To improve you credit score, you need to understand how it is calculated. The most commonly used credit score, the FICO score, is calculated using an algorithm designed by the Fair Isaac Corporation. The score takes into consideration your payment history, length of credit, amount you owe, how much credit you have recently applied for and the types of credit you use. Having a good credit score can help you get loans at lower interest rates, saving you thousands.
Check Your Credit History
The Federal Reserve's first tip for improving your credit score is to order a copy of your credit history. Federal law allows you to get a free copy of your history once per year (See Resources). Dispute any items that are incorrect such as incorrect accounts, lower credit limits or items that are more than seven years old, 10 years in the case of a bankruptcy. Mail copies of any documentation you have to support your claim. The credit bureau will investigate and if the creditor does not refute your claim, either because you are correct or because it is an old account that is not worth the effort, the item will be corrected.
Pay Down Balances
The amount of money you owe, particularly on credit cards, and the percentage of your available credit that you are using accounts for 30 percent of your credit score. You should try to use less than 15 percent of your available credit. If you cannot pay down your credit cards, Bankrate.com advises spreading your balances over several cards so you use a smaller percentage of the credit limit on each card rather than having one card maxed out. Paying down your credit cards will not be as effective if you close the accounts after you pay them off because you reduce your available credit. For example, if you owe $5,000 on two cards that have a total credit limit of $6,000 and you pay off $2,000 and close one account with a credit line of $3,000, you are left with a total credit limit if $3,000 and total debt of $3,000 so you are using 100 percent of your available credit. If you left the card open, even though you were not using it, you would only using 50 percent of your credit limit and that unused card would still be reporting that your payments were current on your credit history.
Pay Your Bills as Agreed
Payment history is the most heavily weighted category in your credit score at 35 percent. If you have late accounts, get them current as quickly as possible and pay your bills on time in the future. Even if you cannot pay your bill in full, if you make the minimum payment your account will still be reported as current because you agreed to pay at least the minimum payment and you fulfilled that obligation. Your most recent payment history is counted more than your credit history several years ago so you can start improving your score quickly.
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