Over the last year and half I have seen my credit score go from a credit score below 620 to what might be considered an excellent credit score of 730.  Even though this might be on the low end of what is considered an excellent credit score I am going to consider it a huge accomplishment.

Over this time, I have had no late payments, which has also helped my cause.  But my improvement in credit score can directly be related to my focus on paying down my debt.  But I still have a little more to go.

Here is what I have found about your debt to credit ratio.  First, if it is high, it is almost impossible to have a good/excellent credit score.  This is the second largest part of your credit score and it carries a weight in your score of 30%.  Second, lowing your debt to credit ratio is maybe the hardest thing you can do.  You have to commit to paying off every bit of debt.  And if you are like most Americans, you are carry a mountain of debt that seems like will never be paid off.  Third, your debt to credit to credit ratio is not only based on your total debt and total available credit but also on an account by account basis.  This is something definitely overlooked, but could be a reason why balance transfer could hurt your credit score.

So what is a good debt to credit ratio?

I personally am not going to sleep till I have no debt.  But most knowledge on the internet will point to a level anywhere between 20-30% of your available credit.  This is across all your accounts and also on an account by account basis.  If you are there great, but if not getting there again will take to tough things: Time and Discipline.

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Closing Accounts to bump up your score

The truth is this really has a negative effect. First, the idea of closing an account won’t make the account go away. Actually it will stay on your credit report for the next seven years. Also, the second largest part of the FICO score formula is your credit utilization. Or the percentage of debt you have to the available credit you can borrow. Closing an account raises your utilization and therefore could hurt your score.

There are reasons to close an account such as a true lack of control. If you know if the account is open you will spend like crazy then it might be a good idea to close the account.

Checking your own score could hurt it

Checking your own score is not going to hurt your FICO score. Actually checking your score is a sign of an informed consumer and one who wants improve and stay on top of their score. The only time have your score check will possibly count against you is when you are applying for new lines of credit. And actually even then it might not be seen as a negative event. It is when you start applying for several loans in a short period of time you will start to see the effect of too many credit inquiries.

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The Cost of a Credit Score Under 650

There is no better example of how a credit score under 650 will effect your life than the purchase of house. This is the largest purchase of a consumers life. The comparison will be between someone who have an excellent credit and a person who has a credit score below 650. On a $300,000 mortgage the person with an excellent score will wind up with a monthly payment around $1,550 and an interest around 4.8%. The person with the credit score below 650 will have a monthly payment around $1,770 and an interest rate around 5.8%. A whole 1% higher. That might not sound like much but if you look at the total cost of the loan you will really see the effect.

The total cost over 30 years for the person with an excellent credit is $558,000 and for the person with a credit score below is $637,200. That is $79,200 extra spent. If that is not enough to convince you. Then you need to consider all the other loans in a consumer’s life like: auto loans, personal loans, and credit cards.

Actually, this might not be even accurate because getting a mortgage will be pretty tough with a credit score below 650.  This will sometimes push you into the sub prime category based on the lender you are dealing with.

What to do if You Have a Credit Score Below 650

The first thing is to check your credit report for errors. Having any potential errors removed from your credit report will give your score an instant boost. The next thing to do is know the credit score formula and this will point you in the right direction. You will then realize you can never make 30 day late payments, pay down your debt, only apply for credit if you need, and take advantage of your credit mix.

Conclusion

If you are below 650 it is not the end of the world. You can definitely recover, but with anything you need to commit.

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