Fix Mistakes.

Because credit scores are based on credit reports, make sure your reports don't contain inaccurate negative information.

This is a good place to talk about so-called "credit repair," as you might have heard advertised. There's no way to really repair your credit other than to correct mistakes. And you don't need to pay a company to do that for you. Disputing incorrect negative information is free and, in most cases, easy. As we talked about, dispute mistakes while accessing your reports for free once a year at AnnualCreditReport.com. Some credit repair companies will dispute all the negatives on your report, hoping creditors won't respond in the required 30 days. If creditors don't respond within 30 days to confirm that the information is correct, the negatives will be temporarily removed from your reports, raising your credit score. Of course, if a creditor responds after 30 days, the negative mark goes back onto your report.

Creditors and credit bureaus are wise to this strategy, so filing batches of disputes won't necessarily work. If you want to use this ethically questionable tactic of disputing any bad mentions on your reports, at least do it yourself rather than paying a credit-repair service.

Pay Bills.

Paying your bills on time, every time, won't raise your score, but it will keep it from dropping. View due dates on bills as critical, and aim to pay a few days early. Remember, it doesn't matter if your bill somehow got lost in the mail-you still owe the money on time.

And think twice about taking a hard-line stand in a dispute with a creditor. Of course, you shouldn't allow companies to treat you unfairly, but protesting what you view as an unjust $39 charge by refusing to pay could ding up your credit report for the next seven years. Once the black mark is on your report, it could stay there for the full seven years, even if you give up and pay the bill.

Sometimes it's better to pick your battles and choose some to lose.

Find Your Ratio.

Besides correcting mistakes and paying bills on time, the best thing you can do for your credit rating is to continually use credit but use very little of your available limit.

If you have several credit cards that have a combined $5,000 limit, carrying a combined balance of $4,000 is hurting your score. That's because you have an 80 percent "utilization ratio." Calculate your ratio by dividing your combined balances by your combined limit.

Aim to get that ratio down to the 30 percent range. To optimize your score, aim for less than 10 percent. Remember, you score doesn't care whether you pay off the balance, only how much of your available credit limit you're using at any given time. If you're always at zero percent, meaning you don't use the cards at all, the cards won't contribute to your credit score after a while.

Improve Your Ratio.

Paying off debt so you're carrying smaller balances will help your ratio-and your overall financial health. Carrying balances does not help your scores.

And don't close accounts. Keep open your old or unwanted accounts, even if you paid them off and don't use them. The more available and unused credit, the better for your score. Besides helping your ratio, the old accounts help to increase the average age of your credit lines. Remember that your length of credit history is a significant factor in the FICO score.

One exception: If you know that you will spend more on unnecessary purchases just because you have the available credit, close the accounts. You'll do more damage to your overall financial health than the relatively minor improvement to your credit score.

Cautiously raise credit limits. It helps to have a lot of available credit to help your ratio. But opening a lot of new credit accounts at once will likely hurt your credit score in the short term. A strategy to help your score without hurting it would be to regularly ask your current credit card company to raise your current limit "without pulling a credit report." Applying for new credit cards is problematic because you have to use those new cards a little to show them as active accounts, but not use them so much it hurts your ratio. All that a.s.sumes you can have open accounts and not use them irresponsibly by charging things you can't afford.

You can also improve your ratio by double-paying your credit card bill, by making two credit-card payments a month. This artificially lowers your balance reported to credit bureaus. Make a payment in the middle of your billing cycle, which will lower the amount the creditor reports to the credit bureau on the statement closing date.

WARNING.

Be sure to make the second payment after the closing date and before the due date, so you aren't socked with a late payment, says Liz Pulliam Weston, author of Your Credit Score. Some billing systems need to see a payment made between the statement closing date and the due date to register you as paid on time, even if you made more than the minimum payment earlier in the month.

Type "A" personalities, take note: Forget perfect. If your FICO score is 780 or above, don't bother trying to improve it. Lenders already view you as perfect. You gain very little-and potentially nothing at all-by succ.u.mbing to a perfectionist personality and trying to improve your score to 800 and above. In fact, many actions you take might end up hurting your score. Just keep on doing what you've been doing.

Establishing Credit.

Establishing credit, or reestablishing healthy credit after a bankruptcy, can be a challenge.

* Establish credit. If you're new to credit or recovering from a bankruptcy, you might have to apply for a secured credit card, which requires you to pay money into an account and then draw on it with the credit card. Make sure it converts to a regular credit card after a reasonable period of time, for example, 18 months. You can also apply for installment loans, such as an auto loan, which will help build credit by adding a different type of loan. The problem is, without a high credit score, you'll pay a high interest rate. And if, because of that high rate you default on the loan, you're back to having terrible credit.

* A note on credit for college students. Oddly, college students, with or without jobs, can get credit easily by getting a credit card. Applications literally litter college campuses. Credit card companies have learned that when college students can't pay their credit card bills, mommy and daddy usually step in and pay. That makes students a pretty good credit risk. Whether your college student should have a credit card is a different matter. A college student can apply for a card without a parent's approval. So, have a conversation before the first trip to campus about whether your child should get a card.

How You Pay.

Spending smart isn't just about what you buy, but how you pay.

