What you should know about your credit

Your credit score is likely the most important three-digit number in your life.

Your score affects how much you pay for credit, and it can affect other bills you pay, where you live and where you work.

• Banks and credit card companies review your score when deciding whether to extend you credit and how much interest to charge. (See "What bad credit really costs you.")
• A high score can lead to lower car- and home-insurance premiums, a deposit waiver from utility companies and a better service package from the cell-phone company. (See "5 people who check your credit.")
• Many landlords check credit scores before allowing you to sign a lease. (See "Credit checks: A civil rights issue?")
• Many employers -- 35% in 2003 -- are doing credit checks on prospective employees, particularly those who would deal with money. Employers need your written permission to make the check and must give you a chance to respond.

With so much at stake, it's wise to find out where you stand and take steps to raise your score if it's below 700, particularly before you apply for a mortgage or other loan. Above 760 and you're in the upper echelon. A score below 620 tells people you're not a good risk and destines you for credit denial or subprime interest rates.

What is a credit score?

The three major credit-reporting agencies -- Equifax, Experian and TransUnion -- use software developed by Fair Isaac Corp. to rate your risk for assuming debt based on your credit history. The result is commonly known as a FICO score.
The score is based on five factors, including payment history, the amounts you owe and the types of credit you've obtained. Personal information like income, occupation, age and marital status are not considered.
The FICO score can range from 300 to 850, although very few reach that pinnacle. Each credit bureau may assign you a different score, based on the information it receives from creditors.
You generally have to pay to get your credit score. You are legally entitled to one free credit report each year from each of the three credit reporting agencies. (See "How to get a free credit report.")

• To watch for errors and identity theft, stagger your requests and get a report from a different bureau every four months.
• Go to AnnualCreditreport.com to order a free report. Make sure you access the right Web site. Impostor Web sites abound.

Want to improve your score and keep it high? Think of credit as a privilege to be used sparingly.

• Don't apply for lots of credit cards. A credit inquiry can deduct five points from your credit score. However, multiple checks made when you're shopping for a mortgage will count as only one.
• Asking for your personal report won't hurt your score. Neither will requests made by credit card companies that offer preapproved cards, or requests by prospective employers.
• Avoid applying for credit cards from companies that don't set a spending limit or won't report your limit to the credit bureaus. (See "Weird stuff that hurts your credit.")
• Don't cancel multiple credit cards. That can suddenly lower your available credit and can hurt your credit score. Keep old accounts open to ensure a long credit history.
• Limit the percentage of available credit you use to no more than 30%, even if you pay off your balance each month. Your credit report will show the amount you owed, even if you subsequently paid in full, and excessive spending will ding your score.
• If you don't have a credit history, start one by obtaining a secured credit card and managing it responsibly. (See "9 ways to build a killer credit score.")

It pays to pay on time

The No. 1 way to raise your credit score? Pay all of your obligations on time. Your payment history constitutes 35% of your credit score.

• That includes library fines and parking tickets. Municipalities are more aggressive about turning over delinquent accounts to collection agencies, which will drag down your score. (See "Now bounced checks can trash your credit.")
• One late payment reported to a credit bureau can drop your score by 100 points, particularly if you had a high score.
• Late payments can remain on your credit report for seven years. Bankruptcies appear for 10 years.
• Consulting a credit counseling service to manage excessive debt will not damage your credit score.

If you find an error in your credit report, ask the creditor to correct it, then notify the credit bureau by sending a certified letter and copies of documents that support your claim.

• If the error isn't fixed, the bureau must identify the person who investigated your claim, and you can request a second report.
• If the error is corrected, the bureau must send you a copy of your new report and, at your request, a copy to everyone who obtained your credit report within the previous six months.
• If it's not corrected, you can include a statement in your credit report.
• Faced with a faulty credit report when you're about to obtain a mortgage? Mortgage companies can engage a rapid rescoring service to correct errors within days.
• Paying a service to monitor your credit is not worth the fee, unless you've been the victim of identity theft and have reason to believe you're still at risk.