How can you work your way up the scale and gain the financial benefits that come with increasing your credit score? Since your credit rating isn’t fixed in stone, there are several ways that you can work toward the highest credit score. While you may never achieve a score of 850—only 1 percent of the U.S. population does—you can certainly improve your credit score over time.

Review Your Credit Report.CNN Money reported that almost a quarter of credit reports contain incorrect data. The first thing you should do to make improvement on your credit report is to make sure it is accurate. Like it or not, it may be up to you to get the facts right. Reporting negative mistakes may give your credit score the boost it needs.

Improve Your Payment Habits. Your payment history counts toward a significant portion of your credit rating. If you have a poor history of making late payments, it’s time to change those habits for the better. Begin paying at least the minimum payment each payment period and make sure that you send payments on or before their due date.

Keep Old Credit Accounts. Individuals with credit scores of 800 or more typically have at least three credit cards (with low balances) to their name and have had these accounts for at least seven years. Creditors keep tabs on the average age of accounts and your debt-to-credit limit ratio. It is a good idea to keep your balances owed low.

Be Savvy About Opening New Accounts. While increasing your available credit and diversifying your credit accounts can boost your credit score in the long run, do not open new accounts if you plan on applying for a big loan. For instance, if you plan on applying for a mortgage loan in the near future, avoid opening up a new credit card account since doing so will decrease your credit score for a short period of time.

Reduce Hard Inquiries into Your Credit Report. Inquiring into your own credit score is considered a “soft inquiry” and will not affect your credit rating. However, hard inquiries made by lending companies will negatively affect your credit score. Only give permission for hard inquiries when absolutely necessary. For example, do not open a new store credit card simply to save 10% on a purchase. However, if you are applying for a mortgage, for instance, try to ensure that all inquiries are made within a 30-day period. All inquiries into mortgage loans are counted as one inquiry if they are made within 30 days of each other. Similarly, auto loan inquiries made within 15 days of each other will be grouped together as one.

Keep Credit Card Balances Low. Financial advisors recommend that consumers keep their credit cards balances at 75 percent or less of their available credit. If you’re working toward achieving the highest credit score, it is a good idea to keep your credit card balance at 25 percent or less of your available credit.

Use Rejected Loan Applications to Your Advantage. While it is disappointing to have your loan application rejected, you can use the results to improve your credit score so that the loan is more likely to be accepted the next time. The lender who rejected you will provide you with a list of reasons that your loan was rejected. Turn your score around by making improvements in those areas.

How to Get Your Credit Score

You can get a free credit report once a year from a credit reporting agency such as Equifax, TransUnion, or Experian. However, these reports will not give you your credit score. To get an estimate of your credit score for free, there are many online resources that will ask you a series of questions in order to calculate an estimated credit score. Use that credit score as a basis to improve on by following the suggested tips in this article.

So, what is an excellent credit score? A credit score, also known as a FICO score, is based on a system created by the Fair Isaac Corporation. Ratings can fall anywhere between 300 and 850 with 300 being the poorest rating you can receive. Basically, any credit score that falls below 640 is poor. Credit scores between 640 and 680 are fair. A good credit score will be between 680 and 720. An excellent credit score is anything from 720 and up.

Keep in mind that lending companies have their own guidelines when it comes to whether or not they will approve a loan. Your credit score in addition to individual company guidelines will determine whether or not you are issued a loan, how high your interest rate is, and what loan amount will be approved.

What is an Excellent Credit Score and how is it Determined?

There are five factors that will determine your credit score. Some of these factors are weighed more heavily than others. These five factors and their importance in determining your credit score are as follows:

Payment history makes up 35 percent of your credit score. Your payment history includes such factors as late payments, on-time payments, and slow payments. Slow payments are payments that are received by the lending company before a determined grace period ends but after the due date. To increase your credit score, make sure that you make all payments and that payments are made before the specified due date.

Amounts owed makes up 30 percent of your credit score. The more that you owe against your credit, the less worthy loan companies will deem you for additional credit. In other words, it is important to keep your debt-to-income (DTI) ratio below 30 percent. Your DTI is determined by dividing your debts from loans and credit by your gross monthly income.

