Credit scores are little three-digit numbers that have a big impact on every U.S. consumer's ability to borrow and spend.
"Good credit scores affect many aspects of life —– most notably, the big money decisions," says Julie Heath, director of the Economics Center at the University of Cincinnati.
Credit scores range from 300 to 850 for the most commonly used measure, known as a FICO score. People with good credit scores get the best interest rates on auto and other loans.
"The magic number is around 760," Heath says.
A good credit score can also provide an edge when you try to rent an apartment, or even when you apply for a job.
By contrast, a poor credit score can result in paying much higher rates on loans —– or possibly not getting the loan at all.
If your credit score is low, don't fret. You can begin to boost your score and turn around your finances by taking several steps.
Check your credit report and credit score
First, check your credit report and credit score. By law, you are entitled to one free annual credit report from each of the three credit reporting agencies —– Equifax, Experian and TransUnion.
When you look over your credit report, scan for mistakes.
"Many people have errors on their reports that negatively affect their scores," Heath says.
If you find an error, report it to the credit reporting agency. The Federal Trade Commission website offers tips for doing so. Correcting such information can boost your score.
You may find negative information on your report that is nonetheless accurate —– such as a stray late payment reported by a lender or merchant.
"If you're a long-standing customer and have had one late payment, call the company and ask that it be removed from your credit history," Heath says.
After smoothing out your credit history, turn your attention to other methods to boost your score.
Begin by paying your bills on time. If you have been late on payments in the past, your score has suffered as a result. But paying your bills faithfully by the due date month-after-month may help your score to rise.
"Payment history is the single biggest factor considered by the score," says Anthony Sprauve, a spokesman for FICO, the company that generates the FICO credit score.
Your debt-to-income ratio also has a big impact on your score. The more debt you carry on credit cards and other forms of revolving credit, the tougher it will be on your score.
Paying off your debt completely is always best. But if that option isn't viable, paying down your debt will help send your score higher.
"Get your balances on your credit cards down to a good percentage of your credit limit," Heath says. "Thirty percent is good. Ten percent is even better."
Be aware that certain actions that may seem wise actually can undermine the good work you are doing.
For example, closing unused accounts may appear to be wise. But Heath cautions against such an action because it may hurt your utilization ratio —– the total amount of debt you carry compared to the total amount of credit you have available.
"If you close an account, it looks like you're closer to the maximum amount you can borrow," Heath says.
That perception could hurt your score.
It will take time to repair your credit.
"Repairing bad credit is a bit like losing weight: it takes time," Sprauve says.
For example, some negative information on your credit report may haunt your credit score for years.
"Delinquencies stay on your history for seven years, as do some bankruptcies," Heath says.
While it may be frustrating to continue paying for past mistakes, be patient. Over time, your old delinquencies will have less impact on your score. Eventually, they no longer will be part of your score calculation.
Also remember that getting rid of debt as soon as possible will speed up the score recovery process.
"If you can pay down credit lines, that can often improve scores in just a few months," Heath says.