Raise your credit score to 740

By Liz Pulliam Weston

As mortgage rates tumble, many would-be buyers and refinancers are missing the chance to lock in loans at record lows. The reason? Their credit scores aren't high enough to qualify for the best rates and in some cases are too low to qualify for any loan at all.

Credit scores are three-digit numbers lenders use to gauge your creditworthiness, and in recent years a 720 FICO credit score was enough to get the best rates and terms. Even people with lower scores could get a decent deal, and at the peak of the lending boom it seemed no score was so low that it merited a rejection.

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These days, some lenders demand a 740 score for the best mortgage rates. Lower scores mean higher rates; if your scores are below 580, forget about it.

Missing out on what may be once-in-a-generation interest rates is painful enough. But less-than-stellar credit can hurt in other ways. After all, credit information is used:

• By insurance companies to evaluate applicants and set premiums.

• By landlords to decide who gets apartments.

• By employers concerned about higher risk of theft from those with troubled finances.

Clearly, cultivating good credit scores is an essential 21st-century skill.

The good news is that it's possible to boost your numbers if you have a handle on your finances and you know how credit scores work. After all, the median credit score is 720 on the 300-to-850 FICO scale, meaning half the adult U.S. population has a higher score and half has a lower score. Forty percent have scores over 750, and 13% have scores above 800, according to Fair Isaac, the company that created FICO scoring. (You can get an idea of your relative standing with MSN Money's Credit Score Estimator; it uses Experian's Plus score ranges, which roughly align to FICO.)

Plenty of folks are handling their credit well enough to earn good scores. You can, too. But first you need to recognize that:

• You can't raise your scores if your finances are still in free fall. If you're unable to pay your bills, you certainly can't fix your credit. Real credit score repair will have to wait until your financial crisis has been solved and you have enough money to cover your expenses, plus some extra to begin paying down your debts.

• You can't raise your scores if you don't use credit. Credit scores try to predict how well you're likely to use credit in the future by how well you've used it in the past. So while living a cash-only lifestyle may do wonders for your wallet, it won't boost your scores -- in fact, without continuing use of some type of credit, eventually your credit reports won't even generate credit scores.

• You don't have to pay credit card interest to achieve great scores. "Using credit" is not the same as "carrying a balance on your credit cards." Carrying a balance is expensive, bad for your finances and completely unnecessary. Many of us who have achieved 800-plus scores pay off our balances religiously, and we know you can build and keep great credit scores without ever paying a dime of credit card interest.

• You can't expect overnight results. You're likely to see improvement in your scores within 30 days if you pay down significant chunks of your credit card debt. But otherwise, credit repair takes time, and how much time depends on the many details of your credit reports. If you have serious black marks, such as bankruptcies or foreclosures, you can see significant improvement in your scores as time passes but you may have to wait until those negatives drop off your credit reports before you can join the 700-Plus Club.

Now that you understand the basics, you can use the following techniques to get your scores over 740.

You have to nail the basics

Patrol your credit reports. Your credit scores are based entirely on the information in your credit reports on file at the big three credit bureaus: Equifax, Experian and TransUnion. If the information is wrong, your credit scores could suffer. You can get your reports once a year for free from the government-run AnnualCreditReport.com; you can buy subsequent copies directly from the bureaus or from MyFico.com. Dispute any serious errors, such as:

• Accounts that aren't yours.

• Reports of late payments when you paid on time.

• Bankruptcies older than 10 years or accounts that were wiped out in bankruptcy but are listed as still due.

• Other negative information that's older than seven years (the seven-year clock typically starts 180 days after the account first went delinquent).

Get a major credit card. Retail cards and gas cards can help you build your credit history initially, but to get your scores into 700-plus territory you'll want at least one big kahuna: Visa, MasterCard, Discover or American Express. If you can't qualify for a regular card, consider a secured version, for which you make a deposit with an issuing bank. Just make sure the card reports to all three bureaus and that it converts to a regular credit card after 12 to 18 months of on-time payments.

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Arrange automatic payments for every card or loan. Credit scores are extraordinarily sensitive to whether you pay your bills on time, so don't let travel, a busy schedule or a simple brain fart trash your scores. Most lenders will let you set up automatic payments that take an amount you specify -- the minimum payment, a set dollar amount or the full balance -- every month from your checking account.

Don't let disputes go to collections. Yes, your insurance should have covered that bill; no, you shouldn't have to pay for a broadband connection that doesn't work. But if you let a commonplace problem like these escalate, your account will be turned over to collections and become a big black mark on your credit reports. Pay under protest and get your revenge in small claims court. (Don't get sued yourself, though: Lawsuits and judgments are another major stain on your credit reports.)

Continued: Give your limits a wide berth

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