Fix your 5 biggest money mistakes

By Liz Pulliam Weston

Everybody messes up when it comes to money.

Wall Street, lenders and regulators certainly did, spectacularly, in 2008. They gave us the mortgage mess, the credit crunch and the worst stock market since the 1930s.

But they had plenty of help. As individuals, our propensity to spend instead of save and speculate instead of invest helped fuel the bubbles that have burst so devastatingly. We were gullible, greedy, shortsighted and downright lazy.

While bailout billions, bankruptcies and negotiated debt settlements might ease your worries temporarily, they would leave your finances in tatters.

It's time for a little soul-searching, repentance and change.

• Play the video to the right for more from Liz Pulliam Weston.

Ultimately, we can't control the stock market or fix the credit crunch, but we can do quite a bit to get ourselves in financial shape to survive the year -- and even thrive when good times return. If you've made any of the following mistakes, now is the time to fix them.

No one else will.

Mistake No. 1: You neglected your credit scores

These three-digit numbers matter more today than ever before, now that the credit crunch and rising defaults have lenders running scared.

What lenders are looking for these days are low-risk customers. If you've got great credit scores -- say, 750 or above on the 300-to-850 FICO scale -- lenders are still falling all over themselves for your business. That means you'll get great rates on mortgages, auto loans, private student loans and credit cards. (See "Raise your credit score to 740.")

If your scores are 700 to 750, you're still in pretty good shape. The further you drop below that line, though, the tougher it is to get loans and credit cards, and the more interest you'll pay.

Insurance companies and landlords also use credit scores to evaluate applicants, so it pays to keep yours in good shape.

Not sure where you stand? You can get a free educated guess at your credit scores by using MSN Money's credit score estimator or Bankrate.com's FICO score estimator. Otherwise, you can shell out $15 for one of your scores, or about $50 for all three, at MyFico.com. (By federal law, you're entitled to free annual looks at your credit reports at AnnualCreditReport.com, but those reports don't include your credit scores.)

Here's what you can do to boost your scores and keep them high:

• Pay your bills on time. Set up automatic payments and e-mail reminders so that you don't miss any payments, which can trash your scores. Also, don't let financial disputes or unpaid bills turn into collections.

• Keep those balances low. The less of your available credit you use, the better. This includes those of you who pay off your credit card balances in full, since the number that matters for credit score calculations is the balance on your last statement. So even if you pay your bill in full every month, you should try not to use more than 30% of your available credit -- and less is even better.

• Use an old card. Issuers increasingly are canceling cards that haven't been used in a while, and such closures can negatively affect your scores. If you want to keep an account active, use it occasionally and pay the balance in full.

• Borrow someone else's good credit. If your credit history is troubled or thin, ask a friend or relative with good credit to add you to a credit card as an authorized user. Such so-called piggybacking can help your score, even under the new version of the FICO formula (for more, read "New threats to your credit score").

• Dispute errors and old black marks. Check your credit reports at least once a year for serious errors, including accounts that aren't yours, inaccurate entries (a late payment showing when you paid on time) and negative items, other than bankruptcies or tax liens, that are older than seven years.

Mistake No. 2: You carried credit card debt

When credit was easy and cheap, you could delude yourself into thinking that carrying a balance didn't matter all that much.

Now we're seeing exactly how vulnerable credit card debt makes you to the whims of the issuers, as credit card companies slash credit lines, increase interest rates and close accounts even for good customers (for details, see "The credit card party is officially over" and "Thaw out your frozen credit").

If that weren't enough to convince you, consider that the newest version of the FICO credit scoring formula is even more sensitive to how big your balances are than the old one -- which is saying a lot.

Clearly, it's time to free yourself from credit card debt. MSN Money's Debt Management Decision Center can get you started. Here are the key things to know:

• You can't borrow your way out of debt. You may be able to get a lower interest rate with another card or loan, but to get debt-free you'll need to trim your expenses and redirect the money toward your debt.

• Good credit scores equal better rates. If your credit is good, you can ask your issuers for lower rates (read "Get a better deal . . . with a threat") or take advantage of low-rate balance transfer offers (but read "3 money strategies that can backfire" for the potential perils). Use lower rates as a way to pay your balances off faster, rather than as an excuse to continue carrying debt.

• If you need help, get it. You won't have much leverage with lenders if your credit is shot and you're already struggling to pay your minimum balances. If that's the case, consider talking with a legitimate credit counselor (read "The consumer's guide to credit counseling" first). Other options include bankruptcy and debt settlement, but do your research, since these have serious and long-lasting impacts on your credit.

Continued: Overdosed on home or auto debt

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