Her strategy was to pay down her debt and keep current on her bills, but increase the amount of available credit. It worked. Within seven months, her credit score went from 697 to 758.
“I just recently graduated from college, so because of that I was relatively new to credit scores and having a lot of credit,” the 22-year-old University of California-Berkeley graduate said. “If you have credit available but you don’t use a lot of it, you’ll have a higher credit score. I started paying down my debt and making sure I was spending only what I could afford.”
Credit scores have a huge effect on your financial life. They can determine the interest rate you will pay on a mortgage or a car loan. For that matter, they make the difference in qualifying for a loan or being approved for a credit card.
After checking her credit score on CreditKarma.com in June before renting an apartment in Emeryville, Calif., Villacorta used some credit score tips she found on the website.
She added two retail credit cards at stores where she liked to shop to the two bank cards she already had, increasing and diversifying her credit limit while keeping her balances low.
“There is a difference between having a lot of credit versus having a lot of credit and using it and being in debt. People often confuse the two. They think, ‘If I have five credit cards, it means I’m probably carrying a lot of debt,’ but the reality is if you have five credit cards and use them very sparingly, that is actually a great credit attribute,” said Ken Lin, chief executive officer of San Francisco-based CreditKarma.com, which provides visitors with free access to credit scores.
A FICO score is the credit score used by most lenders. The higher the score, the lower a consumer’s future credit risk.
Payment history – the biggest factor in setting FICO scores – accounts for 35 percent of the calculation, followed by amounts owed at 30 percent. So it’s not surprising that the key recommendation to raising credit scores is paying off existing debt and keeping current on bills.
How much of a difference does a great credit score make compared with a poor one? Consider this: A consumer with a score of 760 would have a monthly payment of $750 on a $25,000 auto loan over a three-year period based on a 4.9 percent interest rate. Someone with a poor credit score of 600 would have a monthly payment of about $900 based on an interest rate of 17.7 percent, according to myfico.com.