A three-digit number affects so many aspects of your financial life: your odds of getting approved for a loan or a credit card, your interest rate, your insurance premiums, even your employability. That's because your FICO credit score, used by most lenders, represents your ability to pay back a debt. A less-than-stellar rating or damaging errors on your report can ruin your dream of qualifying for a home-equity loan or getting preferred financing on a new car. Thankfully, if your number is lower than you'd like, nudging it upward isn't difficult. Follow these steps and you should see improvement in as little as a year.
Find your credit score. Lots of sites ask you to pay before doling it out, but why throw away money? You can check yours for free at CreditKarma.com (some credit-card issuers also provide the score as a courtesy to account holders). Once you learn your number, figure out what it means. Generally speaking, anything above 740 puts you in the "very dependable" category, while a score that's below 670 tends to be rated as subprime. Either way, chances are there are easy areas for improvement, so get to work.
Pay on time. The largest chunk of your FICO score (approximately 35 percent) is based on your payment history. To make sure you don't ever miss due dates, consider automating your payments for credit-card statements, car and student loans, utility and cell bills, and so forth. Stagger them to avoid a massive outflow, and coordinate them with when you get paid. "That way you can avoid being late or overdrawing on your bank account," says Ellie Kay, Moms Money Clinic advisor and author of The 60-Minute Money Workout.
Reduce your debt load. The amount you owe makes up another 30 percent of your FICO score. Lenders are particularly mindful of your debt-to-credit ratio. Prepare to get dinged if you use more than 30 percent of your available limit. So if your cards have a cumulative credit limit of, say, $10,000, your revolving balance should never exceed $3,000, says Stephany Kirkpatrick, CFP, Moms Money Clinic advisor and vice president of financial advice for LearnVest.com.
Avoid massive charges. Credit scores are fluid. If a bureau takes a snapshot of your credit right after you've made a huge purchase (such as preschool tuition for the year), your score could suffer temporarily. Try to spread out such big-ticket charges over several months and pay balances promptly to avoid being penalized.
Up your credit limit. If your debt-to-credit ratio needs improvement, paying down debt is the obvious answer. But since it takes a while for your score to creep up once you do this, you should also ask credit issuers to increase your limit. Sounds counterintuitive? It's not. This will lower your ratio independently from any changes in your spending. If lenders ask why you're requesting it, be honest. "Tell them you understand this step can help improve your credit score," says Farnoosh Torabi, Moms Money Clinic advisor and host of the So Money podcast. "If you're a good customer and have been paying your bills consistently, they should be more than happy to raise it."
Be aware of excessive hard inquiries. When you apply for a new credit card, it's standard for the proposed lender to check your credit report before extending an offer. That's considered a hard inquiry. While applying for one line of credit won't matter much, four or five inquiries within a year could seriously hurt your score. Think about that before you say yes to a retailer's tempting card offer at checkout. "If you open up multiple store cards to get the onetime 15 or 20 percent discount, that little short-term gain can lead to a big long-term loss," Torabi says. Note: While shopping around for a competitive mortgage or car loan often necessitates several hard inquiries within a short period, these generally count as a single probe for the purposes of your score. And checking your own credit report doesn't count against you.
"I've fallen behind on some bills. How do I rebuild my credit quickly?" - Autumn Stratton
After she suffered a back injury, Stratton and her husband, Ed, from Smyrna, Delaware, missed some medical payments. "We got numerous, separate bills for different procedures and lost track of which had been paid," says Stratton. The account wound up with a collection agency. Stratton's credit score has dropped by 110 points, and she isn't sure how to build it back up.
Moms Money Clinic advisor Ellie Kay answers
Stratton should visit nfcc.org, the website for the nonprofit National Foundation for Credit Counseling (NFCC), whose member agencies offer financial advice online, by phone, or in person (the average cost is about $24). A certified counselor can help create a repayment plan that may reduce her monthly payments as well as interest charges. Once it's in place, she should set up either alerts or automatic withdrawals to ensure she hits due dates. By following these steps, her score should start to improve within a couple of months.