Length of credit history makes up 15 percent of your credit score. This is the amount of time that you have had credit accounts open. While closing your oldest account will shorten your credit history, accounts are reported for up to seven years since the date it was last active. Closing an account is considered the last activity you made on the account and the account will be recorded for seven years from the date it was closed.

New credit makes up 10 percent of your credit score. This part of your score is related to any new accounts that you open. The number of recently opened accounts and any credit inquiries are incorporated into 10 percent of your credit score.

Types of credit will account for another 10 percent of your credit score. The variety of accounts that you have, such as secured, collateral, or unsecured loans, will determine this part of your credit score. Examples of secured or collateral loans include car or mortgages loans. Credit card loans are an example of an unsecured loan.

How to Find Out Your Credit Score

While Federal law gives you the right to receive an annual credit report from credit reporting agencies, these agencies are not required to give you a free credit score. To determine your credit score free of charge, you can use an online credit score estimator. These free online credit score estimators will give you an idea of where your credit score falls and will ask you questions such as how long ago you received your first loan, how many credit cards you have, when you got your first credit card, what your combined balance on credit cards and other loans is, how many of your loans and credit cards currently have a balance, when you last missed a payment on your credit card, how many of your loans or credit cards are past due, how many credit cards and loans you have applied for recently, and many other pertinent questions.

Free online credit score estimators provide you with an easy way to determine your credit score, but keep in mind that these are estimates and loan companies will determine a more specific credit score. In addition, loan companies will have their own set of factors that they will use to determine whether or not to approve you for a loan.

Credit Card Scales

Loan companies use different credit card scales. In general, credit score scales range anywhere from 300 to 900. Using this scale gives lenders a quick and convenient method for determining how much of a credit risk you are and how well you’ve maintained previous loans and credit card payments. Consumers who have a high credit score pose less risk and are, therefore, less likely to default on a loan. Those with a low score or bad credit score are more likely to default and pose a greater risk. The breakdown of the scale is as follows:

Credit scores below 640 are considered poor.
Credit scores between 640 and 680 are considered fair.
Credit scores between 680 and 720 are considered good.
Credit scores that are above 720 are considered excellent.

Keep in mind that this is a general outline of what is considered a good credit score, a bad credit score, and everything in between. Lenders often have their own set of factors and scoring methods. However, the above outline of credit scores will give you a good estimate of what is a bad credit score and what category your credit score falls under.

What is a Bad Credit Score and is it the End of the World?

While a bad credit score will make it more difficult to find a loan company that will accept your application, you do have the ability to improve your credit card score over time. We’ll discuss how to do this later in this article. For now, it is important to understand how a bad credit score will affect you.

A bad credit score is not the end of the world, but individuals with a bad credit score will have a harder time being approved for credit cards, auto loans, personal loans, mortgage loans, and other types of loans. In addition, since people with a bad credit score pose a higher risk for defaulting on a loan, they are more likely to be charged extra fees and higher interest rates by a loan company. In general, if you have a bad credit score, you will end up spending more on loans due to higher interest rates and may find it difficult to be approved for loans in the first place.

How can Improve Your Credit Score?

Now that you know what a bad credit score is, you know that you’ll need to improve it if your credit score does fall into that category. Before you can make improvements, it is a good idea to get a detailed report of your credit rating. By Federal law, consumers have the right to receive their annual credit report from credit reporting agencies. However, these same agencies are not required to give you a credit score for free. The good news is that you can get an estimated credit score online by searching for a “free credit score calculator.”

In addition, you can order a free credit report once a year from different credit bureaus. The top three credit bureaus that most lenders use to access credit scores are TransUnion, Equifax, and Experian. You can request a credit report online, by phone, or by mail. Having these detailed credit reports on hand will give you a better idea of where you need to make improvements in order to increase your credit score. With time and changed habits, you will be able to boost your credit rating so that lending companies look upon you more favorably.

A few tips for improving your credit score include:

Pay your bills on time. Missing payments or paying past the due date will sink your credit score over time. Be sure to pay before the grace period ends. Even better, make it a habit to send your loan payments on or before the due date.

Avoid bankruptcy, collection accounts, and tax liens if possible. Bankruptcy will affect your credit score for up to 10 years. Unpaid tax liens will stay on your credit record indefinitely. Paid tax liens and collection accounts will remain on your credit report for seven years.

