Shape Your Credit Score

Here's how you can shape up your credit score to meet lenders' standards

USA TODAY

January 29, 2008 Tuesday
FINAL EDITION

BYLINE: Sandra Block

SECTION: MONEY; Pg. 3B

Interest rates on home mortgages, credit cards and even car loans have been dropping for months. They could fall even more if the Federal Reserve decides to slice short-term rates again when it meets Wednesday. But before you start shopping for a new car or mortgage, check your credit reports. These days, even a minor dent or ding could prevent you from getting the lowest rates.

Faced with rising delinquencies and defaults, lenders have become much more selective, says John Ulzheimer, president of educational services for Credit.com. In the past, borrowers with a credit score of 720 could get the best rates. Now, "The bar has been raised," Ulzheimer says. Many lenders, he says, are reserving their lowest rates and most favorable terms for borrowers with scores of 750 or higher.

You can take steps to improve your credit score. But first, you need to know where you stand. Here's how to get started:

*Order a credit report from all three of the major credit-reporting bureaus at www.annualcreditreport.com. By law, you're entitled to one free credit report a year from each of the credit-reporting agencies: Equifax, TransUnion and Experian.

Once you get your credit reports, check them carefully for errors that could hurt your score. Watch for credit information about someone whose name is similar to yours, or accounts wrongly reported as delinquent. Credit bureaus are required to investigate disputed items, usually within 30 days.

You can order all three credit reports at once or stagger them over a 12-month period. The latter strategy lets you monitor changes in your credit history. But if you plan to refinance within the next few months, order all three credit reports now, says Evan Hendricks, author of Credit Scores and Credit Reports. Mortgage lenders will likely review all three of your credit reports and scores, so it's important to address errors in any one of them before you start shopping for a loan.

*Buy your credit score. Your credit score isn't included with the free annual reports, so you'll have to pay for it. All three credit bureaus and dozens of websites will sell you a credit score, often in combination with credit-monitoring services and other products. Some credit bureaus offer their own proprietary credit scores. But because most lenders use the FICO score, that's the only one you should buy, Hendricks says.

When you order your free credit reports, you can buy your FICO score from Equifax for $7.95. Alternatively, you can order your score from Fair Isaac's website, www.myfico.com. Prices range from $15.95 for a FICO score and one credit report to $47.85 for all three scores and reports. (Your FICO scores and credit reports will vary somewhat because some lenders don't report to all three credit bureaus.)

Once you know where you stand, you can take steps to improve your score. Here's how:

*Pay your bills on time. Your payment history accounts for 35% of your score (see box). A late payment can stay on your report for up to seven years.

Fortunately, lenders pay more attention to recent history than to past misdeeds. The older the late payments are, the less effect they'll have on your score, Ulzheimer says. After several months of on-time payments, you should see improvement in your score, he says.

*Reduce your debt. The amount of debt you have outstanding, as a percentage of your available credit limit, accounts for 30% of your score. If, for example, you have a credit card with a $10,000 limit and a balance of $5,000, your "credit utilization" is 50%. Your credit score reflects the debt ratio for each of your cards, as well as the ratio for your overall debt.

If you plan to apply for a mortgage or car loan soon, reducing your credit utilization is one of the most effective ways to improve your score, Ulzheimer says. He recommends reducing your individual and total balances to 10% of your available credit.

*Don't open new accounts. By now, you might be wondering whether you can increase your available credit -- and lower your credit-utilization ratio -- by getting some new credit cards. Well, stop wondering. That strategy will hurt your score more than it would help.

If you apply for a new credit card or other type of loan, the lender will request your credit record, and that inquiry will appear on your report. Many such inquiries can hurt your score, because lenders believe that borrowers who take on a lot of new credit are more likely to fall behind on their payments. (Requesting your own credit report won't affect your score.)

In addition, when you open new accounts, the average age of all your accounts combined drops, which might also hurt your score, Ulzheimer says. The length of your credit history accounts for 15% of your FICO score.