The new way of the world is this: If you want to take out a mortgage or car loan anytime soon — and do so at a decent rate of interest — you are going to need pristine credit. In the olden days (that is, last year) a credit score of 720 would have entitled you to borrow at the best rates; today you need a score of 760 or higher. Improving your credit score means doing all of the following things without fail.
- Pay bills on time. Every one of them. This accounts for 35 percent of your score.
- Use as little as 10 percent of the credit available to you on plastic. This means paying down your revolving debt. (A backdoor way to do this: Ask for increases in your credit lines, but don’t increase the debt you carry.) Your total debt of all types accounts for 30 percent of your score.
- Maintain long credit relationships. This is one reason you shouldn’t close out old cards. (The other is that doing so decreases your credit lines, which will ding your total.) This represents 15 percent of your score.
- Don’t get a new credit card unless you have to. Applications take down your score because they are interpreted as a sign that you’re short on cash. If you’re applying for cards, put out your feelers within a 45-day period when they’ll count as a single inquiry. Your credit inquiry status represents 10 percent of your score.
- Keep a good mix of creditors. You want to demonstrate that you can borrow from and then repay all kinds of companies — car dealerships, mortgage lenders and, of course, credit card issuers. However, this is only 10 percent of your score.
Finally, any outfit claiming it can painlessly clean up your credit or settle your debts is overpromising. The one DIY strategy that’s working — at least for now — is called piggybacking. If you have, say, a spouse, partner or child with not-so-great credit, you can give their score a boost by adding them to your accounts as an authorized user. (If it’s your credit that’s not so hot, they can do the same for you.)
Q. I’m in the middle of a divorce, but all the financial numbers — mine and my husband’s — are changing. How do I protect myself?
A. This kind of market should make you rethink your divorce game plan, says New York matrimonial attorney Lois J. Liberman. Primarily, you need to think carefully about what to do with the house. If you’re the one who’ll be living there, you’d be smart to take it at its current lower price — and angle for more in cash and stocks — and then sit on it (and in it) until home values rebound. On the other hand, if you’re the one who’s moving out and you think the house may recover its higher price in a few years, you might negotiate to remain co-owner in hopes of recapturing some of that value.
Also important to know: Even if you and your husband agree to transfer ownership of the marital residence to you or to him, you may not be able to do so. That’s because a transfer usually requires that the mortgage be refinanced in the single owner’s name, and he or she must have the income to support a refi. So if the transferee has been laid off or has suffered financial reversals in this climate, the transaction may be impossible in the short term.
Q. Has the tightening of credit affected college loans?
A. The market for private student loans has dried up somewhat, but federal loans are still available. In fact, new legislation was passed last May that provides for higher borrowing limits on federally insured Stafford loans. The credit requirements for Plus loans have also been relaxed. "If you’re less than 180 days late on your mortgage, you can still pass the credit test for Plus loans," says Kal Chany, author of Paying for College Without Going Broke. "There are also provisions if you have outstanding medical bills."