Understanding your credit score is divided into five areas. Each area helps lending instituions determine how risky you are. If you are a new creditor, with limited types of credit, and have made late payments, your credit score will be very low. On the other hand if you have a long history of payments with various types of credit your credit score will be very high.

The Five Areas in detail are:
What is your debt to available credit ratio? Simply put, are you maxed out. If you have a $1,000 credit card are you carrying a balance of $999 which goes past the limit occasionally? If you give yourself a zero here. Another part of this calculation is your debt to income ratio. If you make $35K a year and you have $20K in credit card and auto debt your ratio is not looking very good. Paying off your debt and living below your available debt will raise your credit score.

How long is your credit history? This is an important because it helps creditors discover your spending and debt habits. The longer you have handled debt responsibly the more credit they want to give you. When my brother was applying for a loan on his first house the loan agent told him to get a department store credit card. After he got a card and used it for a few months he was eligible for a mortgage. Kind of scary that a $100 in-store credit card could make it possible to buy a house but there it is.

Are you timely with your payments? Never be late on a single payment. In my experience if you are late by a day or two it doesn’t show up on your credit report. Besides having to pay a fee you won’t be in trouble there. If you are more than a month late you are getting a permanant mark on your credit report. While your score will rebound over time creditors will always be able to see your little boo boo.

How many credit cards are you applying for this month? If you are loading up on credit card accounts and buying new cars it will hurt your credit score. Every time you open a new line of credit your score takes a hit. If you open 2 or 3 cards within a month your sending the message that you’re crazy and intend to leave the country or something. Try to avoid this mistake before making a big purchase. It could cost you from buying your dream home.

How diverse are your lines of credit? If you have a number of different types of credit is shows that you’re mature with your accounts. If all you have is department store credit, and nothing else, it shows that you may not be capable of handling more credit. Try to apply for a signature loan instead of going to mom and dad for that small loan next time.

Your are entitled to a free credit report from the government every year from each of the credit reporting bureaus. With three bureaus offering a free report yearly you can monitor your credit for free by spreading out the times you pull your credit.

This type of credit pull is referred to as a “soft pull” and will not effect your credit score.

This is an example of how you would space out getting your credit reports to monitor your credit.

• January (01) – Pull your report from Experian
• May (05) – Now, get your report for Equifax
• September (09) – Last of all, get your report from TransUnion.
• Next year – Start with Experian in January and repeat the process

Because you can’t schedule the reports to be sent to you automatically it might be a good idea to have something to remind you. A service that I use regularly is LetterMeLater.com. You can schedule e-mail reminders scheduled to be delivered into the future. A reminder would say “It’s time to get your credit report from Equifax.” when May 1 arrives.

You would start my visiting annualcreditreport.com. From their visit the bureau of choice and complete the process. You will see Experian, Equifax, and TransUnion.

Take care not to get up-sold as you work through each of these bureaus. They they will try to offer you your credit score number and other upgrades. You do not need any of these to complete the process. Read carefully and try to avoid these tricks. By law you are entitled to one credit report a year.

A good credit score is 700 and above.

Anything above 800 is considered exceptional. Bad credit scores are around 600 and below.

Notable FICO credit score benchmarks
850 – The absolute highest credit score possible. If you have a credit score of 850 you’ve done a good job watching your credit history and have done everything right.

723 – This is the “Average” credit score. You can use this as a benchmark against your own credit score.

620 – This is the “Prime Rate Cut Off”. This means you will pay higher interest when you apply for a loan.

Improving your credit score
If you are trying to increase your credit score try these 19 tips proven tips to Improve Your Credit Score.

Free Credit Report
By law you are entitled to three free credit reports each year. You can get one from each of the credit reporting bureaus. The only catch is that you don’t get to see your actual score. As you strive to improve your score this is an important first step. You might be surprised at all the skeletons waiting for you in your credit closet. Get a Free Credit Report from the Government

Credit reporting agencies are tight lipped on the specifics of how a credit score works. While the specifics are shrouded in secrecy the general knowledge of do’s and don’ts are fairly intuitive and readily available. What it really boils down to is this: Are you the type of person that can pay back a loan? Do you have dangerous signs in your debt and spending behavior that would indicate you aren’t reliable? If you behave lenders will be falling all over themselves to get your attention.

While a good credit score can save you thousands in interest and penalties it’s probably best not to use it. But that the irony, when you don’t need or want credit, lenders want you more than a T-bone steak at the pound.

