Financial Balance: Good Credit

With lenders tightening their purse strings, good credit matters more than ever. Without it, you'll find yourself at the back of the line when you try to get a mortgage, car loan, or business line of credit. So instead of leaving your fiscal health to its own devices, take a proactive approach to credit maintenance.

At the center of your fiscal picture lies your credit score, a number derived from credit reports compiled by the three credit bureaus: Equifax, Experian, and TransUnion. Based on this data, the Fair Isaac Corporation (FICO) creates what's known as a FICO score, which ranges from 300 to 850 points. Although you technically have three FICO scores (one for each bureau), most lenders look at an average of all three.

Generally, the higher the number, the better the interest rates and terms you'll get for loans, credit cards, and lines of credit. And the benefits don't end at the bank. Many landlords, insurance companies, and employers consider that number when deciding whether you're a safe prospect. A number in the 600s used to be perfectly respectable, but these days you want to fall in the 700s. Read on to learn how to maintain a high score or give a low one a nudge.

Request your report. Before you even seek your score, check the accuracy of your credit reports, because the data the bureaus gather isn't always correct. Studies have shown that most reports contain mistakes, from a wrong address to incorrect balances, some serious enough to drag down your score. If the report lists an account you didn't open, that should raise a red flag for possible identity theft.

The Fair and Accurate Credit Transactions Act of 2003 gives all Americans the right to a free copy of their credit reports from the three bureaus once a year. To get yours, use the official Web site, annualcreditreport.com, or call 877-322-8228; other sites, such as freecreditreport.com, may charge fees or try to sell you services. Dispute any mistakes with the bureaus by filing a report online or using snail mail. Afterward, get a free updated copy of your reports to make sure they fixed the mistakes.

Get your digits. Now you're ready to get your score -- and that's where things get confusing. When you order your free credit reports, each bureau will try to sell you its own proprietary credit score, called a Personal Credit Score or a VantageScore. Don't buy it -- yet. Although these scores are slowly gaining ground, most lenders don't use them. Instead, go with the FICO score, which remains the gold standard. You can buy FICO scores from two of the three credit bureaus at myfico.com for $15.95 each. If you're already applying for a loan, ask the lender to tell you your score, because they have to check it anyway.

Stay balanced. Ideally, the amounts you owe on your cards and lines of credit should come in at 30 percent or less of your available credit, so paying down any extra debt makes a big difference. Also, make sure the credit-card-issuing bank doesn't lower your credit limit. This hurts your credit-debt ratio, which makes up about a third of your score.

Be punctual. Your payment history accounts for 35 percent of your overall number. To keep up-to-date, put bills on autopay or set up an online bill-payment service with your bank.

Spend a little. The longer and more stable your credit history is, the better. Some companies close dormant accounts, so keep older accounts active by charging a small purchase and immediately paying it off. If you're a reformed credit-card addict and want to prune your unused accounts, be smart: Maintain your oldest accounts whenever possible, cancel those with the smallest limits first, and spread out the closings over a period of time.

Keep applications to a minimum. Every time you apply for a loan, line of credit, or new card, the potential lender makes a "hard inquiry." Too many hard inquiries make you look risky and can ding your score, so apply for new accounts thoughtfully. Over time, with strategies and good habits, you'll get your credit to really shine -- and open more doors along the way.

M.P. Dunleavey is the author of "Money Can Buy Happiness."

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