In Search of the Perfect Credit Score

Shelley Cantrelle swore off credit after troublesome debt in her twenties resulted in bankruptcy. Cantrelle, 49, happily pursued a cash-only lifestyle for more than 20 years. Then, two years ago, curiosity got the better of her. On a whim, she checked her credit score -- and was horrified to discover that it was zero.

"I didn't even know that was possible," says Cantrelle. "It was like I had died and nobody told me." Armed with advice from CreditBoards.com, an online credit forum, Cantrelle began to resurrect her score. First she put $5,000 into a one-year certificate of deposit at her bank and used the CD as collateral for a secured loan. Then she had the payments deducted automatically from her checking account each month.

Also at the recommendation of CreditBoards, Cantrelle slowly began applying for credit cards to build a credit history. She pays $12 a month to a credit-monitoring service and checks her credit score every day -- sometimes twice a day. Her FICO score -- compiled by the company Fair Isaac and the score most commonly used by lenders -- is now in the mid 700s, but her goal is to top 800 (out of a possible 850). "I'm a little obsessed," admits Cantrelle, who lives in Birmingham, Ala., "but it became a challenge."

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Plenty of other people share her obsession. The forums at CreditBoards.com and CardRatings.com are crawling with credit-score junkies who reply to each other's questions and post tips on boosting their scores. One trick of the trade, for example, is to have different types of accounts that reflect a mix of credit. That includes revolving debt, such as credit cards, and installment debt, such as a car or mortgage loan. Credit-card issuers are authorized to raise your credit limit every few months. So another tactic -- used regularly by Cantrelle -- is to ask your card issuer when you're eligible for an increase and then request one.

Rebecca Walker says she has always had a keen interest in finance and credit. Finding mistakes in her husband's credit reports has made her more diligent about managing her own score.

The 29-year-old Broomfield, Colo., woman pays $27 a month to get daily scores from two monitoring services. She checks her balances online and often pays them off before they post to her statement. The card issuer sees that she has used her card, but the statement doesn't report a balance, so the ratio of debt to her credit limit is zero for that account. That gives a big boost to her credit score, which is now 780 -- well on the way to her goal of at least 800.

Three Simple Rules

We're not saying you should emulate Rebecca Walker. Unless you've got credit problems or mistakes in your report, or you're about to apply for a big loan, you don't need to micromanage your credit score. Only 13% of credit users score above 800 on the FICO scale, and once your score is in the mid 700s, you won't have trouble qualifying for the best interest rates (the median FICO score is 723). "There's just no need to go in search of the holy grail of credit scores," says Steven Katz, of TrueCredit.com, which is operated by the credit bureau TransUnion.

But you do need to know and understand your score. A recent study by Visa USA found that 42% of consumers have never checked their score. That's "like driving with your eyes closed," says Jason Alderman, director of financial education at Visa USA.

[page break]

Your credit history affects not only whether you qualify for a loan and what rate you'll pay, but also whether you'll be able to rent an apartment or get a job (an employer can legally refuse to hire you based on information in your credit report). A low score also means you'll pay higher premiums for car insurance because research shows that people with higher scores file fewer claims.

You don't have to go to the lengths of Cantrelle and Walker to maintain or boost your score. You just need to follow three simple rules. First, pay bills on time. Your payment history makes up more than one-third of your score, so "the single worst thing for your credit is to be reported late," says Fair Isaac's Craig Watts.

How much you owe makes up another third of your score. In FICO's model, your actual credit limit isn't as important as your "credit utilization ratio" -- the percentage of your limit that you've actually used. It's best to keep the balances on your cards below 25% of your available credit -- or $2,500 on a card with a $10,000 ceiling. Even if you pay in full each month, the amount reported to the three credit bureaus on a particular date goes on record as your balance (that's why Walker's tactic of paying her balance early lowers her utilization rate).

New credit also takes a toll -- especially for people with a short credit history or few accounts -- so be judicious in applying for it. Each time you apply for new credit, an inquiry is made on your credit report. Inquiries themselves are tiny dings. When you request your own report or your current creditors ask to see it, your score isn't affected at all. But a lot of dings add up to a dent.

Don't worry if you're shopping around for a car loan or a mortgage; those inquiries are lumped together so they won't damage your score. But it pays to follow Watts's rule: Take on new credit only when you need it.

Know the Scores

You can get a free copy of your credit report once a year from each of the three major credit bureaus -- Equifax, Experian and TransUnion -- at AnnualCreditReport.com. But take note: Getting your credit score itself isn't free. It will cost you $6 to $8 at AnnualCreditReport.com, and the score you pay for isn't necessarily the ubiquitous FICO score that 95% of lenders use when determining your interest rate.

Among the three bureaus, for example, only Equifax sells the FICO score, for which you'll pay $7.95 in combination with your free credit report -- or $15.95 for your report, score and more information at Equifax.com. TransUnion and Experian sell the VantageScore, which they've developed with Equifax. VantageScore numbers can still give you a good idea of where you stand, says John Ulzheimer, president of educational services for Credit.com. "If you have good credit, you'll have a good score regardless of who developed it," says Ulzheimer.

But if you're in the market for a loan, make a point of getting your FICO score, which is still the industry standard. You can order a single FICO score, as determined by one of the credit bureaus, at myFICO.com for $15.95, or scores from all three bureaus for $47.85. The credit bureaus introduced VantageScore to compete with Fair Isaac. The scale is higher, running from 501 to 990 to mimic academic scoring, and borrowers with the highest scores get As. So far, however, VantageScore hasn't hit the mainstream with lenders.