Managing Your Credit Score

There are three major credit bureaus in the U.S. - Experian, Trans Union and Equifax - each with their own credit reporting process. Some creditors, such as your mortgage company will report to all three while other creditors only report to one. These credit agencies also share information, so over time, your three credit reports should look pretty similar in nature, showing the type, balance and payment histories of your various credit accounts.

In addition to these lengthy credit report, each credit reporting agency also maintains what's known as a "credit score". The credit score is a number, ranging from 350 to 850, with 850 being a perfect score.

This score is based upon the information in your credit report, a sort of summary of your payment history and money management skills. Using a credit score, a potential creditor can tell right away if you're someone they want to do business with. A good credit score tells them you pay your bills on time and aren't up to your eyeballs in debt. A bad credit score on the other hand, tells the creditor to pass on your application.

So, how do you manage your credit score?

Your credit rating breaks down like this:

750 to 850 Excellent

660 to 749 Good

620 to 659 Fair

350 to 619 Poor

If your credit score is excellent, you'll pay the lowest interest rates and have no problems getting unsecured loans and credit cards. Buying a car will be a snap - just sign here please - and when you do finally decide to buy that dream house, the mortgage companies will be knocking at your door just like they do in the television commercial.

A good rating will still bring you many benefits and you'll enjoy decent purchasing power but at a point or two higher. Mortgage companies may look a little closer at your application, wanting to make sure all your numbers add up, but you should still have no problem buying that dream house, assuming of course its within your debt to income ratio.

Is your credit rating fair? Don't be surprised if some of the traditional banks and financing companies pass on your application. You'll still be able to buy the things you want, but you'll pay a considerably higher interest rate than your good and excellent rated counterparts.

Those with a poor credit rating will have a hard time buying anything on credit. When they do manage to get approved, it will be with a ridiculously high interest rate, one that often equals triple and even quadruple the amount of the original loan.

The three major bureaus rely on the Fair Isaac & Co. scoring model (which is why you'll hear it referred to as a "FICO score"). Here it is in a nutshell:

• Amount you owe - 30%
• Payment history - 35%
• Length of credit - 15%
• New credit - 10%
• Balance of different types of credit - 10%

In addition to these categories, there are some things that will definitely lower your score:

• New credit - applying for new credit cards and loans can lower your score by up to 15 points.
• Late payments - miss a payment (just one mind you) and your score can drop as much as 30 points.
• High balances - max out your credit cards and you could lose up to 100 points.
• Bankruptcy - this is the mother of all credit score destroyers. File for bankruptcy and your credit score could drop by 225 points.

If your credit score isn't what you'd like it to be, there are ways to get it back up to par.

You can start by making sure you pay your bills on time. There's nothing you can do about the late payments already showing - their impact on your credit score will diminish over time. But you don't want to add to the problem with more slow pays so get yourself a spreadsheet or calendar and make sure all your payments get there when they should.

Another great way to improve your credit score is to pay down your balances. Ideally, you should never charge more than 25 to 30% of the available balance on your credit cards. Obviously, things happen and one big emergency can put you over that mark but do what you can to keep your balances low and you'll notice your credit score begin to rise.

Keep your long-time accounts open, even if you're not using them. Remember, part of your credit score is the length of time you've carried the credit. Don't close your accounts - just pay them off and leave them open. Combine those low balances with a long history and you've got the makings for a good credit score.

Try to balance your credit accounts with a healthy mix. A mortgage, a car loan and a few credit cards is a good blend for example, typically of the average household. But if you have eight credit cards and no mortgage or car loans, creditors see you as debt-heavy but without any real long term commitments.