No matter when you left school, you're always being graded on how you handle credit. What's more, the score you get (a number ranging from 300 to 850) is no trifling matter. That number (known as the Fair Isaac Corporation or FICO score, named for the analytical company that devised it) determines the rates you get on your mortgage and car loans, and even whether you are approved for a new apartment.
For instance, say a score of 650 gets you a mortgage rate of about 7.9 percent. Boost your score to 750 and you could qualify for an interest rate that's 1 or even 2 percentage points lower, saving thousands over the life of a 30-year, fixed-rate loan.
Yet many consumers don't know their score. And some people (particularly older women) don't even have a FICO score, typically because their mortgage and credit cards are in the name of their spouses.
"But all marriages end, even the happy ones," points out Ginita Wall, director of the Women's Institute for Financial Education (www.wife.org) and coauthor of It's More Than Money, It's Your Life (Wiley). "And if a woman does not have credit in her name, she is going to have problems." For instance, if she wants to start a business later in life or simply open a department store charge account, she needs to show that she handles credit well. Without a good FICO score, lenders tend to be skittish about extending credit.
It is relatively easy to establish a credit history, but difficult to fix your record if you've mismanaged credit in the past. Still, making the right moves boosts that credit score.
Credit bureaus are required to provide consumers with a free annual credit report. You can also purchase a credit report (although not your FICO score) from the three major credit bureaus:
Fair Isaac offers all three reports plus your FICO score (www.myfico.com). Costs vary, as does the amount of information each report provides, but any one report should give a good bird's-eye view of your credit.
However, to get the most comprehensive overview of your credit, it's a good idea to invest in all three reports. That's because some creditors may report to one bureau but not another. Or if those creditors report to every bureau, they may do so at different times of the month. So your scores with each bureau will differ slightly.
"Generally, if your score is 680 or higher, you can apply for credit with confidence," says Stephen Snyder, financial expert and author of Do You Make These 38 Mistakes With Your Credit? (Bellwether).
Now that you have what is essentially your credit management report card, look for ways to boost your grade.
Next, check to see if your report contains four two-digit codes. These "reason codes" explain why your score isn't higher, says Snyder.
If you're in serious trouble -- with bankruptcy, a tax lien, or judgment -- you can write a 100-word statement that the credit bureaus will include in the report. "You can say, 'I was going through a divorce and my ex was supposed to pay the bills but did not,'" says Wall. Snyder feels lenders rarely if ever give such statements the consideration they deserve anymore, but it certainly can't hurt to try.
Divorce, incidentally, is one the biggest causes of credit problems. A judge may state that your ex-spouse is responsible for half of the Visa bill, but if your name is on the account, beware.
"You still have a contract with the creditor and the divorce decree has nothing to do with that," warns Maxine Sweet, vice president of consumer education for Experian. If you can't pay off all joint accounts immediately, Sweet's advice is for both parties to take out personal consolidation loans to pay off debts. "That totally breaks your tie to your ex," she explains.
If your credit history is a blank slate, getting credit may take time. On the plus side, at least you're starting with a clean record and can begin building a history right away.
As you build a history, keep in mind that revolving credit (such as Visa and MasterCard) counts more toward a score than installment loans such as mortgages, which have a fixed monthly payment. "With a credit card, you determine how much of your credit limit you will charge and whether you will pay the minimum or the amount in full," says Sweet. In short, it provides a better snapshot of how you handle money.
"Whenever you apply for credit, you give the lender permission to look at your report," explains Snyder. "Each inquiry, each time someone looks at your report, it lowers your score." That's because the more inquiries your report shows, the more you've been applying for credit. Watts says people who apply for credit frequently are a statistically higher risk, so even just a simple inquiry can be damaging.
Finally, keep your credit score high by paying on time. "That is absolutely the most critical thing," says Sweet.
If you've had credit concerns at all, you've probably noticed the ads on television or the Internet from companies that claim to "erase" bad credit or "eliminate" bankruptcies and judgments against you. For a fee, of course.
As appealing as it sounds, according to the U.S. Federal Trade Commission (FTC), there's very little that these so-called credit repair companies can do for you that you can't do for yourself for free. Moreover, some of the things such companies promise may not be legal.
For example, no one can legally remove any accurate information from your credit report, whether that information is positive or not. And lying about negative information in an attempt to remove it is a federal crime. If you're caught, you could be looking at a fine or jail time.
As a rule, the FTC warns consumers to avoid companies that do the following:
If you've paid a credit repair company and believe you've been scammed, contact your local consumer affairs office or state attorney general. For more information about legal credit services, go to the FTC Web site at www.ftc.gov.
A former editor at Money magazine, Karen Cheney writes frequently on family money issues from her home in Pennsylvania.
Originally published in Better Homes & Gardens magazine.