Improving your credit score

Many people suffered blows to their credit scores during the unstable economy of the last few years, whether because they missed payments, exceeded credit limits or, more seriously, experienced a home foreclosure or even bankruptcy. Is this a big deal? Absolutely.

If your credit score drops significantly, you'll likely be charged higher loan and credit card interest rates and offered lower credit limits – or perhaps be disqualified altogether. And, lower scores can also lead to higher insurance rates and harm your ability to rent an apartment or get a cell phone.

Fortunately, taking these few steps will begin improving your credit score almost immediately:

First, review your credit reports from the three major credit bureaus (Equifax, Experian and Transunion) to see which negative actions your creditors have reported and look for errors or fraudulent activity. You can order one free report per year from each at www.annualreport.com. You can also order a FICO credit score (the score most commonly used by lenders) for $19.95 from www.myfico.com to know exactly where you stand.

"It definitely pays to have a good FICO Score," says Greg Pelling, vice president of Scoring and Analytics at FICO. "Based on today's rates, you could save $30,000 in interest on a $100,000 home loan over 30 years, if your score is above 740 rather than below 620. Lenders base their decision on many factors but your FICO score plays a major role."

Never exceed individual credit limits. In fact, the lower your credit utilization ratio (the percentage of available credit you're using), the better. Try to keep your overall utilization ratio – and ratios on individual cards and lines of credit – below 30 percent.

Even if you pay off your balance each month, showing a high utilization ratio at any time during the month could conceivably hurt your score. A few suggestions:

• Spread purchases among multiple cards to keep individual balances lower.
• Make extra payments midway through billing cycles so your outstanding balances appear lower.
• Ask lenders to reinstate higher limits if your payment history has been solid.

Transferring balances to a new credit card to get a lower rate dings your credit score by a few points – although it won't take long to recover. But, say you move a $2,000 balance from a card with a $10,000 limit to one with a $4,000 limit; you've immediately gone from a 20 percent utilization ratio to 50 percent on the new card.

A few other credit score-improvement tips:

• Make sure that credit card limits reported to credit bureaus are accurate.
• Don't automatically close older, unused accounts; 15 percent of your score is based on credit history. In fact, occasionally make small charges on existing accounts to make sure lenders don't close them out.
• Each time you open a new account there's a slight impact on your score, so avoid doing so in the months before a major purchase like a home or car.
• Pay off medical bills and parking, traffic or library fines. Once old, unpaid bills go into collection, they can damage your credit.

There are many good resources for learning what you can do to repair and protect your credit scores, including the Credit Education Center at www.myfico.com/CreditEducation, the Credits and Loans page at www.ftc.gov/bcp/menus/consumer/credit.shtm, and What's My Score (www.whatsmyscore.org), a financial literacy program run by Visa Inc.