't go on your record. Ending up with a big balance owed can be a black mark on your record, reportedly as costly as a foreclosure.

If a high credit score is important to you -- and for most of us it should be -- always consider how your financial actions will affect your score. For more information on credit scores, be sure to look at this guide from myFICO.com, which is the consumer division of the company that is responsible for the popular FICO credit score.
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