What Is the Best Way to Increase Your Credit Score?

If you want a good deal on your mortgage or car loan, you need a good credit score. The score is calculated based on your credit history---timely payments, bankruptcy and foreclosures---and gives lenders a quick assessment of your credit risk. Your score isn't fixed in stone; if yours isn't good, it's possible to improve it.

Errors

You can order annual free reports from the three big credit bureaus---Equifax, Experian and TransUnion---through the Annual Credit Report website (see Resources). Check your reports for errors, such as open accounts you've actually closed. If you find debts you never incurred or new accounts you never signed up for, it's likely that your a victim of identity theft. If you find errors, notify the bureaus and get them to change it. If the information is negative, removing it is a simple way to up your score.

Prompt Payment

The Fair Isaac Corporation, which developed the FICO credit-scoring system, says payment history counts for 35 percent of your score. That means making payments regularly will go a long way toward raising your number. If you have trouble making timely payments, consider arranging for as many automatic payments as possible. If you are planning to take out a loan soon, make extra effort to keep payment current: Recent missed payments will hurt your score more than old ones.

Cutting Debt

Thirty percent of your FICO score is based on how much you owe, so cutting debt will also do a lot to raise your current number. Don't pay off one card while leaving the others maxed out, Liz Pulliam Weston says on the MSN Money website: Credit bureaus monitor the percentage of your available credit that you've used up, so keeping a low balance on several cards will work better. Don't rush to close paid-off accounts, either---if you have less credit available, it makes your percentage worse.

Variety

There are two main kinds of consumer debt. Credit cards are revolving debt; every time you pay off your card, you can reuse the credit. Installment debts such as mortgages, personal loans or car loans are a one-time deal---you pay the loan off and the account is closed. Weston says mixing both kinds of debt will boost your score; if you don't have any installment credit, try taking out a small personal loan from your bank.