How to Improve Your Credit Score: Introduction

The good ole days of being able to obtain credit with a combination of your credit score, your character, and your personal affiliations are over. Your credit score is now the most important factor that lenders use to evaluate your credit worthiness.

What exactly is your credit score?

Your credit score is a three digit score calculated by the credit bureaus from your past credit history. The credit score was invented by a company called Fair Isaac as a way to predict your chances of credit failure using just your credit report. In recent years this system has gained popularity and now each of the three major credit bureaus, Equifax, Experian, and Transunion all use the Fair Isaac system to calculate their version of your credit score. When applying for credit today you are nothing but a "number" - your credit score.

What's considered a good credit score?

Your credit score can range from 200 to 850 with 200 being the worst score and 850 being the best score. Most lenders will usually give you home loans or car loans with a credit score of 500 and up. However, the "magic" score is considered to be 720. With a credit score of 720 you can obtain any type of credit such as nothing down home loans, no income verification loans (personal loans), home loans with an equity line of credit built in, etc. While a credit score of 720 is ideal, you can still obtain no income verification loans with a credit score of 620 or higher. Credit scores in this range can also give you the ability to obtain a home loan with a 5% to 10% down payment. It's important to note that most lenders look at your "middle score" when determining credit worthiness. Your middle score is the average score calculated from combining all three of your credit scores from each of the three major credit bureaus.

What exactly is a credit bureau?

The three major credit bureaus are Equifax, Experian, and Transunion. Experian has traditionally had the most market share at about 70% but now Equifax is gaining more popularity with lenders while Transunion is falling behind. Credit bureaus are also known as "credit reporting agencies" and lenders must subscribe to their services in order to be able to "pull" your credit report if you apply for credit. These agencies are subject to the Fair Credit Reporting Act which says derogatory items can stay on your report for seven years. For example, if you have an account go into collections then the information will remain on your credit report for seven years. If you have filed bankruptcy or had a lien, charge off, repossession, or any type of derogatory item appear on your report it will also remain for seven years. House repossessions are the longest appearing derogatory item which will remain for ten years. The good news is you can have these derogatory items "disputed" online, by phone, or by mail. In many cases these incidences will eventually no longer appear on your credit report because the information turns out to be false or the creditor looses interest in reporting your derogatory account.

What is a dispute or investigation and why can it boost your credit score?

The Fair Credit Reporting Act is the law that lets you dispute or investigate the derogatory items on your credit report. There are "credit consultants" who charge hundreds of dollars to do this for you but you can easily do this process yourself. By law you are allowed to contact each credit bureau and request a copy of your credit report. However, be aware that requesting your credit report from the bureau's can cost you as much as eight dollars each. Recently the federal government began a new program called Annual Credit Report that allows you to obtain a free copy of each of your three credit reports once per year. You can request your free credit reports by logging onto the Annual Credit Report website (www.annualcreditreport.com). If you've applied for credit and been denied you are also entitled to a free copy of your credit report from the credit bureau that is listed on your denial letter. Once you have received your credit report you will be given a "confirmation number" which will enable you to contact the credit bureau's and dispute any item that you believe is in error or that you want removed from your report. The reason this process helps your credit report is that it removes all of the inaccurate items and sometimes will remove accurate information that creditors loose interest in verifying. Items such as charge offs, bankruptcies, repossessions, liens, collections and other derogatory items can come off your credit report by utilizing the dispute process.

This introduction on how to improve your credit score is designed to give you an overview of what the credit scoring system is and how you can begin taking control of your credit report.