Your credit rating is one of your most important financial assets -- or liabilities. Credit scores affect your ability to obtain a mortgage, open a credit card account and even get a job. If you have been paying your bills on time, but your credit score is low, it's no small matter. You need to find out why and take corrective action.
Description
Your credit score is a number generated by a computer program that summarizes the risk you present as a borrower. That is, it tells a potential lender how much risk he takes by extending you credit. SmartMoney.com points out that the average American has a credit score of around 725 out of a possible 850 on the FICO scoring system, the most widely used credit score. Anything over 700 is good, while a score under 620 is considered subprime, or poor. The key thing to understand is that your credit score is calculated based on the information on your credit report. If your credit score is too low, the problem will be information on your credit report.
Check Your Record
To discover why your credit score is low, you need an up-to-date copy of your credit report from at least one of the major credit reporting agencies --- Experian, TransUnion and Equifax. Under the Fair Credit Reporting Act, you are entitled to a free copy of your report each year from each company. Although you can purchase copies of your credit report from commercial sources, the free reports are available only from the Federal Trade Commission's authorized agent, AnnualCreditReport.com.
Correcting Problems
When you review your credit report, look for outdated or incorrect information. If you find items you think are in error, contact the credit reporting agency and initiate a dispute to have the problem corrected. You can usually do this online at the websites of the credit reporting agencies. Look also for credit accounts you don't recognize or other evidence of possible identity theft. If you see something suspicious, you can file a complaint with the FTC, file a police report and inform the credit reporting agency.
Improving Credit
Sometimes people think they are doing what they need to do to maintain a good credit score, but that's not always the case. You can trip yourself up even if you pay all of your bills on time. If you have recently applied for several new credit accounts or closed some accounts, this will lower your credit rating. The good news here is that this information stays on your report for only a short time and then is dropped. Another frequent problem is excessive debt. In particular, having a lot of unsecured debt, like "maxed out" credit cards, will hurt your credit score. Paying down these debts will improve your credit score.
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