By FPA member Marina Goodman, CFP®

Last Updated: October 11, 2010

Whether you’re young or old, single or married, a man or a woman, it’s important to have a good credit rating so you can borrow money to buy a car or house, open a credit card, rent an apartment or even insure your car at a reasonable price.

And it’s particularly crucial for mothers with kids to have a good credit rating as a safety net in case your spouse becomes disabled or unemployed, or if you get divorced.

Your credit score is a measure of how financially responsible you are. The “big three” consumer credit-reporting agencies — Experian, TransUnion, Equifax — keep track of your financial behavior and based on it, give you a numerical credit score. 

Your credit score depends on numerous factors, including how long you have had a credit history and the amount of money you could borrow immediately (the maximum allowed on your credit cards) compared to the actual amount of loans you have outstanding. 

It also considers the types of loans you have, such as your mortgage, credit card debt, auto and other loans. Your payment history is crucial: a history of late payments will lower your score. If you make a late payment (whether on a loan or even your phone bill), it probably gets reported to the credit agencies.

Do not pay to find out your credit score. You can get one free report per year from each of the three agencies. Each has a website and a toll-free number.

How can you build your credit rating?

If you haven’t had your own credit card, apply for a credit card in your own name. Once you get it, use it at least occasionally, and pay it off in full each month.

If you can’t get a regular credit card, apply for secured credit card. You will need to post collateral (say $500). You can charge up to the collateral amount. Such a card usually has an annual fee.

Make sure the secured card you open gets reported to the consumer reporting agencies by calling customer service. After using it for six to 12 months and building up a good payment history, you will in good position to apply for a regular credit card.

How to repair a bad credit rating

The best thing is to pay off your debts, and pay off any future loans or bills on time. With past late payments, the best thing is to wait. Most items have legal limits on how long they can be on your credit report. They should be removed automatically, but that doesn’t always happen. So, if you’ve done some things in the past that still damage your credit rating, make sure they are removed as soon as legally possible. You will need to look at your credit report, and tell the agencies which items should be deleted.

If you need help managing credit and debt, the National Foundation for Credit Counseling (www.nfcc.org or 1-800-388-2227) is a great resource that provides advice on budgeting, credit counseling, bankruptcy, and Debt Management Plans.

FPA member Marina Goodman, CFP®, is an investment strategist with Brinton Eaton of Madison, N.J.