How to Build and Improve Your Credit Score

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Whether you are buying a new car, a new house, or opening a new credit card, your credit score tells potential lenders how much of a risk you pose to them. Fortunately, if you have bad credit you can make changes and improve your situation. Much like building your biceps, making these changes and building your credit score is hard work; the results don't happen overnight. Below is the information you need to know how your credit score is calculated and tips for improving your score.

How Your Credit Score Calculated

Your credit score, often called FICO score after the Fair Isaac Corporation which calculates it, is comprised of a formula of your payment history, amounts owed, length of credit, new credit, and type of credit. You have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax. You need to find out what your credit score is before determining whether or not you should put any effort into building your score. A free annual credit report is available to you--if you know where to go. Although the jingles may be memorable, you won't find your free credit report on any of the credit report websites or businesses advertised. Under the Free File Disclosure Rule of the Fair and Accurate Credit Transactions Act, each of the nationwide consumer reporting companies -- Equifax, Experian, and TransUnion -- is required to provide you with a free copy of your credit report once every 12 months, if you ask for it. To get your credit report from one of the three nationwide consumer reporting companies, you can go to one website: annualcreditreport.com and follow the onscreen prompts. This is the correct way to go about getting your free annual credit report.

Higher Credit Scores

The higher your score, the better the interest rates you will receive on loans and the higher the credit limit you will be granted. Credit scores range from 300 to 850. If you are lucky enough to discover that your score is above a 760, you're golden. Improving your score from 760 to 800 won't get you better terms. This is why it's important to figure out what number you are at before you dedicate yourself to improving your score. Increasing your score from 699 to over 700 may do wonders for getting you access to the best interest rates whereas a push from 749 to over 750 will not see significant impact because you are already getting the best terms.

Generally, a low credit score is considered to be between 500 and 549. These days, a credit score under 700 is likely to be regarded as a moderate credit risk as banks are taking on less risk due to the credit crunch. You almost have to have a great score these days to get a loan. This doesn't necessarily mean you won't get that car loan or mortgage if you have a below average score. Each lender has different risk factors they may look at to determine if you are an acceptable risk. Factors such as a new job with increased income and employment history in general may come into play.

Tips for Raising your Credit Score

If you already have a string of negative items on your credit reports, one more won't have a big impact, (Ironically, late or missed payments will hurt good scores more than bad one), but this still something you want to avoid if you're going to begin improving your score. Here are some tips for improving your score:

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