WFSB Channel 3Boost your credit score with smart debt management

By Andrew Housser

You have likely heard that your credit score is very important. But if you are wondering just why it is so important -- or how to improve your score -- read on. 

Credit scores are a way that lenders, and even employers and landlords, gauge how reliable you are in the way you handle money. Several different companies calculate credit scores for individuals based on their past history with money. The factors they look at include how much debt you have, whether you pay bills on time, and whether you carry large balances or max out your credit cards and loans.

Credit scores can range from the 300s to 800. Scores of about 720 or higher tell lenders that consumers are likely to reliably pay back debt. As a reward for this perceived reliability, lenders often offer people with good credit lower interest rates that ultimately can make a big difference in payments.

Here's an example: Person A, with a credit score of 750, might apply for a mortgage loan of $165,000 and be offered an interest rate of 4.25 percent annually. That individual would pay about $812 a month for that loan. Person B, with a credit score of 580 -- in the "high-risk" category -- might qualify for an interest rate of 7.00 percent. Person B would pay $1,098 per month for the same loan -- $286 more per month. Over 30 years, that equals nearly $103,000 more in payments. Put another way, if Person B improved his or her credit, and invested that $286 in a fund that earned 4 percent interest annually, after 30 years, he or she could have paid off his house and also accumulated approximately $200,000 in additional savings!

Clearly, a good credit score can pay off. Here's how to build your score starting today.

1) Know your score.

The first step to understanding your credit is to "pull," or request, your credit report. You can pay a nominal fee to receive your report, or you can get a free copy once every year from www.annualcreditreport.com.

2) Correct errors on your credit report.

If you see incorrect information on your credit report, write the credit bureaus asking them to correct the information. This is very important if you see a wrong name, address or credit account on your record. Any of these indicators could mean someone else is damaging your credit score.

3) Set a goal.

Once you know your credit score, you can set a goal to improve it.

4) Pay every bill on time.

Without changing anything else, you can raise your score by paying bills on time. In fact, payment history makes up about 35 percent of a credit score.

5) Pay down as much debt as possible.

The total amount that you owe makes up another 30 percent of your credit score. If you can eliminate some of that debt, your credit score will go up. Work hard to avoid adding to your debt, and to pay as much as possible on your debt, starting today.

6) Be cautious about opening credit cards or lines of credit.

Adding to your available credit can sometimes damage your credit score. It's all right to add credit you need, such as a car loan or mortgage. But if you open a new store credit card every few weeks or accept every offer that comes in the mail, you can damage your credit score.

7) Keep existing credit lines open after they are paid off.

Some people have an impulse to close credit cards after they pay off the balance. But creditors calculate how much you owe out of your total available balance. This ratio is called credit utilization. If you close a credit card, you eliminate that amount in available credit. That, in turn, causes the amount you owe to be a greater percentage of your total available credit. It is better to simply not use the credit card, or charge a relatively small expense to that credit card and pay it in full every month so the credit card lender does not close the account.

8) Remove accounts that are not yours from the credit report.

If you have been divorced, or had a joint account with your child or another person, be sure your name has been removed from those accounts if you are no longer liable to pay them. Otherwise, the other person's actions can affect your credit score.

9) Verify debts that are in collections.

If a debt collector contacts you, make sure to validate that debt before paying it. You have a right to ask the collector to prove that you do owe the debt and that it is correct. See section 809 of the federal Fair Debt Collection Practices Act (FDCPA) for more information.

10) Ask for "goodwill" repairs to old credit problems.

If you have managed your credit responsibly for several years, but weren't so trustworthy before that time, you might see some late or missed payments still lingering on your credit report. These missteps are still damaging your credit score. If you truly have established a better track record, you can write those creditors and request that they make a "goodwill" adjustment to your credit report by removing those items from your credit report. Creditors do not always respond to these requests, but it will only cost you a stamp -- and it just might earn you a higher score in the long run.

As you can see, building a strong credit score takes some work. But if you are in a situation in which you cannot pay your debts on time, understand that your credit will be impacted.  In that situation, your first step should be to contact a reputable credit advocacy or debt relief company to help you get out of debt. After you are back on track, you can begin to take the steps above to rebuild your credit score. While it might take some time to improve your score significantly, with time, patience and consistency, you can earn the credit score you deserve.