Easy steps to improve your credit score –

DO’s

• Pay your bills on time (everytime) – This isn’t rocket surgery =). If you can’t pay your bills on time no one will want to lend to you, not even your friends.
• Call your creditor if you know you’re going to miss a payment – Many times a creditor will work out a special deal for you, they won’t slap a late payment fee on you, and most likely you’ll come out unscathed. If you plan on missing multiple payments you should call for sure. Just like in real life faceless corporations like to know what’s going on.
• Check your credit report regularly – Everyone can get a Free Credit report from the government every year from each of the credit bureaus. TransUnion, Equifax, and Experian all have to give you one every twelve months for FREE. Read more here.
• Start and/or maintain your credit history – If you’ve never had a credit card, loan, or any other type of credit building device get one. You can sign up for a credit card and start building now. If you’ve recently gone through a bankruptcy get back on the saddle with a poor credit credit card. If credit cards were your down fall then be careful.
• Shop for a loan in a short amount of time - If you’re looking for an auto loan or a mortgage try to do it within a two week period. Try to avoid looking for a loan over extended amounts of time. The reason for this is that you are pardoned if you get a number of similar credit checks for the same thing. If you stretch it out every time you get your credit pulled it will count against you. So the moral of the story here is get your credit checked in the window of forgiveness.
• If you have outstanding debt or problems in your credit report fix it- right now! – You might be surprised by what you’ll find in your credit report. A five dollar bounced check when you were a freshman in college might be lingering there waiting for you. If you see something like this fix it quickly. The contact information for the company responsible for the bad mark will be there for you to call. Call them and have them remove the issue A.S.A.P. Don’t wait until you actually need the loan to worry about problems like this.
• Have a good mix of different types of credit – Don’t just do credit cards or auto loans or department store credit. Try to maintain a healthy mix of credit and pay everything diligently. Having one or two credit cards that you actively use will be as good or better than working with fifteen. Try diversifying your credit if possible.
• Give yourself time – It takes time to build your credit score. Any changes you make to improve it will likely take months and sometimes years before the full impact is known. If you have a big purchase coming up pull your credit report now and be aware of any problems you might have.
• Protect against identity theft – especially from friends and family – Studies have shown you are much more likely to be victimized by friends and family than by some stranger online. Your kids, siblings, parents, acquaintances, or family members are more likely to steal your identity than anyone else. So protect your private information from prying eyes and keep passwords and other private information locked up. Buy a shredder and be careful. It’s also interesting to note that homicide and rape are also more likely done by people the victim knew as opposed to strangers.
• Have older average account ages – Accounts with long positive histories will do wonders for your account. Opening new accounts (even if you don’t use them) will lower the average age of your account and can take 10 points off each time.

Easy steps to improve your credit score –

DON’Ts

• Don’t apply for too many credit cards or other loans too quickly – Signing up for multiple accounts within a few weeks of each other send off the wrong message to creditors. What you’re doing may be innocent enough but creditors get the idea that you’re going to fake your own death or something worse.
• Don’t have your credit report pulled to frequently by creditors – This kind of goes hand in hand with the previous warning. Even if you don’t actually apply for a loan or credit card the simple act of having your credit pulled will too frequently will hurt your credit. This is refered to as a ‘hard pull’. A ‘soft pull’ is when banks or existing credit card companies do frequent prequalification or check ups on you. At any rate try to avoid ‘hard pulls’ as much as possible.
• Don’t close down credit card accounts to improve your credit score – Most of the damage is done when you first apply for your credit card. Closing down accounts has little to no positive impact and will more likely hurt your long running credit history.
• Don’t carry more than 50% of your total balance – Carrying too much debt on your revolving credit or maxing out your card means you’re desperate and you are living beyond your means. Remember to pay your cards off monthly or carry less than 50% of the total balance if you must.
• Never go past your credit limit – Going over your balance actually shows up on your credit report and is a serious bad mark. Never ever go past your limit.
• Don’t move debt around…pay it off – Moving debt around won’t help your credit score in any meaningful way. While you might get a little bit of a boost by transfering revolving credit to a 2nd mortgage (bad idea for a million other reasons) you won’t get any boost by transfering from one card to another.
• Don’t declare bankruptcy or foreclose if at all possible – These things stay on your credit report for a very long time. Foreclosure stays on your account forever while bankruptcy will fade in time. Creditors can still ask you if you have ever declared bankruptcy even though it’s not on your credit report any more. Try everything you can before you have to use one of these two options.
• Don’t let past due bills go to collection agencies – Collection agencies are the creditors last resort to get money out of you. If you get a threatening letter saying you’ll be sent to collections, take heed. Once an account goes to collections that’s usually when the damage is applied to your credit report. Sometimes you can avoid disaster if you can catch it before it goes to this stage.
• Don’t job hop – keep a regular job. This might have more to do with certain personalities, or economic woes, but try to stay with one employer for as long as possible. Job hoping sends the message that you’re unstable and paying your bills might not be a guarantee.