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How Are You at Managing Your Credit Score?

Know your scores and how to improve them

By Fred Yager
ConsumerAffairs.com

August 6, 2008

Some wireless providers are checking your credit rating to determine what kind of agreement they will offer you. Meanwhile, more and more employers are starting to look at your credit scores as part of the hiring process. It's just as important these days to manage what you owe as it is to manage what you own.

What is your credit score?

According to a recent survey sponsored by the Consumer Federation of America and Washington Mutual, more than two-thirds of all Americans don't even understand what a credit score means. Basically, your credit score measures the probability that you'll repay a loan. The higher your score, the more likely it is that you will repay your lenders.

The most popular credit rating is the FICO score. FICO stands for Fair Isaac Credit Organizations and it was one of the first firms to institute a credit rating system. FICO scores range from 300 for the worst score to 850 for the best with the median score for consumers at 723.

Your credit score is based on five categories:

• Repayment history, including whether or not you have been late on any payments

• Total amount of debt

• Length of credit history

• Type of credit such as secured debt like mortgages or unsecured like credit cards

• How frequently you borrow

With FICO, the first three categories make up 80 percent of your score. That means if you have a short credit history, even one late payment on a credit card will impact your score greater than if you have a long credit account.

How do I manage my credit card debt?

Like anything else, it helps to have a plan. Create a chart showing the total balance on your credit cards and the minimum monthly payments for each card. Now you may want to pay off the smallest balance first just to give yourself a feeling of accomplishment. But it may make more sense to pay off the cards with the highest interest rates first. Each time you pay off a credit card, add the amount you had been paying to the monthly payments on the remaining cards and continue this until all accounts are paid off in full.

Although each credit card requires a minimum monthly payment, you should pay more, otherwise it will take years and years to pay off the debt and your interest charges will more than double what you paid for your original purchase. Also, try to stop making any new charges until you have paid off all your accumulated debt. If you can't stop totally, reduce it as much as possible.

It's also a good credit management strategy to avoid getting too close to your credit card limit. In fact, most experts suggest keeping your balances less than 30 percent of your credit limit. There are two things you can do if you go over that 30 percent. Pay down your balance or call your issuer and ask for a higher credit limit. But be careful that you don't see that as an open invitation to charge more just because you have a higher credit limit.

Should I apply for new credit cards?

There are situations in which taking on new credit cards could be a good idea. For example, if the cards you had that were once zero interest cards have now popped up into double digit interest rates, it's time to find a better rate. Or if you have several credit cards, you can consolidate these into one low-rate card. Some of the more competitive deals include the Virgin Credit Card, which has a 15-month introductory interest-free balance transfer period, with a debt transfer fee of 2.98 percent. Barclays has a range of cards offering 14 months interest free with a 2.9 percent transfer charge.

Taking on new borrowing - and managing it well - can actually improve your credit score, especially if your credit history includes late payments. But there's a catch. The rate you are offered will depend on your credit score and these good rates are for those with high credit scores. So if you are unlikely to be accepted for these low rates, don't even apply. If you make a number of applications for credit within a short space of time, it will have a negative impact on your credit score.

How do I fix bad credit scores?

Before you can begin repairing a low credit score, you have to get a copy of your credit report just to see what you have to do to improve it. You can do this online by contacting one of three major credit bureau such as Experian, Equifax, or Trans Union. You can also get credit reports for free once a year by visiting the AnnualCreditReport.com Web site. Checking your own reports has no impact on your credit score, and you should check your reports at least once a year to look over your credit usage.

Experts agree that the best way to increase a credit score is to consistently pay bills on time. Late payments can haunt your credit file for up to seven years. One way to make sure this doesn't happen is to set up direct debits.

If you've fallen into that unfortunate category of borrowers who have failed to keep up with with their bills and debt repayments to the point that lenders will have nothing more to do with you, thus denying you the chance to even repair your credit score, you may want to consider a "secured" credit card. This gives you a chance to build up a payment history by borrowing up to the amount you paid into the account. Just make sure the company offering the secured card reports to the credit bureaus, because if it doesn't then it will have no impact on your report. A secured credit card means that you're basically borrowing against your own money because you have put into an account the money that you are borrowing against. It's something in between a debit card and a credit card but it could be a way to demonstrate that you can manage your credit more responsibly.

Improving a poor credit score may take some time, but it is definitely time well spent. Better credit scores will get you better rates on everything from a mortgage to car loans or credit cards, on your existing debt or on any credit you wish to apply for in the future.

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