Give Your Credit a Post-holiday Checkup

Physician's Money Digest, January 2006, Volume 13, Issue 1

The average credit scorenationwide is 677. Generally,a credit score above720 is considered attractiveto most lenders. Notonly do these computerized three-digitmeasurements of creditworthiness influencehow much we'll pay for a creditcard or a car loan, plenty of nonlenders—such as future employers—like tocheck that information as well.

As you start the new year, it makessense not only to check your creditreport and credit score, but also tounderstand the proper things to do tomaintain the best numbers possible.The following are some New Year's resolutionsfor your credit rating:

•Obtain all three credit reportsand scores. You'll have to spendaround $5 to access your credit score,but you can get your credit reports forfree at AnnualCreditReport.com. Thisparticular site accesses all three creditbureaus: Experian (www.experian.com), Equifax (www.equifax.com),and TransUnion (www.transunion.com). Respond quickly to inaccuraciesin writing either by mail or online, andmake sure you do this at the same timeevery year. It won't affect your creditscore if you do this more than once,but it's a good idea to mark a specifictime and follow through.

•Resolve to pay on time. Manypeople fail to remember the day to putthe checks in the mail so they'll clear ontime. To cure yourself of this, first get acalendar and mark payment days 5 to 7days ahead of due dates so your paymentgoes through the mail on time.Second, check out the electronic billpayment service at your bank and programpayment reminders so you neverforget to push that button.

•Catch up on your payments. Ifyou have missed payments on anaccount, do whatever it takes to get currentand then never let yourself fallbehind again. According to myFICO.com, the longer you pay bills on time,the better your credit score.

•Understand problems withyour credit. It takes 7 years to removea collection account from your creditrecord, even if you've paid it off. Writedown the exact month when that markon your report will be removed, andmake sure it happens.

•Pay off balances in sequence.Devise a plan to pay off credit card balancesin a sensible order. There's a temptationto move around outstanding balancesif you get a good offer. Sometimesit still makes sense to do this if it cutsyour borrowing cost, but make sure youdon't shift balances too often. Focus onpaying off high-rate balances first.

•Limit your credit inquiries. Youmight get tempting credit card offersand refinancing notices at a rate of fivea week, 52 weeks a year, but that doesnot mean you need to check all of themout. In fact, an excess number of creditinquiries can lower your score. Use yourJanuary credit review period as part ofan overall financial plan for the yearthat will allow you to investigate creditsensibly, if you need to do it at all. Andwhen you do investigate credit, do sowithin a focused period of time, optimally2 weeks. Don't go back to thewell for a very long time.

•If you do borrow, ask lenderswhich bureau they use. If you aremaking an effort to keep your credit incheck and your reports accurate, thiswon't make a lot of difference, but italways pays to ask a potential lender,particularly a mortgage lender, if thereis one brand of credit report they favorover others. This is important becauseyou may have a significantly higher orlower score on one report comparedto another one.

•Cut up the card, but don't closethe account. Closing accounts, eventhose that have had zero balances foryears, can be a bad idea. Lenders wantto see a long record of credit management,and longtime accounts that youhaven't touched in years may actuallyhelp your score because it shows youhave some restraint.

This article has been produced by the Financial PlanningAssociation (www.fpanet.org), the membership organizationfor the financial planning community.