To re-establish your credit, consider asking someone close to you that has good credit rating to sign onto a credit card or small loan with you. Be sure to make all of your payments by the due date in order to boost your credit score.

Now that you know the answer to “what is a bad credit score?” and know what to do to give your credit score a boost, it’s just a matter of time and good habits before your credit score improves.

What Affects Your Credit Score

Most lenders use the credit score methods that were created by the Fair Isaac Corporation with additional guidance by the credit bureaus Equifax, TransUnion, and Experian. This credit score method, also called the FICO credit score, uses a credit score scale that ranges from 300 to 850. Other types of scales used by lending companies may run anywhere between 300 to 900.

On the FICO scale, any score that is 720 and up is considered excellent. A good credit score falls between 680 and 720. Credit scores between 640 and 680 are considered fair. Anything below 640 is considered poor.

Scoring Methods

What affects your credit score will depend on the lending guidelines of the loan company you are applying to. In addition to the credit score that lenders will receive from a credit bureau, such as TransUnion or Equifax, they may apply additional factors to decide whether or not to approve you for a loan, what interest rate to charge you, and what additional fees to apply if necessary.

To get an idea of how your credit score is determined, the following is a general breakdown of what factors are used to generate your score and how heavily each factor weighs in to your final credit rating:

Payment History – 35 percent. Your payment history has the most influence on your credit score. This part of the score is affected by your bill paying habits. In other words, factors such as how many bills were paid after the due date (and after the grace period), how many bills were sent for collection, and whether or not you’ve ever filed for bankruptcy (and how many times). All of these things go down on your credit report. The most recent transactions have the greatest affect on your credit score.

Outstanding Debt – 30 percent. The total amount of your outstanding debt will be factored into your credit score. In other words, the amount you owe on home, car, business or other loans will be added up. In addition, credit cards that are at their credit limits and the number of credit cards that are at their credit limits will also be factored in. For this reason, it is a good idea to pay off your credit cards whenever possible and to keep balances below 25 percent of your credit limit.

Length of Credit History – 15 percent. Your credit score will benefit from established credit (or the length of your credit history). The longer your credit history, the more information lenders will have about your payment history. This allows them to make a more accurate prediction of what your payment habits will be in the future.

Type of Credit – 10 percent. This part of your credit score is determined by the amount of experience you have with different types of loans. The more experience you have, the better for your credit score.

New Credit – 10 percent. Any new credit accounts that you open will negatively affect this part of your credit score for a short period of time. In addition, “hard inquiries” into your credit rating will also negatively affect this part of your score. However, multiple hard inquiries that are carried out within a short time frame will only count as one since most people shop around for loans before making a final decision. “Soft inquiries,” which are inquiries that you perform yourself to determine your credit score, will not affect your score at all.

Examine Your Credit Reports

Now that you know what affects your credit score, you should also realize that credit reports are not always accurate. While credit bureaus generate credit reports based on data they receive from creditors, they do not verify this information. It is up to the consumer to review their own credit reports to ensure accuracy. While this may seem like a hassle, it’s the way things are at the moment and it is important to ensure that your credit report is a true reflection of your credit history. Not only is inspecting your credit report a good way to detect any errors, doing so will also help you to determine the best methods for improving your overall credit score so that you can increase your chances of being approved for loans, will reduce your interest rates, and will reduce the amount of extra fees applied to loans.

Most people have never heard about individuals with a perfect credit score. Craig Watts, spokesman for FICO, said, “They tend to be more conservative and a little older. We don’t get too many of them in our forums. They aren’t the type of people who stand up on a bus and tell everyone they scored an 850.”

The Benefits of a Perfect Credit Score

Having a perfect credit score has its advantages. Benefits include instant approval for just about any type of loan, the lowest annual percentage rates possible, and entry into the most beneficial credit card rewards programs.

Is a Perfect Credit Score Necessary to Attain the Most Benefits?

It will probably come as a relief to most people that a perfect credit score is not necessary to take advantage of superb benefits. In general, scores that are above 720 are considered excellent, and individuals with scores above 760 are likely to receive the same benefits as those with perfect credit scores.

