Improve your credit score

NEW YORK (CNN/Money)
If you want the best loan, make sure your score is the best it can be.
By Staff Writer Jeanne Sahadi

You may be out of school, but that doesn't mean you're free from report cards. In fact, if you want to buy a house, a car or any other big-ticket item, a lender will look up your "grade" as soon as you come knocking. That grade is your credit score.

Generally speaking, a credit score measures the likelihood you'll repay what you owe, and it is based on information in your credit report.

The rewards of raising your score speak directly to your wallet: You'll qualify for more loans and be offered better interest rates.

There are many varieties of credit scores available to lenders. But the most widely used for large loans are FICO scores, which are based on a scoring system developed by Fair, Isaac & Co., and which are provided to lenders by the three national credit bureaus - Equifax, Experian and TransUnion.

Consumers may now get their FICO score or a comparable version of it from each of the bureaus. It pays to review these scores at least three to six months before shopping for a loan so you'll have time to improve your standing before approaching a lender.

Following are five things you can do to boost your creditworthiness, plus more information on obtaining your personal score.

5 steps to better credit

Correct blatant mistakes. Your credit score is only as good as what shows up in your credit report. Review your reports from all three credit bureaus for accuracy once a year as well as several months before applying for a loan. Changing a mistake on your report - such as a payment that is wrongly labeled as late -- can take 30 days to three months, sometimes longer.

Pay your bills on time. This is always a good practice, and it's especially critical that you make prompt payments close to the time you need a loan. That's because a late or missed payment in the last few months is likely to lower your score much more than an isolated late payment five years ago.

Reduce your credit card balances. A heavily weighted factor in your FICO score is how much money you owe on your credit cards relative to your total credit limit. Generally, it's good to keep your balances at or below 25 percent of your credit card limit, said Jeanne Kelly, founder of The Kelly Group in Brookfield, Conn., which helps clients improve their credit scores.

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Pay off debt rather than moving it around. Since the ratio of your credit card balance to your credit limit is key, closing out an account and transferring the balance simply means you increase that ratio, which is likely to lower your score. In other words, say you owe a total of $2,000 on four credit cards, each of which has a $2,000 limit. Your total credit limit is $8,000, of which your total balance ($2,000) accounts for 25 percent. If you transfer all your balances to two cards and cancel the other two, your total credit limit is reduced to $4,000, and your $2,000 balance now accounts for 50 percent of that limit.

 
 
 
 
Don't close unused credit card accounts near loan time. If you have several credit card accounts but are only using a few of them, you'll only raise your balance-to-limit ratio if you close the unused ones. You also shouldn't open new accounts when applying for a loan if possible. If you have a short credit history or very few accounts, opening a new credit line may lower your score since you don't have a proven track record, said Jan Davis, an executive vice president at TransUnion. What's more, a new account will lower the average age of your accounts, another factor in your FICO score.

Where can I get my score?

To find out specifically what you must do to raise your score, you can order your score report from all three national credit bureaus. In addition to your score, you'll get your credit report, an indication of how your score ranks nationally and an explanation of how you can boost your standing.

There are two reasons to get your score from all three bureaus: First, each bureau may have slightly different information about you depending on which companies have reported to them on your accounts -- reporting is not mandatory and many companies will report more regularly to the bureau based in their region. Second, mortgage lenders often look at all three of the bureaus' FICO scores and take the middle score - not the average -- to assess your eligibility, said Michael Daversa of Atlantic National Mortgage in Westport, Conn. So it's in your interest to know what that middle score is and make it the best it can be.

Currently, only Equifax offers consumers their actual FICO score. It can be purchased online for $12.95 at Equifax or myFICO.com. TransUnion and Experian sell their own score brands, but spokesmen for the two bureaus say their scores are comparable to FICO scores in that any advice they give you to improve your score will apply to the FICO score as well.

Like Equifax, the Experian score can only be purchased online for $12.95. The TransUnion score (included whenever you buy your TransUnion credit report, which will cost up to $9.00 depending where you live) may be purchased online, by mail, or, in some cases, by phone.

If you were denied credit, you're entitled to a free credit report from the bureau supplying the information that was the basis for denial. Some states also entitle residents to a free credit report at least once a year. There is, however, no requirement that credit scores be offered free, although with TransUnion your score is automatically included in your report, whether you get it free or not.