Bryan and Trudi Sorge used two credit cards with zero percent interest rates to pay for a new deck at their home in Pine, unaware the transaction would lower their credit score.
“We thought why use the cash, this is easier,” said Trudi, 47. “But because we maxed them out, it brought our score down.”
When they tried to refinance their adjustable-rate mortgage to a 30-year fixed rate, they learned they would have to pay $3,185 in fees to get the rate they wanted because of their lower score.
“Having a good credit score in today’s environment is more vital than ever,” said Curtis Arnold, chief executive of , in Little Rock, Ark., which offers credit card reviews to consumers. A high score can help get credit and may lead to lower rates on financial products such as insurance and loans, Arnold said.
Scores between 600 and 649 represent a 31 percent default risk, and scores under 599 mean a 51 percent risk, according to , a division of Minneapolis-based Fair Isaac Corp. which developed the Fico credit score many lenders use. The maximum score is 850.
A score of at least 700 is the goal, according to Carol Kaplan, a spokeswoman for the American Bankers Association in Washington: “That will guarantee that you have the most likely chance of getting credit, and qualify for the lowest interest rates.”
Loans are harder to obtain as banks tighten lending standards in the credit crunch.
“We’re taking a more aggressive look at accounts to control for risk, given the current environment,” said Betty Reiss, a spokeswoman at Charlotte, N.C.-based Bank of America Corp., the largest U.S. consumer bank, which lost $373 million in the third quarter in its credit-card unit.
Consumers can raise their credit score or avoid having it lowered by maintaining a low debt-to-credit ratio, keeping a good payment record and building credit history.
A debt-to-credit ratio, or utilization rate, measures available credit relative to the amount of credit that’s been used. It should be less than 30 percent, said David BarMack, president of National Credit Education Plus in San Diego.
One way to lower the ratio is to spread credit across multiple cards, said Kenneth Lin, chief executive of San Francisco-based Credit Karma.
A lower credit limit changes the utilization rate, which can affect credit scores, especially when total credit is reduced to just above an existing balance, said Arnold of CreditRatings.
