How to Raise Your Credit Score

A credit score is your financial fingerprint.  Full of your financial history, it's the most effective way for a lender to identify your creditworthiness.  Many people are shocked to discover that this fingerprint can lead to a thumbs-down from a lender.  Here are some simple ways to improve your credit score.

Lenders subscribe to the belief that history repeats itself.  If you apply for a loan, their decision will be based on your FICO score, which is an indicator of your financial history.  This little number can be your gateway to a decent mortgage or car loan; if you have a low score, "improve credit" should be the task at the top of your to-do list.

Know your FICO credit score

FICO stands for the formula developed by Fair, Isaac & Co. (FICO) that defines your credit score.  Mortgage lenders and credit card companies all provide credit bureaus with data regarding the amount of your credit and your timeliness with payments.  This data is compiled by bureaus, and fed into a formula.  The result is a credit score, generally in the 300 to 850 range.

Most lenders are happy to find a borrower with a credit score in the 700 range.  Anything in the high 600s generally indicates that you're a bit of a credit risk, and will result in a higher interest rate on your loan.  Borrowers in the 500 and below range are high credit risks and encounter significant problems getting a loan.

Improve credit

Now that you understand how the system works, take the steps necessary to ensure that your number is as high as possible. Start by reviewing your credit report.  Check it over for any errors; keep an eye out for any "open" accounts that you know you closed long ago.  Credit bureaus make mistakes, too.  Be on the lookout for erroneous reports of late fees.  Any of these miscues can significantly lower your score.

Once you have your report in tip-top shape, take steps to make yourself less of a credit risk. Begin by paying off your debt.  Target those high-interest credit cards first, zapping as much of those balances as your budget will allow.  Don't be afraid to keep a few credit cards open-two or three will do-but never carry a balance.  Use them more as emergency sources of cash.

Strive to pay your bills in a timely fashion.  Your FICO score is largely determined by how promptly you pay your bills.  Avoid any late pays, and your credit score will rise.

While you can't change your past, you do have the power to redirect your future.  Take positive steps toward improving your credit score by reducing your debt and making your payments on time.  This type of good money management will send a clear signal to a lender that a financial relationship with you can be built less on risk, and more on reward.