Working on your credit score is also an important part of this process. Why? The higher your credit score, the lower you can reduce the interest rates you're paying to all of your creditors—mortgage lenders, auto lenders, credit card companies. If you're in debt, then servicing those debts takes a big chunk out of your monthly nut. A high credit score can make that chunk as small as possible.

What is a credit score?
A credit score, sometimes referred to as a FICO score, is a numerical representation of the information in your credit report. FICO credit scores, which look a lot like SAT scores, range from 300 (though it's rare to see one below 500) to 850 (equally rare). These scores pack a powerful punch. Last year, 25 billion credit decisions were made based on FICO scores alone. These weren't just decisions about whether you'd be approved for a new credit card but:

• How much you can borrow
• What sort of interest rate you'll pay
• Whether you'll qualify for an increase in your credit line
• Whether you'll qualify to rent an apartment
• Whether you can get a cell phone
• Whether you'll qualify for a cash advance
• Whether you'll actually get the credit card for which you're "pre-approved"
• Whether an employer will hire you
• What sort of auto insurance premium you will pay

In other words, your score is a really powerful piece of information. And because what it really is, for lack of a better description, is a snapshot of your borrowing and bill-paying behavior over the previous 24 months, as time goes by you have the power to change it for the better.

35% of your score is based upon how well you pay your bills.

30% of your score is a measure of how much credit you have available to you and how much of that credit you're using.

10% is based on your search for new credit—how recently have you opened (or inquired about opening) new accounts?

10% is the composition of your file. What percentage of your file is bankcard debt and what percentage is installment debt?

15% is a measure of the length of your credit relationships. How long have you had the cards in your wallet?

How to Boost Your Credit Score

Print the FICO-raising advice sheet. 

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Step 8: Understand your spending issues...and save!

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