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Saturday, August 26, 2006

My FICO Credit Score Gets An 18 Point Boost: Now @ 745

Looks like all the cash I used to get my debt into a zone that I'm comfortable with is paying off. My FICO® credit score has just been bumped up by 18 points and is now @ 745. Am I pleased? Yes, quite pleased. 745 is basically an A- rating. From my research, I've determined that any score over 720 will get you the best possible interest rate on most loan products.

What does a FICO score of 745 mean to me? It means that when I am ready to buy a house or condo, the mortgage companies are less likely to ask for employment or income verification. This is very key for me because I'm self-employed. I'm actually hoping that I won't need to rely on a loan when I'm ready to buy; with a little luck and a lot of hard work, I may be able to pull it off. But if I don't have enough tucked away by the time I'm ready to take the plunge, I may have no other choice but to get a mortgage.

From this point forward, any increase in my FICO score probably won't make much difference in the interest rate I get on loans, etc. But I'm still shooting for an 800+ score by the time Bush & Co. leave office, just so I won't have to worry about those temporary dips that can cause problem if your score isn't high enough. In other words, if my FICO score was 800, and it dipped to 785 temporarily as a result of a new credit account being opened, then the temporary dip would be nothing to sweat about. On the other hand, a temporary dip from 725 to 710 may cause some interest rate-related issues.

About a month ago, I had a brief conversation with a mortgage broker at a car dealership. He told me that 720 is the threshold with most lenders, and any score above 720 is just good for breathing room. So, in theory, someone with a score of 731 should get the same rate on a mortgage loan as someone with a score of 799 -- all other things being equal, of course.

You know what's kinda' embarrassing? I know a guy who is in his early 20's and has a FICO credit score at or around 800. In my early 20's I was a very poor, spendthrift college student with lots of debt-related problems. But I don't feel too bad about my past. I really didn't understand money back then, but I do now, and even though it can take up to 7 years to fix major mistakes, those mistakes aren't a death sentence. With knowledge and perseverance, I believe that anyone can go from having a credit rating of F-, to A+.

Some advice for those who are working on repairing or building credit.

There was a time not too long ago when people in-the-know would advise credit consumers to cancel old credit card accounts once the balance on each account was paid in full. The reasoning was sound, as it was thought that banks considered you an increased credit risk if you had a lot of credit available to you. After all, a long, drunken weekend in Las Vegas, for example, is all it would take to raze a solid financial house to the ground.

These days, the advice from credit experts is to keep those old accounts open, because the FICO scoring system favors older credit accounts, especially those with a zero balance.

Also, if you really want the banks and credit reporting agencies to notice your excellent debt repayment track record, use your credit card(s) to make a few minor purchases each month, then pay the balance in full when the statement arrives. If you can't pay the balance in full, then pay at least 3 times to minimum amount due. Timely payments on your student or car loan will help your credit score by demonstrating that you are willing and able to pay your bills on time, but regular and responsible credit card activity is, in my opinion, the best thing for improving a credit score over time. Bottom line: the banks pay close attention to how well you handle retail purchases. Once you've achieved your desired credit score, you can pay all your cards in full to avoid interest charges, but remember to keep the account(s) open once you've done so.

And if you want to get 3 or 4 credit cards, do it, just don't get them all at once! Having more than once card can be advantageous, because having a modest balance on 3 credit cards is better -- from a FICO point of view -- than having 1 credit card that is nearly maxed out. Just be sure to space out the applications. In my opinion, the time between credit card applications should be at least 7-9 months. Remember: a great way to save on interest charges is to take advantage of the best available 0% APR balance transfer offers out there.

That's all for now. Below I've posted an updated image of my charted FICO credit score:

Updated Chart of my FICO Credit Score - August 26, 2006: 745

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