Everyday Cheapskate

Your credit score is a three-digit number between 300 and 850, generated by a mathematical algorithm (a mostly secret formula) based on information in your credit report, as compared with information on tens of millions of other people. The number is said to be a highly accurate prediction of how likely you are to pay your bills.

If it sounds boring and unimportant, you couldn't be more wrong. Credit scores are used extensively these days. If you rent an apartment, get braces, buy cell phone service, apply for a job or call to get utilities connected, there's a good chance your score will be pulled.

If you have an existing credit card, the issuer is likely to look at your credit score to decide whether to decrease your credit limit or charge you a higher interest rate. The higher the number the better you look to lenders. People with the highest scores get the lowest interest rates. And, we hear, they're getting the jobs.

Fair Isaac, the company that created the FICO scoring formula, gives us the following ways to improve our credit scores:

—Pay your bills on time. Paying late or letting something go to collection can have a major negative impact on your credit score. If you have missed payments, get current and stay current. The longer you pay your bills on time the better your credit score. Be aware, however, that paying off a collection account or bringing an account current will not remove it from your credit report.

—Keep balances low on "revolving credit." Using more than 30 percent of your available credit on your credit cards brings down your credit score.

This applies to individual accounts and when you add up all of your available credit and compare it with how much you are using on any given day during the billing cycle.

—Pay off debt rather than move it around. The most effective way to improve your credit score is to pay down your revolving credit.

—Don't close unused credit cards. Closing accounts might sound like a great short-term strategy to raise your score, but it's not. This will close the gap between your outstanding debt (the amount of credit you are using) and the total amount available. Instead, use a clear strategy to close accounts, but only as it will not impact the gap between what you owe and the amount of credit available.

—Don't open new accounts. More credit might seem wise in order to increase your available credit ratio, but it will be seen as a negative to your score. New, or "young," accounts are not useful in credit scoring because they dilute your average account age. Unless it's a dire emergency, do not open new credit accounts.

—Work on longevity. Make sure you maintain your oldest accounts. A great deal of weight is given to longevity, so the oldest account you have is the most valuable.

As with a lot of things in life, time is the best "healer." Do the right thing by managing your finances responsibly and your credit score will take care of itself.

Mary Hunt is the founder of www.DebtProofLiving.com and author of 18 books, including her latest, "Can I Pay My Credit Card Bill With a Credit Card?" You can e-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723. To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.

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