By Jean Chatzky
There’s no doubt that you’ve been hearing a lot about the credit crunch, but do you know what it actually means for you as a consumer? . That’s because it’s complicated, and f you’re not in the market for a mortgage or a car loan, it’s easy to dismiss this as something that doesn’t apply to you.But that would be a mistake because sooner or later, you’re likely to be affected. If you do happen to be in need of a mortgage, home equity or car loan, you might have a tough time finding a lender and a decent rate. These days, your credit score has to be in the 760 range — or better — to get the best rates. This is in contrast to last year at this time, when a score of 720 would have guaranteed you a good loan. Luckily, there are several things you can do to minimize the blow:
Get your score
There are three major credit bureaus — Experian, TransUnion and Equifax — and the information collected by each is used by a company called Fair Isaac to calculate your FICO, or credit score. That means you actually have three scores, although the numbers should be relatively similar. When a lender wants to evaluate how risky you’ll be as a borrower, they generally pull just one, with the exception of mortgage lenders, who pull three, says John Ulzheimer, the resident expert at Credit.com. That means if you’re applying for an auto loan, it’s a good idea to ask the lender which credit bureau they rely on so you can pull the same score and know where you stand. You can buy one score from myfico.com for $15.95, or all three for $47.85.
A good start is paying on time. Making sure your bills get to the creditor before the due date is important, and about a third of the equation. The rest is made up of factors like how often you shop for credit (keep it to a minimum), the age of your credit report (a longer history is best), the amount of credit you’re using (aim for 10 percent or less), and the blend of accounts you’re holding. A mix — say, credit cards, a student loan and a mortgage — is best because it shows lenders that you can manage different forms of debt. Another way to attract lenders is to hold a steady job. It may be harder in these times, but if you can hang on by showing your company that you’re indispensable, it’ll pay off. “Sometimes on your credit report it will show where you work, and lenders want to know how long you’ve been there,”
Use your cards
Yes, you read that correctly. But I’m talking about responsible usage, not spending more than you can afford. If you let your card get dusty, it’s possible that the card company will close your account due to inactivity. This reduces the amount of credit you have available, which negatively affects your credit score. “Make sure you use them at least once every quarter, but I’m not talking about going out and spending a lot of money.
This practice was actually shunned by Fair Isaac, but the company recently brought it back. Essentially, it allows you to boost your credit score by becoming an authorized user on the account of a family member with a higher score. As long as the card issuer sends the credit bureau notation that you have been added to the account you’ll see the positive effect on your credit report. It’s a good way to raise the score for your husband or wife, but be sure to add the extra party as an authorized user, not a joint cardholder, so he or she can be easily removed if need be.
Believe it or not, we used to save for our goals, and we’ll have to get back into that habit,”Getting a mortgage these days without a 10 percent down payment is a struggle, so if you don’t have a stellar credit score, having a bigger down payment is likely to help. Also, banks want to know that after you buy the house, you still have enough money left over to make the payments.”Even if you don’t need a mortgage, stashing money aside for an emergency is more important than ever. My advice has always been to use saved money to pay off credit cards with high interest rates, because in the end, you come out on top when you compare the interest you’re earning to the interest you’re paying. But as I said, banks are cutting credit lines, so you may not have a card available in case of an emergency. That, combined with this era of layoffs, means you need money in the bank.