If you can improve your credit scores, you will probably spend less money, perhaps hundreds or thousands of dollars less each year.
Here is how to raise your scores, so you can receive the best financing rates and deals, better rates on insurance and all the other benefits of having a high credit rating.
*What's a good score?
You have many credit scores. By far the most important are your FICO scores with each of the three major credit bureaus, Experian, Equifax and TransUnion. A mediocre score is 700, while a score above 750 should get you all the best deals and borrowing rates, said John Ulzheimer, president of consumer education for Credit.com and author of the book You're Nothing but a Number.
*Know the ingredients.
Oddly, your credit score doesn't care about your net worth, your income, how much money you have in the bank or even whether you pay off your credit-card bill in full every month. The scoring system only cares about what credit lines you have open and how you have been using them.
*Understand the breakdown.
The exact formula for calculating FICO credit scores is a secret, but we know that the biggest factor is your payment history. Paying your bills and loans affects 35 percent of your credit score. The amounts you owe account for 30 percent. The length of your credit history is 15 percent. Applying for new credit counts for 10 percent, as do the different types of credit you have.
There's really no such thing as "credit repair," as you might have heard advertised. Either you have mistakes on your credit reports or you don't. Disputing incorrect negative information is free and, in most cases, easy. Dispute mistakes while accessing your reports for free once a year at www.annualcreditreport.com.
Negative information, such as late payments, repossessions and bills in collection, can stay on your report for seven years. A bankruptcy can stay for 10 years. Some credit-repair companies will dispute all the negatives on your report, hoping creditors won't respond in the required 30 days. That will result in removal of the negative item from your report, at least until the creditor responds. Credit bureaus are wise to that strategy, so it doesn't necessarily work, Ulzheimer said. And if you wanted to use that tactic, you could just do it yourself rather than paying a credit-repair service.
Paying your bills on time, every time, won't raise your score, but it will keep it from dropping.
*Mind your ratio.
Besides paying bills on time, the best thing you can do for your credit rating is to continually use credit, but use very little of your available limit. Imagine you have several credit cards that have a combined $5,000 limit. If you regularly have combined balances of $4,000 or more each month on those cards, that's bad. You have an 80 percent utilization ratio. Better is a ratio in the 30 percent range; best is less than 10 percent. Remember, your score doesn't care whether you pay off the balance, only how much of your available credit limit you're using at any given time.
"The score is incredibly sensitive to how much of your available credit you're using, particularly on your revolving lines of credit - typically, credit cards," said Liz Pulliam Weston, author of Your Credit Score. "Having small balances on a number of cards is better than having a big balance on one card, in general."
*Don't close accounts.
Keep open your old credit accounts, even if you paid them off and don't use them. The more available and unused credit, the better for your score. Older credit accounts also boost your score. One caveat: If you know that you will spend unnecessarily just because you have the available credit, close the accounts.
*Carefully raise credit limits.
It helps to have a lot of available credit to help your ratio. But opening a lot of new credit accounts at once likely will hurt your credit score in the short term. A strategy to help your score without hurting it would be to regularly ask your current credit-card company to raise your current limit "without pulling a credit report." You also could make two credit-card payments a month, which artificially lowers your balance reported to credit bureaus. Just be sure to make the second payment after the closing date and before the due date, so you aren't socked with a late payment, Weston said.
Gregory Karp is a personal finance writer for The Morning Call in Allentown, Pa.