Some tips on improving your credit score

For too many American consumers, their credit rating remains a mysterious entity, something they do not believe they can control.

The truth is that there are steps you can take to assure that you are not unpleasantly surprised by the news that your credit score is too low. Here are some specific strategies consumers can use to improve their credit scores.

What is a credit score?

Your credit score is a number between 300 and 850 that gives lenders an idea of whether or not they should take a chance on lending you money.

If your score is below 560, you are considered a poor risk. Get your score above 760 and you get a rating of excellent.

It is often referred to as a FICO score, which stands for the Fair Isaac Corp. It developed the rating system in 1956.

The score is based on an analysis of your credit history and your existing habits. The score can be used to determine whether you qualify for a credit card, car loan, student loan, mortgage or business loan, and it can determine what your interest rate will be.

Here are the different factors that go into creating your FICO score, and what percentage of the score each makes up:

▪ Payment history – 35 percent. This is an assessment of whether you pay your bills on time.

▪ Amount owed – 30 percent. It is not necessarily bad to have credit accounts and owe on them, unless your debt load is too high a percentage of your available credit.

▪ Length of credit history – 15 percent. Usually, the longer the better but short histories can be OK if the rest of your report is good.

▪ Types of credit – 10 percent. This looks at where your credit is: credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

▪ New credit – 10 percent. If you have a short credit history, opening several accounts within a short time period makes you a higher risk.

What is a credit report?

A credit report is an examination of your credit history.

Reports are maintained by three credit reporting agencies: Equifax, TransUnion and Experian. Every 12 months you are entitled to a free credit report.

Your credit score is not available for free, however. It costs around $20. Recently, some credit card companies have been offering free monthly checks of your credit score as a way of attracting customers.

Maintaining a good credit score

Six ways to improve your credit score are:

▪ Establish credit if you do not have any by getting a credit card from your bank or credit union, using it sparingly and paying it off every month. Responsible card use is valued more highly than having no credit cards.

▪ Go to AnnualCreditReport.com, get your reports from each of the three agencies listed earlier and check them carefully for errors.

▪ Don’t shuffle your debt around. Pay it off instead of moving it to another card.

▪ Pay off larger balances first. This frees up a bigger portion of your available credit and improves your score.

▪ Don’t fall into debt denial. If you’re having trouble, contact the lender and try to set up payments you can afford. Then make those payments on time. That helps your score.

▪ Know the value of punctuality. Late payments tell lenders you are not reliable. Use automated payment whenever possible or at least automated reminders of when payments are due.

For more credit management advice, go to bbb.org/credit-management/.

This story was originally published September 19, 2014 at 10:00 AM with the headline "Some tips on improving your credit score."