Rachel Bell is a spokeswoman for MyFico.com, the consumer division of FICO, the credit-score giant.
Looking at credit scores, we’ve been a nation of extreme highs and lows in recent years. Is that still true?
Heading into and through the recession, the proportion of FICO scores in the middle range, from 600 to 749, shrank, and the percentages of scores in the highest and lowest tiers increased. As we pulled out of the recession, the middle started to grow again. Now, about 18% of scores are in the highest range: 800 to 850. That’s the most since October 2008. At about 15%, the portion of scores in the bottom group, 300 to 549, is at the lowest level since 2006. Some consumers whose scores were in that lowest rung are moving to the 550 to 699 range, which accounts for about 32% of scores, the most since 2006.
What’s behind the shift?
People who were able to get by during the recession buckled down and managed their credit carefully. They used credit only if they absolutely needed it, paid down card balances and started saving money. Consumers are continuing to be very careful about how they manage their money, and many of those who had trouble during the recession are getting back on track.
What do these trends mean for borrowers?
As borrowers’ scores improve, they’ll have access to credit with better terms and lower interest rates. A borrower who purchases a home with a $150,000, 30-year fixed mortgage could save more than $6,500 with a score of 760 or better, compared with a score between 700 and 759. And a borrower who buys a new auto with a loan of $20,000 could save $756 with a score above 720, compared with a score between 690 and 719.
How can more people boost their scores?
There’s no silver bullet. If you’re not paying your bills on time, get current and stay current. Keep credit card balances low relative to credit limits. Take out credit only when you need it. Don’t succumb to sale offers to get 10% off. In the end, it could cost you a lot more than that 10%. Those are simple rules for keeping your credit score strong. And if you haven’t done it recently, get a free copy of your credit report to make sure the information on it is accurate. [For more about managing your credit score, see the 6 things you need to know.]
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.