How Do I Improve & Understand a Credit Rating?

by Joy Uyeno, Demand Media
    Your credit score is a profile of how financially responsible you are.

    Your credit score is a profile of how financially responsible you are.

    While it may take time to bring yourself out of credit card debt completely, simple actions like catching errors on your credit report and making small purchases on old credit cards will boost your score. By understanding how your credit is rated, you will be able to easily navigate the scoring game, so that your financial portrait is more attractive to lenders.

    Step 1

    Order a free copy of your credit report. According to the Federal Trade Commission, the Fair Credit Reporting Act mandates that everyone may have access to their credit reports from each of the three credit bureaus (Experian, TransUnion and Equifax) once per year through the official Annual Credit Report Website (see Resources).
    You are also entitled to a free credit report if someone rejects an application for insurance, credit or employment; if fraud or identity theft has left inaccurate information on your report; if you're on welfare; or if you're unemployed and plan to look for work within the next 60 days.
    Otherwise, as of November 2010, the credit bureaus charge $10.50 for your credit report, except for Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, and Vermont, where consumers already have free access to their reports. Consumers may order credit reports directly through the credit bureaus. The FTC warns against any other companies that claim to offer "free credit reports," as they are not part of the legally mandated program; they may end up charging you for other services.

    Step 2

    Learn about how your score is calculated and what the ranges of scores mean. Your credit score is based on the following factors: how you're using your credit; whether or not you've made payments on time; how old your credit is; how many times you've applied for new credit; and the type of credit you have (secured vs. unsecured).
    Credit scores range from 300 to about 900. According to Bank Rate, a score of 720 and above is excellent, and borrowers within this range will have the easiest time getting loans and will get the best rates. Those with a score of 620 and below will have a difficult time getting loans and obtaining new credit; if they do, they will likely have high interest rates.

    Step 3

    Report any discrepancies to both the credit bureau and the creditor. One of the fastest ways to improve your credit ratings is by reporting any errors you find on your credit report. Go through your reports from all three agencies with a fine-toothed comb and immediately report any errors in writing to the credit bureau and creditor. Make sure to include copies of supporting documentation. Look out for any accounts that you didn't open, inaccurate reports of late payments, listings for bankruptcies that are older than 10 years, accounts which should have been wiped out by a bankruptcy and negative marks older than seven years.

    Step 4

    Pay all of your credit cards on time. By making timely payments, you are demonstrating a good level of responsibility, which is an important factor to lenders and, therefore, carries significant weight in determining your credit score. According to CNN Money, "Someone with an average credit rating of 707 can raise their score by as much as 20 points by paying all their bills on time for one month."

    Step 5

    Lower your credit card balances. Your debt-to-credit ratio is an indicator to lenders about your ability to pay your bills. When you keep your balances low, your score improves. It's a good idea to keep your balances to 30 percent of your credit limit. Although keeping a balance of zero is better, you must use your credit to increase your score, so make sure that zero balance is because you've paid off your card each month.

    Step 6

    Use your old credit cards. The longer you've had a credit card open, the better it is for your credit score. However, don't neglect old cards. If you haven't used a card in a long time, your creditors may stop reporting your account to the credit bureaus. Use it every so often to make a small purchase, then pay off the balance each month to bump up your credit score.

    About the Author

    Joy Uyeno has been writing about travel, food, fashion, culture and finance since 2005. For three years she wrote a column for the "Honolulu Star-Bulletin" aimed at young and first-time travelers. Her writing has appeared in several local and national publications, including the 2008 anthology "Honolulu Stories." She holds a Master of Arts in writing and publishing from Emerson College.

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