Unless you pay cash for everything, your credit score will affect what you pay for purchases for the rest of your life. If you have fair credit, loosely-defined as a FICO between 620 and 679, you'll probably end up paying about 20 percent more interest than someone with good credit, whose score may be just a few points higher than yours (680-719).
Fortunately, it's not that difficult to add those few points and move up a grade.
Improving a Fair Score
People have fair credit scores for different reasons. Your score may be lower than necessary because your history is limited or short. That's a very different problem from having a report that's littered with late payments or simply having too much credit. Your strategy for improving depends on the cause of your fair credit.
Your first step in your improvement strategy, then, is to get a copy of your credit report and FICO, and check out the "reason codes," which explain the biggest factors affecting your score.
If you're fairly young and just starting out, for example, you might see these reasons for your fair credit score:
- Too few active accounts
- Account payment history is too new to rate
- Date of last inquiry too recent
None of these reasons is serious, and all of them can be resolved over time by simply using the accounts you have (making them active), avoiding carrying balances and paying them as agreed. If you want to create additional good history and have friends or family with excellent credit, try having them add you as an "authorized user" on an account or two. You don't actually use the account (in fact, you don't even need to know the number), but their good payment history on that account will become part of your report and it can help your score.
Too Much Credit
On the other hand, you may see these reasons:
- Amount owed on accounts is too high
- Number of revolving accounts
- Too many accounts with balances
In this case, you have too many accounts, and you're using too much credit. Steadily growing balances indicates an overspending problem -- which could eventually result in bankruptcy if unchecked. The upside is that your payment history is good, and your score can be raised as quickly as you can reduce your balances.
To go from fair to good, then, you'll need to stop adding accounts, refrain from increasing your balances and try to pay them down as quickly as possible. People with good credit don't use more than 25 to 30 percent of their available credit, while those in the fair range use 40 to 60 percent. If you have accounts with small balances, try zeroing those out first, then work on paying down the others to less than 30 percent of their limits. Most experts don't recommend actually closing accounts until your balances are repaid. At that point, you can consider closing the newest of your revolving accounts.
Finally, if your reason codes look like these, you've got serious work to do.
- Delinquency on accounts
- Frequency of delinquency
- Time since delinquency is too recent or unknown
While paying late may not seem to be a big deal ("I always pay eventually"), it's a big deal to creditors and credit rating firms, because a pattern of late payments indicates a statistically much higher chance of serious default.
According to FICO data, a person with a 680 score (in the "good" credit range) can lose 60 to 80 FICO points by paying just one bill more than 30 days late. Your score will come up eventually if you keep your nose clean, but you need a plan. If you're just bad at remembering your bills, try setting up automatic payments. Create and stick to a budget, so the money needed to pay on time is there. And monitor your credit score and accounts monthly -- you can do this for free at LendingTree.com. Watching your score improve should give you all the incentive you need to turn your finances around.