Score a Better Loan

Alisa Rowe Kenney knew she had bad credit, but she assumed it was getting better. Then the Florida mother of two ordered a copy of her credit report and discovered just how low she had scored. "I'd been paying my bills on time for seven years, thinking my score was improving," she says.

Last month the Bush Administration proposed changes to the Fair Credit Reporting Act that would make it easier for people like Kenney to avoid such surprises. New provisions to the act, which is set to expire at the end of the year, would allow consumers to get a credit report every year something everybody should probably do without charge. Right now, getting a report and score from one of the three national credit bureaus Equifax, Experian and TransUnion costs $13 to $15.

Why is it important? Because the first thing banks and other lenders do when you apply for a car loan, a new credit card or that mortgage for your dream house is check out your credit report and ranking. Your credit score, often called a FICO score after the Fair Isaac Corporation, which calculates the number, gives lenders a snapshot of your financial life and can determine whether you'll qualify for that loan and how much you'll pay for it. The scale ranges from 300 to 850; the average consumer's score is 720.

When Rowe discovered she had landed an abysmal 519, she logged on to Fair Isaac's website, www.myfico.com , to find out what she could do about it. Her report said she had defaulted on a student loan twice (it happened only once) and listed credit cards she didn't have. By correcting those mistakes and continuing to pay her bills promptly, she raised her score to 700 within a year.

An increase like that can translate into big savings. According to myfico.com , a typical consumer with a score of 700 would have been quoted a rate of 6% on a 30-year fixed-rate mortgage last week, compared with a rate of more than 9% for someone whose score was in the low 500s. The difference could be very costly translating into $162,177 in extra payments over the life of a $200,000 loan.

There are many ways to boost your score, including paying bills on time, keeping a low balance on your cards and getting new credit only when you really need it. As a rule you should order copies of all three of your credit reports and scores at least three months before you apply for a loan, so that you have time to correct any errors.

Sharon Epperson is a correspondent at CNBC