Reaching the Top Tier Credit Score

While you don’t have to have a perfect credit score of 850 to achieve the best benefits, even achieving above 760 isn’t an easy task. In other words, simply having a low debt-to-credit ratio and positive payment history are not the only things you will need reach that top tier. If you’d like to work toward attaining a top tier credit score, it is imperative to consider the following:

Maintain a Clean Record. Those with a perfect credit score do not have any history of bankruptcy, liens, settlements, or bank repossessions. Their records are 100 percent clean. For some people, it is too late to attempt to achieve a perfect credit score. However, a credit score can be improved over time by avoiding such things as tax liens, bankruptcy, and settlements.

Work Toward a Long and Positive Payment History. Individuals with a perfect credit score always pay their bills on time. In fact, 35 percent of your credit score is determined by your payment history. To improve this part of your credit score, always pay your bills on or before their due date. Never let bills go beyond the grace period set up by the lending company.

Age of Credit Accounts. The reason why most of the U.S. citizens that have a perfect credit score are older is because they have had more time to develop a positive credit report. A person who is 30 and has similar credit habits as a person who is 60 is less likely to have as high a credit rating as the older individual. That said, it is important to realize that credit scores are not based on a person’s age but on the age of their oldest credit account. This is why it is a good idea to keep older credit accounts open so that you have a longer credit history.

Credit Account Diversity. Top tier credit scorers have a more diverse set of accounts. This doesn’t mean that they have 10 credit cards from different companies. In order to create account diversity, you’ll need to maintain credit accounts that fall into two categories—installment accounts and revolving accounts. Installment accounts may include car loans or mortgages and require individuals to pay a specified amount every month until the balance is paid off completely. Revolving accounts include credit card accounts and have fluctuating balances.

Credit Inquiries. Newly opened credit accounts affect 10 percent of your credit score. Every time you apply for a credit account, an inquiry is made into your credit score. The more hard inquiries (inquiries made by lending companies) into your credit report, the lower your credit score will be. While a number of these inquiries over time will not affect your overall credit report too much, many inquiries made over a short period of time may keep you out of the top tier credit score. However, if you are shopping for a house for instance, all mortgage inquiries that are made within a 30-day timeframe will only count as one inquiry.

Re-establishing Your Credit Score

Whether you already have a high credit score and would like to make further improvements, or you have a poor credit score and need to give it a boost, it is possible to do so over time. Get your credit report for detailed information so that you know what aspects of your credit rating you need to improve.

Understanding the FICO Scoring System

Now that you know what the highest credit score possible is, you’re probably wondering how your credit score is determined. Becoming familiar with the FICO scoring system is a smart way to know how to make drastic improvements to your credit score. There are several five basic factors that affect a credit report—your payment history, amounts owed, length of credit history, new credit, and types of credit used. Each factor is weighed differently. In addition, lenders may have their own stipulations that will affect whether or not they approve you for a loan and what the details of your loan will be.

To get started on making improvements to your credit score, let’s take a more in-depth look into the five factors that affect your credit score. Keep in mind that the significance of each factor changed slightly in 2009 due to changing economic factors. The following information will give you a general idea of how the FICO scoring system works.

• Payment History

Consumers who are often late with making payments to lenders will have a lower credit score. On the complete opposite side of the spectrum, those with the highest credit score possible have a clean credit record and make all payments on or before the due date. Other factors that affect your payment history include any liens, wage attachments, history of bankruptcy, collection items, etc. The amount that’s due on delinquent accounts and how long ago such things as bankruptcy occurred will be taken into account. Your payment history makes up about 35 percent of your overall credit score.

• Amounts Owed

This portion of your credit rating compares the debt that you owe in comparison to your available balance. Keeping the amount you owe below 25 percent of your available balance will result in a higher credit score. It is a common belief that having one credit card with a large amount owed on it is better than having several credit cards with smaller amounts owed. This is not the case. No matter how many credit cards you have, it is important to keep the amount you owe as low as possible in order to improve your credit score.

While amounts owed accounted for 30 percent of a credit score prior to 2009, many credit scoring companies now place even heavier importance on the amount owed and less on your payment history.

• Length of Credit History

About 15 percent of your credit score depends on the length of your credit history. Consumers with the highest credit score possible are likely to have at least three credit cards (with an excellent payment history) that they’ve had for more than seven years. It is better for your credit report to keep credit card accounts open and pay them off over time than to close accounts. The time since the last activity on an account is also considered. Keep accounts open and make sure there is at least a small amount of activity on each account each month.

