9 Ways to Salvage an Ailing Credit Score

Without even contacting a credit bureau, Jeana Reed has a pretty good sense of what her credit score is. "It's probably the worst they've ever seen," says Reed, a 51-year-old Texan. Like many Americans, Reed's current credit headaches can be traced to a hospital stay. After her husband blew out his knee playing softball, complications from the injury kept him out of work longer than expected, which forced the couple to use credit cards to pay off medical bills. A job loss and a subprime mortgage refinancing later, the Reeds find themselves among the scores of Americans struggling to rebuild a soiled credit history. "I just want to get back on track," Reed says. "I'm not a deadbeat person."

Poor credit has always been a drag on household finances, as unpaid bills and late payments can lower a consumer's FICO score—the 300-to-850-point gauge lenders use to evaluate the risk that a borrower will default. Lower FICO scores can trigger higher interest rates on everything from credit cards to car loans. But recently, they've become more important to the real estate market. Just a few years ago, Fannie Mae and Freddie Mac used FICO scores primarily in deciding whether to approve a loan application. "That all changed as the market started to deteriorate and [Fannie and Freddie] were looking to fine-tune their mortgage pricing from a risk-based perspective," says Rick Allen, director of strategic initiatives for Mortgage Marvel, an online mortgage shopping website. Today, the mortgage finance giants use credit scores to determine mortgage costs too, jacking up fees on consumers with lower credit scores to compensate for their higher risk of default.

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For would-be home buyers, this change has had powerful ramifications. With home prices declining and 30-year, fixed mortgage rates hitting near-record lows of less than 5 percent, the real estate market is offering plenty of incentives to jump in. But only borrowers who meet today's tighter credit standards—which include a FICO score of around 720, a down payment of at least 3.5 percent, and documented income verification—can get the lowest cost of financing. For example, a lender operating under Fannie Mae's pricing structure would charge a borrower who has a FICO score of 695 and a 15 percent down payment $3,000 in extra fees on a $300,000 mortgage. A borrower with a 720 FICO score, meanwhile, wouldn't pay any of those fees on the same loan. "FICOs are everything," says Chris Freemott, president of mortgage lender All American Mortgage in Naperville, Ill.

But whether you are deep in the weeds or just looking to get the best deal on a home loan, it's never too late to improve your credit. To help consumers reduce their mortgage financing costs, U.S. News gleaned tips from a handful of experts on boosting your credit score.

1. Get your credit report: The first step for improving your credit profile is to find out where your credit currently stands. Three main credit reporting bureaus—TransUnion, Equifax, and Experian—collect and compile payment information on individuals from tens of thousands of credit grantors, such as banks, credit card issuers, and retailers. "If you are about to buy a house ... then I want you to get all three credit reports," says Gail Cunningham of the National Foundation for Credit Counseling. "I never want to end up sitting across the desk from someone who knows more about me than I do." By law, consumers are entitled to one free credit report from each of these bureaus during any 12-month period. The free reports are available at AnnualCreditReport.com.

2. Get your FICO score: The FICO company created the formula that credit bureaus use to generate a FICO score. Every consumer's FICO scores are calculated from data from each of the three main credit bureaus. The scores take into account your payment history, the amounts you owe, your length of credit history, your new credit, and the types of credit you have used, says Shon Dellinger, vice president of myFICO.com for FICO. After getting your credit reports, Cunningham recommends obtaining your credit scores. A single FICO score can be purchased at myFICO.com for about $16. (FICO scores from Experian are no longer available through myFICO.com. Instead, Experian scores can be obtained through Experian.com or AnnualCreditReport.com.)

3. Study and check: Everyone—including the major credit bureaus—makes mistakes. But when it comes to credit scores, it's the consumer who pays for such screw-ups through higher interest rates. As a result, consumers need to ensure that everything included in their credit history is accurate by thoroughly examining their credit reports. "If you are a junior and your father is a senior who's got rotten credit habits, make sure that your report is distinguished from his," Cunningham says. Since a mistake may appear on one credit report but not another, it's best to examine all three of your reports. If you discover any incorrect material, contact the appropriate credit bureau for information about filing a dispute.