You can take steps to ensure you have a good credit rating

Pare down huge balances, check personal report for errors, pay bills on time

On The Money

Your Money

March 28, 2004|By Lorene Yue | Lorene Yue,YOUR MONEY STAFF WRITER

If a low credit score has hampered your access to new credit and the best interest rates, there are ways to boost your rating.

Before lenders give you money, they will look at your credit score, typically a number from 300 to 850, to determine how great a risk you are. The higher the score, the more likely you are to pay your bills on time.

A high score doesn't guarantee a low interest rate, but chances are you'll get a better deal than you would with a lower score.

The national average is 678 points. Anything under 600 points is typically considered subprime, although some lenders may set a higher threshold.

The formula for the credit score takes into account how you've been paying your bills, how much you owe, the length of your credit history, how much new credit you have and what kind of credit (mortgage, credit cards, installment loans) you use.

Payment history and debt load account for 65 percent of your score, so it's important to pay bills on time and keep your financial obligations manageable.

Credit scores are not based on income, marital status, race or gender.

Some lenders may be willing to tell you your score when you're applying for a loan. Otherwise, you'll have to find out from a credit-reporting agency such as Experian, Equifax or TransUnion, or from Fair Isaac Corp., which computes credit scores.

"There are only two things that you can do that have a relatively quick effect [on your score]" said Craig Watts, consumer affairs manager for Fair Isaac Corp. "Pay down high balances and check over a credit report" for errors.

Here are five things that can help bump up your credit score. None will change your score overnight, but some may work slightly faster than other tactics.

Cease and desist. Stop opening new accounts. Every new account can lower your score.

Check for errors. Correcting errors in your report is one of the easiest ways to bump up your score. One study found 29 percent of credit reports had errors serious enough to affect the score, according to the Federal Trade Commission. Not every credit report will contain errors, but it's worth giving your report a thorough exam to make sure you're not being penalized for bad information.

Pay off late bills. Your payment history makes up the largest chunk of your credit score, 35 percent. Calculations are based on how long your bills are past due - 30 days, 60 days, 90 days or more - and how much is owed. If you have any delinquent accounts, pay them down.

Pay on time. Once you have taken care of your overdue bills, start paying them on time to re-establish a good payment history.

"It shows creditors that you have the discipline to take [on credit] and make payments as agreed," said Catherine Williams, who handles financial literacy for Money Management International in Houston. "That's what creditors want."

Pay down balances. The closer you are to your credit limits, the stronger the likelihood of a lower score. Some experts recommend keeping account balances below 75 percent of your available credit.

If you think that raising your limits will help by making you seem further away from maxing out, think again. A request for a higher limit will show up on your credit report, and too many of those requests can count against you, said Joel Greenburg, a founder of the Association of Independent Consumer Credit Counseling Agencies and president of NovaDebt counseling services in Freehold, N.J.

Consolidating your balances to a few cards, or spreading out your debt over a number of cards won't help either. That looks like you are manipulating things instead of trying to pay off debt.

Lorene Yue is a Your Money staff writer.

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