Managing Your Credit

Improving or repairing your credit is a process that focuses on improving lenders' perceptions of you as a credit risk.

Ultimately, lenders use their own guidelines to make credit decisions. But your credit score is an important component in shaping those decisions. By taking steps to improve your credit score, you improve your creditworthiness.

You can find your credit score in your credit report. Credit scores generally range from 500 to 800, but can go lower if you're struggling with a poor credit history. Lenders offer the best rates for borrowers with higher scores, usually in the range of 750 and higher. Persons with a credit score in the 500 to 600 range can obtain credit, but will almost certainly pay a higher interest rate.

When you review your credit score, evaluate any disclosed reasons for not having a higher one. Fair, Isaac & Co., a major vendor of the credit-scoring software sold to credit bureaus, indicates that several major reasons for a low credit score are related to delinquencies. A delinquency results from failing to pay your bills on time.

Fair, Isaac estimates that about 35% of your credit score is based on your loan payment history. Naturally, delinquencies adversely affect it. How much you owe, in aggregate, contributes another 30% or so to your score. Other factors that contribute (in roughly equal proportions) to your credit score are:

• How long of a credit history you have. Here the advantage goes to adults who have had more time to establish credit.
• Whether you've recently obtained other credit. If lenders perceive you as loading up on your credit, they're likely to take a cautious stance in offering additional credit.
• Your current credit mix. Your credit mix indicates the types of credit you use. For example, mortgage debt is the loan on your home. Installment debt, which includes auto and student loans, also requires regular monthly payments. Revolving credit includes credit cards and credit lines.

If you determine that your loan payment history needs repair, consider the following steps. Over time, these steps will help to boost your credit score:

• List what you owe. Prepare a table of how much you owe each creditor, what the interest rate is and how much you pay monthly. In short, you want to itemize your personal liabilities. Much of this information, in fact, is what's shown in your credit report.
• Review your personal cash flow. Prepare a sheet that shows how much you pay out and how much you receive each month in cash. This statement represents your personal cash flow and identifies where you may be able to set aside additional savings to pay off debt.
• Prepare a personal budget. You can use a personal budget to augment your personal cash flow statement. A personal budget and personal cash flow statement need to work together: You want to find ways to cut non-essential expenses that identify an extra $50 or $100 a month to repay debt.
• Set up a debt workout plan with each creditor. Lenders want to get repaid, even for small debts. If you're unsure of how to set up a debt-repayment plan, visit a representative of your institution or a workout specialist.
• Apply for a secured credit card. A secured credit card is backed by deposits or investments that you keep at the lending institution. It may offer only a small credit limit initially, even less than an amount you are required to deposit. But by charging and making payments regularly, you build a better credit history. In turn, your credit score will increase.

To the extent that accurate but negative information remains on your credit report for up to seven years -- and 10 years for personal bankruptcy -- time is a dubious ally in helping you to repair your credit. Instead, real progress comes from diligent and disciplined saving and budgeting, a solid debt-repayment plan and judicious use of credit.

Next, we take a look at using a credit-counseling service to help you improve your credit.

Updated: May 2002