How to Improve Your Credit Score

Your credit score theoretically indicates how likely you are to repay your debts, with information based directly from your credit report. Obviously, you want this score to be as high as it can - a higher score means more lenders will be interested in you and your loans will have better interest rates. A group called Fair Isaac and Company (better known as FICO) created a credit score system that nearly all lenders now use when considering lending you money for large purchases (as in, say, a mortgage.) This score is used by the national credit bureaus Equifax, TransUnion, and Experian in your credit report.

You can order a copy of your credit score from any of the three bureaus above; this is an especially good move when you're planning to get a loan 6-12 months down the road to give you time to polish up a tarnished record. Here are some tips for improving your credit:

First, review the reports from each bureau and take the time to correct any mistakes. Your score will never go up if mistakes in your reports keep that score lower than it should be. Reviewing your reports at least once a year is generally a good idea to keep an eye on things, as well as reviewing them before you apply for a loan. Even changing a small mistake can take a while, often up to 12 weeks - and sometimes even longer.

Next, a seemingly obvious but important step is to keep your bills current by paying them on time. Though it's always good to be up-to-date with payments, it's mandatory when you're preparing to apply for a loan. Late and missed payments within the last few months is going to look worse to lenders that one or two late payments five years ago.

Third, pay off debt instead of shifting it from one card to another. You may think you're doing a good job by consolidating the debt onto one or two cards, but the whole point of your credit score lies on the ratio of the balance, not just the debt on individual cards. Closing an account on one card and shifting the balance onto another increasesthe ratio, which in turn lowers your credit core.

That being said, try to reduce all balances on your credit card. A factor in your FICO score is how much money you owe on your credit cards in relation to your total credit limit. Debt counselors strongly suggest keeping your card balances below twenty-five percent of your credit card limit. Also, don't close any credit card accounts that you aren't using when you're looking for a loan. That ratio of yours will increase if you close your unused accounts, regardless of the fact you haven't actually incurred any debt with them. On the opposite side, don't open new accounts when you're applying for a loan, especially if your credit history isn't particularly long. Opening a new credit line with a short credit history may actually lower your score because you have no track record, and a new account will lower the average age of your accounts, which your FICO score also takes into account.

It sounds complicated, but in truth all you really need to raise your score is to look at your credit report and fix any mistakes, pay your bills on time, and keep the ratio of your credit card debt below twenty-five percent. This is easier said than done in many instances, but for the determined future car or home owner, certainly possible.

To find out specifically what you must do to raise your score, you can order your score report from all three national credit bureaus. In addition to your score, you'll get your credit report, an indication of how your score ranks nationally and an explanation of how you can boost your standing.

There are two reasons to get your score from all three bureaus: First, each bureau may have slightly different information about you depending on which companies have reported to them on your accounts - reporting is not mandatory and many companies will report more regularly to the bureau based in their region. Second, mortgage lenders often look at all three of the bureaus' FICO scores and take the middle score - not the average - to assess your eligibility, said Michael Daversa of Atlantic National Mortgage in Westport, Conn. So it's in your interest to know what that middle score is and make it the best it can be.

Currently, only Equifax offers consumers their actual FICO score. It can be purchased online for $12.95 at Equifax or myFICO.com. TransUnion and Experian sell their own score brands, but spokesmen for the two bureaus say their scores are comparable to FICO scores in that any advice they give you to improve your score will apply to the FICO score as well.

Like Equifax, the Experian score can only be purchased online for $12.95. The TransUnion score (included whenever you buy your TransUnion credit report, which will cost up to $9.00 depending where you live) may be purchased online, by mail, or, in some cases, by phone.

If you were denied credit, you're entitled to a free credit report from the bureau supplying the information that was the basis for denial. Some states also entitle residents to a free credit report at least once a year. There is, however, no requirement that credit scores be offered free, although with TransUnion your score is automatically included in your report, whether you get it free or not