Putting credit problems behind you -here's the gameplan

Dear myFICO,

When I bought my car last year, I found out that my credit isn't as good as I thought it was. I couldn't believe it when the salesman told me that I didn't qualify for their best rates because my FICO score was in the low 600s. My goal for 2008 is to improve my credit over the course of this year so I can buy a home next year. Where should I start?

Seattle, Washington

Dear Lauren,

It's often a shock when someone tells you that you don't have good credit. A lot of people think if they haven't filed for bankruptcy or aren't getting pink delinquent payment slips in the mail, that everything is going smoothly. It's like being happy with the way your car is running and then it suddenly breaks down. It's only after you're stuck on the side of the road that you realize that you might have skipped a few tune-ups or forgot to change your oil. Credit is the same way, there may not be any glaring signs that things are damaging your credit -but that doesn't mean that you're in the clear.

You found out that your credit wasn't great when you bought your car last year. You probably also realized that your low FICO score is costing you money in higher interest rates each month. For a $25,000 auto loan the difference between a score in the low 600s and a score in the mid 700s can easily be $100 a month, or $1,200 per year. Since you've said that you want to buy a home next year, you can probably guess that your FICO score will either cost you money or save you money -and on much higher scale than your auto loan! Therefore, it's going to be very important to focus on improving your credit this year. So, how do you get started?

Start with setting some goals for 2008 and create a basic plan to achieve your goals. For example, your goal may be as simple as improving your FICO score enough to qualify you for a good rate on a home loan in 2009. To achieve this goal, your plan might look something like this: .

  1. Determine your starting point - you won't know what parts of your credit profile need help if you don't know where you're starting from. This is as easy as checking your credit report and FICO score to understand which areas need improving.

  2. Educate yourself - knowing you're starting point is fine, but what you really need is the knowledge to move forward with managing your credit wisely - which will ultimately help your FICO score. This
    free booklet called Understand Your FICO Scores is a great place to start.

  3. Set an improvement plan - after you check your report and score and have identified your problem areas, focus on changing your credit behavior in those areas. For example, if you determined that the balances on your credit cards are too high, set a plan to pay down your balances.

  4. **Keep tabs on your credit - don't just assume that your plan is working, make sure it is! Check your credit every so often (probably a few times throughout the year) to see if your actions are having the desired effect. At least 6 months before applying for your home loan next year, get your credit report and score so you know what rates you can expect - and also to know if you should wait until your score improves more. You can get a feel for your monthly payments based on your loan amount and FICO score by using this free calculator.

Put last year's credit woes behind you and start 2008 with some clear objectives. You've already taken the first step towards better credit by making a commitment to improve your credit this year. Hopefully, you've seen how important it is to define your credit goals - and more importantly to stick with them. From all of us at myFICO, we wish you steady credit improvement in 2008 and beyond.

myFICO Team