• New Credit

About 10 percent of your score will be determined by the number of accounts that you recently opened and inquiries made into your credit report. These things will negatively affect your credit rating. However, many inquiries into similar types of loans will be grouped together. For example, auto loan inquiries made within 15 days of each other will be grouped together as one. All mortgage inquires made within 30 days of each other will be grouped together as one.

• Types of Credit

To improve this aspect of your credit score, which accounts for about 10 percent of the overall score, you’ll need to maintain credit account variety. In other words, it is a good idea to have both installment loans and revolving accounts. Installment loans include mortgages or auto loans, and require consumers to pay a certain amount every month until the entire loan is paid off. Revolving accounts, such as credit cards, require consumers to pay a certain percentage of the amount due each month. This amount changes from month to month.

While it is not necessary to have the highest credit score possible, improving your score over time will have its benefits. These benefits include higher rate of approval from loan companies and lower interest rates.

Getting to the Highest Credit Score

If you credit score falls below 680—between 640 and 680 is fair and scores below 640 are poor—you may want to work on improving your rating. If your goal is to get the highest credit score possible and join the 1 percent of people in the U.S. that have a perfect credit score, you will need to pay attention to every detail of your credit habits. Again, it’s not necessary to hit a score of 850 in order to gain benefits such as increased approval for loans and very low interest rates. The following tips and suggestions will assist you in taking steps toward increasing your credit score:

Pay all of your bills by their due date. Sending in payments late or not at all is a sure way to cause your credit rating to plunge.

Avoid declaring bankruptcy. Bankruptcy will stay on your credit report for up to 10 years.

Avoid tax liens and collection accounts. Paid tax liens and collections accounts will stay on your credit report for seven years. Unpaid tax liens will have an indefinite negative impact on your credit rating.

Examine your credit reports. Do this by sending in for your credit report from a major credit bureau such as Experian, TransUnion, or Equifax. Check the reports for errors that may have a negative impact on your rating (errors are more common than most people realize). In addition, use the information in the report to learn what areas of your credit habits need improvement.

Diversify your accounts with both closed-ended installment accounts such as mortgages and auto loans as well as revolving accounts such as credit card accounts. Top tier credit scorers tend to have a balance of both types of accounts.

Minimize hard inquiries into your credit report. If you plan on applying for a loan for a house, car or other large investment, hold off on getting new credit cards. Every time you open a new loan account, your credit rating is reduced for a short period of time.

If you do plan on applying for a large loan such as a mortgage or car, make sure that you put in all of your loan applications within a short time period. Multiple credit inquiries by loan companies will reduce your credit rating significantly if the applications are spread out over many months time. However, applications for loans such as mortgages will be lumped together into one if they are all submitted within 30 days of each other. Auto loans will need to be submitted within 15 days of each other to count as one inquiry.

Why Are Your Credit Reports Different Depending on the Credit Bureau You Received it From?

Credit bureaus use different calculations in creating credit reports. The top three credit bureaus—Experian, TransUnion, and Equifax—use slightly different criteria to determine your creditworthiness. Additionally, not all bureaus will necessarily have the same amount of information on you. Your creditors may not report your credit history to all three of these bureaus.

What is a FICO Score?

FICO stands for the Fair Issac Corporation, which developed the most commonly used credit scoring system called the “FICO score.” By visiting myFICO.com online, you can order your FICO score. Obtaining your credit score in any other way will not give you a precise FICO score. However, you can also figure out your estimated credit score for free using online resources.

You may have heard of other credit scoring systems such as BEACON or EMPIRICA. The BEACON scoring system was developed and is used by the credit bureau Equifax. The EMPERICA scoring system was developed and is used by TransUnion. Experian uses the scoring system known as PLUS.

Take Control of Your Credit Rating

Now that you have a better understanding of what the highest credit score is, what is considered a lower credit score, and how credit scores are determined, you can set a credit score goal for yourself and begin to make improvements right away. Simply finding a way to remember to pay your bills on time and managing your credit habits better will have a significant impact on your overall credit score. With time and effort, you will be able to take advantage of lower interest rates and an improved chance of being approved for loans.