The ultraorganized and responsible consumer might gain advantages by using mostly credit cards, while those struggling with money management should stick with mostly cash. For those in between, the decision lies in the details-although, everybody should be writing as few personal checks as possible.

One reasonable strategy for consumers who fall between the ultradisciplined and financially challenged is to use cash and debit cards for everyday purchases. Then use credit cards for big-ticket purchases and online transactions to ensure you get the added consumer protections credit cards provide.

Noncredit Payment Methods.

Setting aside credit cards for a moment, here is a good preference for cash payment methods.

Noncredit Payment Methods, 1-2-3.

1. Consider cash as king.

2. Do debit right.

3. Limit use of checks.

1. Consider Cash as King.

Paying with cash has a few drawbacks. For example, it might not be convenient to pay for very expensive items with paper bills and coins. You'll get no rewards points or fringe benefits when paying with cash. If you haven't chosen a bank wisely, you might have to pay ATM withdrawal fees. You receive no automatic record of spending like you get with credit card bills, canceled checks, and bank statements. And, of course, there's the somewhat remote possibility you'll be mugged and lose your cash that way.

But using cash can be a fabulous idea. For one, it could help you curb impulse spending. Studies show that consumers spend about 20 percent more when using plastic, rather than cash. That's because people suffer a psychological pain when handing over bills and coins. It feels much more real than swiping plastic. That's because the transfer of funds is right in front of you, rather than occurring in some invisible transfer of electrons among banks. The transfer is proximate enough to feel the loss.

Just as important, cash never has finance charges or overdraft fees or many of the negatives of paying with plastic.

A related and profound point is this: When you use cash, you can spend the money you have but no more. If you don't have the money, you can't buy it. You must stop consuming when the money runs out. If you have $200 in cash to spend at the supermarket, you could be forced to place items back on the shelf if you don't have enough money.

Surely, these points are not news to you, but you might not have thought about them in a long time. For these reasons, cash is still a great form of currency.

QUICK TIP.

Nowadays you can actually withdraw more money from an ATM than you have in your account. Banks call it "courtesy overdraft protection." They give you more money than you have in your account and then slap you with an overdraft fee of $20 to $40 and impose high interest charges on the money they have advanced. This also is offered for overdrawing your account by personal check or debit card. To avoid overdraft fees and interest charges, keep track of spending and obtain real overdraft protection, where you instruct the bank to dip into another account, such as savings, when a checking account is overdrawn. And keep a cushion of about $500 in your account at all times.

2. Do Debit Right.

In general, using debit cards is a fine alternative to using cash and credit cards. Also known as a check card, a debit card is more convenient than cash or personal checks. You use it like a credit card, but the money comes immediately out of your bank account. Most double as an ATM card to make cash withdrawals. They also provide a record of spending and avoid the risk of finance charges. Some debit cards provide rewards.

The big drawback of debit cards is they are not afforded the same fraud protections under federal law as credit cards. With a stolen credit card, you can lose no more than $50 out of pocket. That's federal law. But federal law is weaker when it comes to debit cards. With a debit card, you must report it within two business days to receive the $50 liability limit. Otherwise, you're on the hook for $500, or after 60 days you could lose everything a thief steals from your bank account.

Individual card companies, such as Visa and MasterCard, have policies that promise to limit your debit-card liability to zero, but these policies are not as strong as federal law and could change. And even if the bank eventually puts money back in your account-and it doesn't have to for at least two weeks-you could struggle to pay bills while you and the bank sort out the mess.

You'll have to decide for yourself whether less fraud protection under federal law is a reason to avoid carrying debit cards in lieu of credit cards. If you don't want the direct-debit feature of your card, you can ask your bank to replace your debit card with an ATM-only card, so you still have ATM access to cash.

Another drawback of debit cards arises from merchant blocking. Blocking is when a merchant, at a gas station or hotel, for example, routinely withholds an amount on a debit card until the transaction is fully processed. That blocked amount is temporarily unavailable, meaning you could overdraw your account if you don't have an adequate cushion. That can result in overdraft fees.

And debit cards don't help your creditworthiness, like credit cards do. For these reasons, the Privacy Rights Clearinghouse, a privacy advocacy group, recommends consumers never use, or even carry, debit cards.

That's a hard-line stance against a potentially useful money tool. Even considering all the potential negatives about debit cards, I like them as a cash alternative for people who have trouble handling credit cards responsibly.

QUICK TIP.

When using a debit card, choose to provide a signature rather than PIN-choose "credit" rather than "debit"-if your bank charges for PIN transactions or grants rewards points only for signature transactions. Either method subtracts money directly from your bank account.

3. Limit Use of Checks.

In short, checks are a lousy form of currency.

It's true that you won't incur finance charges with checks, like you might with credit cards. And you can track spending in the checkbook register. But the advantages mostly stop there.

Checks are the most inconvenient form of payment because it takes time to fill out a check, you have to pay for and reorder blank checks, and some merchants don't accept them. Any "float" time you receive between writing the check and money being taken from your account has shrunk dramatically with electronic processing of checks.

More problematic is that checks are at the most risk for fraud and ident.i.ty theft. Most everything a thief would need to steal your ident.i.ty is on your check, including your name, address, and bank account number.

So, regularly paying bills by check just isn't a good idea anymore.