How To Raise Your FICO Score

It's tough to refinance your home at a low rate if you have a poor credit score. Michele Norris talks with John Ulzheimer, author of You're Nothing but a Number: Why achieving great credit scores should be on your list of wealth building strategies, about how FICO scores have been affected by the bad economy — and what people can do about theirs.

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MICHELE NORRIS, HOST:

If Las Vegas has one of the worst foreclosure rates in the country, you might expect people there to be having trouble with their credit, too. And you would be right. A couple of weeks ago, the credit reporting agency Experian ranked Las Vegas near the bottom when it comes to average credit scores. Lower scores make it tougher to refinance, which can make foreclosure more likely. And in these tough times, credit trouble is not just a Las Vegas problem. So now, a bit of news you can use. John Ulzheimer is a credit expert. He's also the author of the book "You're Nothing but a Number." He joins us now to talk about FICO scores. Welcome back to the program.

JOHN ULZHEIMER: Thank you so much for having me. I appreciate it.

NORRIS: Just so we have a basic understanding here, can you explain what, exactly, the FICO score is, and why it's so important? First, what does FICO stand for?

ULZHEIMER: Sure. FICO stands for Fair Isaac Corporation. The way that the score is ascertained is through a fairly complex algorithm that each of the credit-reporting agencies have installed in their databases, and are allowed to use through a licensing agreement with FICO in order to score their credit reports and then turn around and sell them to lenders.

NORRIS: So there's a spectrum of these FICO scores. What's considered bad? What's considered good? And where does the middle fall?

ULZHEIMER: Yeah. The range of the FICO score is 300 on the low end, to 850 on the high end. And if you want to be immune from the credit crunch, then you really need to have FICO scores above 750. Anything below 650 would be considered poor. Anything below 600, you're a hot potato, and lenders are going to avoid you, and you're going to be targeted by lenders who target folks who are willing to pay really egregious interest rates because they just simply don't have any other options.

NORRIS: There are ways to improve a FICO score. Can you tick through some of them, John?

ULZHEIMER: Sure. The myth out there is that the best way to have a good FICO score is to get all the bad stuff off of your credit reports. That stuff stays on for up between seven and 10 years, so there's not really much that you can do if you've got bad credit. However, if you can get out of credit card debt, you can see real change in your FICO scores within 30 days. And it is the most actionable way to improve your scores - is to get out of that credit card debt.

NORRIS: While you're trying to get out of credit card debt, are there small things that you can do - pay more, for instance, than the minimum required balance?

ULZHEIMER: Yeah, I'll give you a great example. Right now, we are a few weeks away from entering the busiest shopping season of the year. People seem to lose their mind and open up a large number of retail store cards to get discounts. What you're doing is, you are populating your credit reports with these new accounts and the credit inquiries that led to the account. These are ways that you can lower your FICO scores even with not taking on a penny of debt, and even without missing any sort of payment. So this is something to keep in mind, that a good FICO score isn't just necessarily about how much debt you have and whether or not you're making your payments.

NORRIS: When you look at the trends in FICO scores, there are more people with lower scores, but there are also more people with higher scores. What explains that - even in the recession?

ULZHEIMER: Yeah. Scores have trended both directions, lower and higher. You had a segment of the population who was kind of in the meaty part of the curve - kind of the 600 to 700 FICO range - really destroyed by the credit prices and are now in those really low-scoring ranges. But you also had a pretty decent segment of the population in manageable debt to begin with, and were not using credit as a way to fund a lifestyle. They're using it for efficiency, which is how you're really supposed to use credit. And they were able to quickly get themselves out of debt and kind of out of harm's way. And of course, when you do these types of things, you find yourself in the land of FICO 750, which is not a bad place to be right now because of how aggressively low interest rates are for almost every consumer product that you can imagine. And it's a good time to be on the buyer's side of the equation, but you better have good scores to do it.

NORRIS: Under federal law, you can get a free credit report. How easy is it to do that?

ULZHEIMER: It's actually very easy. There is one website that is tasked with distributing the free credit reports under federal law, and it's annualcreditreport.com. And you can get a credit report from that website once every 12 months for free, from all three of the credit-reporting agencies.

NORRIS: But even if you get that free credit report, you don't necessarily get your score.

ULZHEIMER: Yeah, that's a very good point. The only way to proactively get your FICO score is to purchase it.

NORRIS: John Ulzheimer, thanks so much.

ULZHEIMER: Thank you very much for having me.

NORRIS: John Ulzheimer is a credit expert. He's the author of the book "You're Nothing but a Number."

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