Improve Your Credit Score with These Techniques

Do you have a low credit score? Do you have no credit at all? Do you know what your credit score is? These are important questions with answers that could save or cost you thousands of dollars over your lifetime.

If you don't know what your credit, or FICO score is, you can go to http://www.creditcards.com/credit-score-estimator/ and answer a few questions to obtain an estimate of where you stand credit-wise. Also, the site creditkarma.com provides you a free score estimate scaled on the same numerical range as your actual FICO score. Again, this is not your actual FICO score, but it can give you an idea what credit terms you are more likely to have access to.

Your actual FICO score is a number calculated by Fair Isaac & Co. It is a complex calculation that yields a simple answer to the question that credit issuers want to know: how likely are you to pay back money you borrow?

While there are actually three FICO scores for each borrower, one each for the bureaus Experian, TransUnion, and Equifax, lenders may prefer the numbers from one bureau over another, or they may use the middle score as a kind of average.

Credit scores below 700 may prevent you from qualifying for the best interest rates on mortgages, car loans, or credit cards. With a score below 700, you could end up paying thousands of dollars more in interest on new credit than you would if your score was above 700.

You are entitled to a free copy of your credit report once every 12 months from each of the nationwide consumer reporting companies. Some financial experts recommend staggering your queries of the three at four month intervals so that you can concentrate of finding errors in each credit report in turn. To order the free annual credit report that you are entitled to, go to http://annualcreditreport.com, or phone 1-877-322-8228.

There are five basic conditions that can lower your credit score: paying bills late; recent acquisition of large amounts of credit; credit used versus credit available; how long you have lived at your current address; and negative credit factors like bankruptcies, repossessions, and foreclosures.

Those heavy hitters - bankruptcy, repossession, and foreclosure - stay on your credit record for years, and it will take years to build your credit rating back up. But it isn't impossible.

In fact, whether your credit score is lowered by a bankruptcy or by your carrying too much available credit, the way to improve your score is basically the same: live within your means, and pay your bills on time. It sounds tedious, but it works.

Even if you don't have a bankruptcy or foreclosure on your record, you should still get the free copy of all three credit reports you are entitled to each year. Mistakes on credit reports are not uncommon, and correcting them can help bump your score back up to where it should be. If you find a mistake on your credit report, call the credit bureau that issued the report. All three have procedures for correcting errors on your credit report.

Another way to keep the credit reporting firms smiling on you is to keep your debt-to-credit limit ratio below 25% on your credit card. This means that if you have, say, a $1,000 limit on a credit card, you should keep the balance you carry below $250. Owing much more than that can adversely affect your credit score.

If you carry several credit cards, you might not have as high a credit score as you would if you only had one or two. This is tricky, however. If you were to suddenly cancel 10 credit cards, bringing you down to two, it wouldn't necessarily hurt your credit rating, but it could raise flags with the credit bureaus.

Your strategy with credit cards should be keeping as few of them as will meet your needs. If you plan to cancel some of your cards, cancel the newest ones first. The credit cards that you've had for several years will lend their long history to your overall credit score.

If you have applied for credit many times in recent months, the reporting bureaus may want to take a closer look. Applying for credit frequently may look to the bureaus as if you are over-borrowing, or that you are frequently being denied credit, and then applying elsewhere.

Suppose you are just starting out as a young adult and have no credit history. You may feel caught in an impossible situation of needing credit, but having no history of credit to make banks want to lend to you. You'll most likely start out with a fairly low FICO score, which may make it difficult to get approved for a car loan or a credit card.

If you have had a bank account for several years, and have kept it tidy, try applying for a credit card offered through your bank. You will most likely have to settle for a low credit limit at first - maybe $500 - but you will be on your way to establishing your own credit history. Other options are having someone with decent credit co-sign on a loan or credit card. However, this may adversely affect the other party's credit score, so research this option carefully if you want to try it.

In summary, the keys to keeping your credit score high or improving it are based on simple financial discipline:

1. Pay your bills on time.

2. Don't apply for credit too frequently.

3. Reduce your credit card balances.

4. If you only have a little credit, apply for more. It may seem counterintuitive, but if you don't have sufficient credit, it can actually lower your credit score.

5. Monitor your FICO scores and correct any mistakes that show up on your credit reports.

While there is no instant way to make your FICO score go up - regardless of "credit repair" companies that claim otherwise - the means to improve your credit history are within your grasp. It may take time, but it will be well worth it in savings on borrowing costs later on.