Tuesday, May 18, 2010

Secrets ot the Perfect Credit Score

Good Credit Scores Are the Key To Financial Health

Credit scores were developed as tools to help banks and businesses make objective decisions. To generate them, a mathematical formula pulls credit report data and transforms it into a numerical rating. Fico Scores range from a low of 300 to a high of 850, and, according to Fair Isaac, the creator of the scoring system, mortgage lenders consider anything above 760 as ideal.

Despite differences in each ranking system, they have one thing in common: A higher score indicates less risk. And having high credit scores makes you more appealing to lenders, employers and landlords.

Consequently, focusing on your credit scores is only natural. "People are drawn to this subject because it allows them to measure something that they equate to financial health," says Jose Rivas, the national education manager for Consumer Credit Counseling Service of San Francisco.

That focus, however, can turn into anxiety, and conflicting information is often to blame.

"One article states that consumers should close their unused accounts," says Rivas, and "another states that consumers should never close their accounts." For this reason, getting the facts from reliable sources is essential.

Keeping the Right Mix of Credit

"Every time someone runs my credit, they say, 'Wow, I almost never see someone with credit that high,'" says Carrie Rocha of Minneapolis, the founder of the “Pocket Your Dollars” blog. She keeps her credit first-rate to preserve her autonomy.

"As someone who got out of $50,000 in debt in less than three years, I take a lot of personal pride in my financial freedom" she says.

Though Rocha has no plans to borrow money again, "I have no barriers when it comes to employment, insurance or other areas of life where my credit score is used to assess the kind of risk I am."

Besides "the obvious things like pay my bills," Rocha says she increased her scores by talking to her credit union loan officer, who said an overabundance of idle retail accounts was driving it down.

She had opened the cards randomly during in-store promotions but never really charged on them, so there was no history to protect. After formally closing the accounts, her scores that were previously in the 720 to 740 mark rose to the 800s.

Does the Perfect Credit Score Exist?

Pursuit of excellence is often wise, but does "perfect" exist? Yes, says Craig Watts, the public affairs director for Fair Isaac. "Several thousand consumers do, in fact, have the highest possible FICO score."

Though most people won't reach the credit score apex, you can get close by consistently following three simple guidelines:

• Pay all bills on time.

• Keep credit card balances low.

• Take on new credit only when you really need it.

Don't obsess over small credit score variations. "Lenders decide what score they will accept for their best-interest-rate product," assures Watts.

"They genuinely don't care if your score is 50 or 100 points higher than that."

Clearly, A-plus credit has its advantages, but there is no reason to go overboard. Find a balance between attentiveness and fixation by understanding what those numbers can do for you and knowing how you can improve them.

And remember: Credit scores gauge your borrowing history, not your value as a person.


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