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Boosting Your Credit Score: A Good Idea (But Not Always Priority No. 1)


December 29, 2010

Dear Carrie,

I currently have $10,000 saved, and I have $15,000 in retirement savings at age 50. I owe $115,000 on my home and make only $65,000 a year. How can I better save to improve my credit score?  

—A Reader 

Dear Reader,

You're smart to want to improve your credit score. In today's climate, lenders are scrutinizing borrowers much more closely than ever. A good credit score can improve access to credit and result in lower rates, and I've got some specific suggestions on ways you can enhance your credit rating.

Taking a step back though, I think that the other part of your question—your desire to save—is even more important. With just $15,000 in your retirement account at age 50, you probably need an aggressive plan to boost your wealth. That means cutting expenses and putting your savings to work.

Ways to Spend Less (and Save More)

One thing I've learned over the years is that most people don't understand where their money goes. So start by keeping track of your spending habits. This is a good starting point for identifying potential savings.

Some things you can't change (or at least can't change easily), like your mortgage payment (though if your interest rate is high, now may be a great time to refinance). But nearly everyone's budget offers opportunities to save. For example: Look at your cell phone bill. Does your plan fit your usage? Are you paying for features you don't use, like text messaging? Also look at your cable bill. Do you pay for premium channels you never watch? Even your health insurance (an obvious necessity) may offer ways to save: Can you get a lower premium with a higher deductible or co-pay?

It's often easy to find ways to economize without changing your quality of life—if you know where to look. A budget will help. For many people, it's discretionary spending that prevents them from saving more, things like restaurants and coffee shops. One way to reduce this kind of spending is to always pay with cash. Studies have shown that people who use cash spend less than people who whip out the plastic. (One more savings tip: If you carry a balance on your credit card, don't! Interest charges and late fees are often exorbitant; if you are serious about saving, eliminate your credit card balances. But don't get rid of the cards themselves. You need to have credit in order to get a good credit score.)

Saving money is a great thing, but you need to put it to work to build wealth. Your $10,000 makes a good emergency fund, so my suggestion is to plow all your newfound savings into your retirement account. If it's a tax-advantaged plan, you'll get an immediate benefit in the form of a tax deduction; if not, put it in a Roth IRA so you'll never have to pay taxes on the principal or income.

Improving Your Credit Score

Now let's get back to your original question: boosting your credit score. Start by going to to get your current scores (it’s free, unlike some of the other sites out there). Then pay attention to five ways to improve it:

  • Pay your bills on time—all of them, not just credit card bills. This alone accounts for about 35% of your score, so don't be late with your payments.
  • Maintain your credit. The longer you have credit (and use it prudently), the better your score.
  • Keep your credit card balances low, no more than 25% of your available limit.
  • Don't get new cards. Applying for more credit cards can lower your score.
  • Use different kinds of credit: A consumer with revolving debt (i.e., credit cards), a car loan, and a mortgage, and who keeps up payments, will have a higher score than someone who uses just one form of credit.

I mentioned above how paying with cash can help you spend less. But you do want to keep using your cards to ensure your credit score remains high. So use them when it makes sense, and pay off the balance every month to avoid interest charges.

With a little effort and prudence, you should be able to improve your credit score. But I still believe the most important goal for you is to increase your savings rate to prepare for retirement. Saving can be habit-forming: once you start, you'll probably find even more ways to spend less. And I think you'll enjoy the sense of accomplishment and confidence that comes with having money in the bank. Good luck!

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