Average Consumers: FICO score too low for good rates

Your FICO score determines the interest rate you'll pay for a home mortgage or a car loan - the higher the score, the better the rate offered. But the minimum score to obtain the best rates has gone up, while the average consumer's score has remained static.

According to John Ulzehimer of Credit.com, the average credit score is 690. Not long ago, consumers only had a short jump - to 720 - to receive the best interest rates. Many could accomplish that by removing errors and making a few changes in their credit usage.

No more. As we head into 2009 the minimum score to get the lowest interest rate on a 30-year fixed rate mortgage is 760, while a 15-year home equity loan requires a score of 740. You can still get the best rates on a 36-month auto loan with a score of 720.

Attaining these scores will take a bit more effort on the part of consumers, but is well worth the time and trouble for anyone contemplating the purchase of a car or a home.

The very first step is to get a copy of your credit report - with scores. The "scoreless" reports that Experian, Equifax, and Trans Union are required to provide each year are useful, but limited. If you don't know where you stand now, you won't know how far you need to go.

Upon receiving your reports, look first for errors. According to a 2004 study from the U.S. Public Interest Research Group, 25% of all credit reports have an error that could result in a lower credit score.

When you find an error, contact each company reporting it and follow their procedures for getting it removed. And be polite - remember that while a data entry error can occur at any time, they're probably just reporting data that's been supplied to them.

One error you might see is an incorrect address. This is a red flag that signals possible identity theft, so investigate immediately. If identity theft has occurred, you'll need to report it and get started repairing the damage as fast as possible.

While you're working on these steps, do begin taking other steps to raise your scores. This includes paying down existing debt, asking creditors for increased credit lines, and even "piggybacking" with someone who has a very high score.

"Piggybacking" was eliminated under the original provisions of FICO 08, but has returned due to uproar from consumers. Piggybacking simply means being added as an authorized user on someone else's credit card account - so that their information from that account is added to your credit report. Parents have long used this method to assist children in building a credit record.

Be sure to check your FICO scores regularly to see how you're doing - and wait until you attain the higher scores before you apply for that mortgage or car loan.