It's always a good idea to be vigilant about your credit score, but even if borrowing loosens up a bit in 2009, you still need to do everything necessary to keep your credit score high.
Fair Isaac, the company that created the FICO score, has been working on a new version of its landmark credit scoring method that might have serious consequences for you if you're planning on borrowing for a home or establishing any other new credit in 2009.
The new version of FICO is going to be particularly focused on your balances, not only on your on-time payment records. You'll need at least a 740 score, out of a possible 850, for the best rates and terms.
Your top priority under this new system: Get balances down.
Reports say that the new FICO revision will actually allow a bit of lenience on late payment. One or two late payments won't make the same impact as in earlier FICO versions.
Yet credit utilization - the amount of credit you're actually using relative to your credit limit - is a much bigger deal. A good target utilization rate for all your revolving credit accounts is no more than 50 percent of your credit limit, and the lower your credit utilization, the better your score.
If you don't meet that under-50 percent goal, you probably shouldn't be applying for new credit or refinancing for awhile. And instead of bemoaning your tougher chances of getting a loan for a home or a car, why not use the current environment to launch a credit makeover that will position you for a better shot six months to a year from now? Some ideas:
Budget: If you've never reviewed your spending and picked out areas where you can cut, you've never done a budget. Start tracking your spending and start pinpointing what spending you can shift over to paying off debt.
One more time - get those balances down: Get all your non-deductible debt under 50 percent of your credit line in each account. Go after your balances with the highest interest rates first, and once you hit 50 percent ... keep trying to get those balances down further.
Keep an eye on your credit reports: You have the right to get all three of your credit reports - from Experian, TransUnion and Equifax - once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. By staggering receipt of each of your credit reports, you'll get a continuous picture of how your credit picture looks because the three bureaus feed each other the latest information. You'll also be able to clean up errors as you find them - errors can drag down a credit score - and you'll also keep an eye out for identity theft.
Oh, and by the way, keep in mind that all "free" credit report sites are not free - if they ask you for a credit card number, remember they're doing that because they want to charge you. Just go to the site above and you'll be fine.
Get on time and pay more than the minimum: Yes, we indicated above that you might get a bit of a break on late payments with the new FICO system, but that's a break you should consider only in a dire emergency.
Once you're paid off, don't close the account: Lenders want to see a long record of credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.
Rebecca Warren is a certified financial planner professional and certified senior advisor in Mesa. She can be reached at (480) 357-8380 or by e-mail at Rebecca@WarrenFinancialServices.com.