Your past is never really behind you. Or so it seems when it comes to credit reports.
As you prepare to shape up your finances in 2010, you'll find that improving your credit score is among the more complicated tasks.
You may be bewildered by what helps or hurts your score, by how much and for how long. Regardless of whether you understand how it's calculated, the number you're tagged with can play a big hand in your financial fate.
Banks use credit scores to help decide whether to extend loans, and if so, at what price. A lower score will likely mean higher interest rates on credit cards, student loans and mortgages. In the latter scenario, the difference could amount to hundreds of dollars a month.
Generally speaking, a score below 620 is considered poor; 620-659 is fair; 660-749 is good, and 750-850 is excellent. It costs $15.95 to get your score at MyFico.com.
Here are some actions you can take, now and over time, to raise your number.
What you can do now
One of the fastest ways to improve your score is to pay down your balances. How much of a lift you'll get will depend on your overall credit profile. But paying off all balances could push someone in the 650-range into the 700-range, said Craig Watts, a spokesman for FICO, which formulates the most widely used credit scores.
This is because the portion of your credit line that you're using — your so-called credit utilization — is a big component of your score, accounting for about 30 percent.
If you buy the standard FICO score package at MyFico.com, you can access a simulator that tells just how much certain actions will lift or lower your score. For some scenarios, you can see how your score would change over one month, versus six months or two years.
In the case of paying down your balances, note that it provides a one-time benefit. You don't get any extra points for keeping your credit usage at a low level.
Also keep in mind that your report could reflect a high utilization even if you pay your bills on time. This could happen if your lender reports your balance to the credit bureau before you pay your bill. To avoid this scenario, pay off charges as soon as you can — don't wait for due dates.
Another way to have a short-term impact on your score is to make payments on time. If you've been chronically late in the past several months, paying all your bills on time for just one month could boost your score by as much as 20 points.
You'll also want to check for any mistakes on your credit report, since your score is calculated based on the information it contains. You're entitled to one free credit report a year from each of the bureaus — Equifax, Experian and TransUnion. To get your free reports, go to www.annualcreditreport.com (beware of sites with similar names).
To correct any information, contact the credit bureau and the lender that reported the error. The Federal Trade Commission provides a sample letter on www.ftc.gov (click on "Credit & Loans" under the "Quick Finder" tab, then "Credit Reports & Scoring" and scroll to the bottom).
Digging in for the long haul
Once you pay down your debt, improving your score becomes a game of long-term vigilance.
"One week's good behavior isn't indicative of future risk," Watts said. "To improve a poor score is a long-term project."
The key is keeping your report free of any negative marks, which can take years to recover from. For someone with a score of 680, for example, a foreclosure can zap away as much as 105 points, while a bankruptcy can shave off 150 points. A single late payment of 30 days or more can drop your score by 80 points.
Just how steeply your score falls depends on factors such as how much you owe and how late you are. But repeat offenses aren't as damaging as the initial infraction, since your riskiness is already reflected by a lower score. So a second or third late payment shouldn't hammer you as much as the first.
The negative marks, including late payments, on your credit report for seven years. Chapter 7 bankruptcies, which wipe clean unsecured debt such as credit card bills, remain for 10 years. And the repercussions recede only over time, assuming you stay current on all your payments.
Applications for new credit ding your score too, although to a far lesser degree — usually around five points
Finally, think twice before closing any accounts. The length of your credit history counts for about 15 percent of your score, so it's a good idea to hold onto any cards you've had for a long time. Those older cards, coupled with a steady history of prompt payments, should provide a good path to an improved score.
"The people who have really high scores are the least interesting," Watts said. "They have few accounts and always keep low balances. For a risk manager, these people are the ones who are as reliable as a Swiss watch."