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4 Steps To Improve Your Credit Score

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By Eva Norlyk Smith, Ph.D.
August 23, 2011

Most people know that paying bills on time is a must to keep credit scores high.

But credit scoring models are complex, and there are many other factors involved in winning the credit score game, say experts.

Here are four essential steps to take to make sure you get to the top rung of the credit score ladder.

1. Pull a copy of your credit score.
This step is often overlooked, says Jeanne Kelly, author of “The 90-Day Credit Challenge: Playing the Game of Credit Scoring.” Yet, it’s important to first find out where you’re at, so you know where you need to go.

“My number one message is to be aware of your credit score,” says Kelly. “Sometimes people don’t even know what their score is. But it’s so important to be monitoring your score to stay on top of it.”

While everyone is entitled to a free copy of their credit report once a year from all three rating agencies, Equifax, Experian and TransUnion, consumers generally have to pay a fee to see their credit score. The one exception is for people who have recently been turned down for a credit card application or loan. In that case, recent regulations require lenders to provide a free copy of the credit score they based their decision on.

When paying to see your credit score, Kelly warns that it’s important to distinguish between FICO scores and imitations — the so-called FAKO scores.

“Many people still don’t know that credit scores aren’t the same,” says Kelly. “There are a lot of companies that sell you credit scores, but 90 percent of lenders use FICO scores. So be sure you’re monitoring the credit score that lender use; go directly to FICO.”

Tip: FICO scores are available for purchase only at myFICO.com. After you pay to get a copy of your FICO score, compare it with the score you get when using a free FICO score estimator. If they are close, consider using the free estimator to gauge your progress over time. Or, if money is not an issue, sign up for one of the paid credit score monitoring services.

2. Don’t pay late or skip payments.
Paying credit cards or installment loans late is a sure way to damage your credit score. However, even though most people know this, many still assume that paying credit cards is like paying utility bills: If you skip one month, but pay the balance in full the next, you’re still okay.

Unfortunately, a skipped credit card payment will show up as a 30-day late payment on your credit report. Worse, it will stay there, even if you pay the credit card balance off in full next month.

Tip: Nothing affects your credit score more than missed payments on loans or bills. If you default on a loan or fail to pay a bill, the information will be retained in your credit report for seven years. Don’t go there.

3. Get to know your debt-to-credit ratio.
Credit scores are designed to reflect how well you handle credit. So while paying on time and meeting your credit obligations are important, so is using credit sparingly and with caution. People who carry large balances or max out their credit cards are viewed as a greater credit risk, and this is reflected in their credit scores.

One of the magic formulas lenders use to gauge how responsibly you handle credit is the debt-to-credit ratio, or the credit utilization ratio. It is a measure of how high your balances are across your credit cards in relation to available credit.

To calculate this ratio, total the credit limit across all your credit cards. Then total the credit card balances on those cards. To get the debt to credit ratio, simply divide your total credit card debt by the combined total of your credit limits. For example, if your total credit card debt is $1,000 and the credit limit across all your credit cards is $10,000, the credit utilization ratio (or debt-to-credit ratio) is 0.1 or 10 percent.

Tip: For the best FICO scores, credit utilization should ideally be less than 10 percent. If it is above 30 percent, it will impact your credit score negatively. If you’re currently using 30 percent of your credit limit, take steps to pare back your debt.

4. Check for variety.
Credit scoring models are hard to please. While using too much credit is frowned upon, using credit too little, or rather, not having a variety of credit accounts, can also be a problem.

“Paying your bills on time and keeping credit card balances low are the most important factors for your credit score,” says Kim McGriggs, Community and Media Relations Manager at Money Management International. “But your credit mix is also important. It’s best to keep a variety of different types of credit, such as a couple of credit cards, a car loan or even a mortgage.”

If you’re just beginning to build your credit, apply for credit cards that are relatively easy to get approved for, such as credit cards for people with limited credit or a store credit card. Then gradually build from there.

Tip: Don’t just rush out and apply for lots of different credit cards or other forms of credit. Each time you apply for credit, your credit score is pulled, and too many credit inquiries count against the score as well.

“Start slowly, and make sure you’re developing a pattern of good credit management,” says McGriggs. “Open one account and prove to yourself and other creditors that you can handle that responsibility wisely; then go on to the next.”

The bottom-line: Even little things can impact your FICO score big time so pay attention to the details. No matter what the state of the economy, the credit doors are always open to those with excellent credit. However, it takes attention and careful planning to get there.

Having a fair or good credit score will still get you approved for loans. But only an excellent credit score will qualify you for the best loan terms.

(Article updated 8-23-2011. Originally published 5-22-2009.)