Your credit score can have a huge impact on whether or not you are approved for a loan. If you are approved for a loan, your interest rates will be determined by your credit score. In general, the lower your credit score, the higher your interest rate. Additional fees may apply for consumers with low credit scores. This is because individuals with low credit ratings are considered higher risk and more likely to default on a loan. Boosting your credit score may just save you a considerable amount of money in the long run on such things as home mortgages, business loans, auto loans, credit cards, and more. Most of us depend on credit for a variety of reasons in our life. For this reason, taking the time to figure out how to improve a credit score is well worth the effort.

How is Your Credit Score Determined?

Your credit report is essentially a history of your credit habits. Credit reports contain such information as how you’ve paid your bills, how much debt you owe in relation to your credit line, what types of credit you have, whether or not you have any tax liens or have ever declared bankruptcy, and any other factors that affect your level of creditworthiness. All of this information is put into a formula that results in your credit score. Some factors are weighted more significantly than others. For example, your payment history is weighed more heavily than the types of credit you use.

How Lenders Use Your Average Credit Score

Your credit score gives lenders a quick and convenient way to determine whether or not to approve you for a loan. Each individual lending company may also have their own set of guidelines to determine whether to approve or reject a person for a loan.

These days, stores can offer customers instant credit by accessing your credit score with your permission. On that note, one tip for individuals who would like to improve their credit score is to not open credit accounts on the spur of the moment. One of the many keys to credit success is to only open accounts when necessary. Opening an account to save a few dollars on the day’s purchases at a department store, for example, is not worth it. This is because newly opened accounts reduce your credit score for a short period of time. That said, if you don’t plan on applying for a large loan such as a mortgage any time in the near future, then opening new credit accounts may not affect you much.

Accessing Your Credit Report is Your Right

Before 2001, consumers did not have access to their own credit reports. However, because of pressure from industry and consumer groups, and the U.S. Congress, individuals now have the right according to Federal law to access their personal credit report. To get your annual credit report, you will need to contact a reporting agency such as TransUnion or Experian. Credit reports may vary slightly depending on who you order your report from.

Before taking steps to improve your credit score, it is important to review your credit report for mistakes. It usually comes as a surprise to consumers that mistakes are often found in credit reports, even those reports generated by the top credit bureaus. Financial advisors recommend that consumers examine their credit reports carefully. It has been said that nearly every credit report contains at least one error. These errors can have a significant impact on your overall credit score. This is why it’s so important to correct negative data.

How to Dispute Data on Your Credit Report

Every credit report that you order should come with a dispute form. You will need to identify each error and then clearly state why the data is incorrect. It is a good idea to make a copy of your credit report and then circle any errors on that copy. Then, send this copy in along with the dispute form. Be sure to keep records and copies of any documents that you’ve sent to the credit bureau. By law, the credit bureau must investigate disputes and verify or deny them within 30 days of receiving your claim.

Once you have reviewed your credit report and have reported incorrect data—which you should do every year—you can begin to make positive changes to improve your average credit score based on the information found in your report. Over time, with improved credit habits, you may be able to dramatically boost your credit score.

However, there are some banks that can override the electronic system and even ignore the credit score altogether. These banks are becoming rarer as it is much cheaper not to have traditional loan officers on the payroll. However, the banks also realize that there are some perfectly valid explanations why someone could have a poor credit score, but be an excellent credit risk.

An example of this is a health issue, loss of job, or debt that you did not know about. I recently worked with a client that made a mistake on their taxes over 7 years ago. The IRS had the wrong address for him and eventually they put a tax lien on a relatively small amount of money. As soon as the tax lien was issued, the customer learned about it on his credit score and quickly paid for it. Unfortunately, tax liens are nearly impossible to have removed from a credit report. My client had excellent credit before the tax lien, and excellent credit since. However, the lien dropped his credit score by over 150 points!

If he was to apply for a mortgage, credit card or even a car loan he would not have a hard time getting approved. Even if he was approved, the interest rates would be out of line for someone that has such a good history. This particular client used my services to find banks that will work with him and overlook the single issue. This route was cheaper than going after the tax lien directly in court and in the grand scheme of things he is still able to get the loans he requires.

The point of the story is that sometimes you can end up with a bad credit score that is not entirely your fault. When this happens the key is to either fight to have the bad items removed, or research banks and other lenders that have the ability to look past credit scores when they make their credit decisions.