– 6 ways to understand and improve your money’s most important number –

Late-night TV and Internet ad banners feature a confused customer trying to understand his or her credit score, intended to rouse viewers’ curiosity about their own credit. Most of these advertisers make money by charging people to provide their credit score – but any consumer can obtain and understand their scores for free, said Andrew Housser, co-CEO of Bills.com.

“The terms ‘credit score,’ ‘credit rating’ and ‘FICO score’ are often used interchangeably,” said Housser. “This is basically correct. FICO simply refers to Fair Isaac Corporation, the company that originally developed a ‘score’ method of rating consumers’ credit histories.”

The three major credit reporting agencies – Equifax, Experian and TransUnion – each report their own credit scores, based on running information they have collected through the Fair Isaac scoring formula, Housser said. He explained that credit scores are calculated using mathematical methods. They incorporate credit history, amount of credit available and used, number of late and on-time payments, and whether any payments due are in default.

“Different creditors use different factors to rate overall credit worthiness,” Housser said. “Basically, it comes down to whether you pay, and pay on time, and whether creditors have reason to believe you might be overextending yourself. The more responsible you are with credit, the better your score will be.”

Credit scores range from 300 to 850. Higher numbers indicate better credit – or a greater likelihood of repaying debt. The median U.S. credit score is about 725. A score below 680 usually results in a borrower being charged a higher interest rate or denied credit.

How to improve a credit score
A good credit score can significantly impact a consumer’s ability to borrow money. Credit scores also can affect consumers’ ability to rent an apartment, lease a car or even get a job. “But you can take steps to improve your credit score,” Housser said.

1. Know the score. The first step in good credit is monitoring credit reports. A credit score actually involves three scores from the three agencies listed above. All three are required to provide a credit report. Consumers can access credit reports once each year for free at www.annualcreditreport.com.

2. Correct mistakes. If the report shows any inaccuracies, correct them. Under the Fair Credit Reporting Act, the credit bureaus must investigate any disputed items and remove them from the credit report if they cannot be verified. “If you disagree with the results of a credit bureau’s investigation, you can ask the bureau to include a statement of dispute in your file and your future reports,” explained Housser. “Do remember to keep copies of all correspondence.”

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3. Pay your bills on time. On-time payments are very important to good credit. Paying bills on time for as little as one month can raise a modest credit score by 20 points. 

4. No new debt. “If you are preparing to apply for a mortgage, auto loan or other significant debt, do not open any new accounts for six months ahead of time,” Housser suggested. Every new inquiry to a credit report affects the credit score. “However, don’t let this discourage you from shopping around for the best loan you can obtain,” Housser added. “The credit bureaus take this into account and will not count multiple inquiries within a short period of time against you.”

5. Get some space. Leave some room on credit cards. Do not “max out” accounts or charge up to the credit limit. If possible, keep one or two cards open with low or no balances. This will help the “credit available” aspect of the credit score. Also, avoid making substantial charges on cards one to two months before applying for a mortgage, even if the balance will later be paid in full. “If it happens that a creditor reports your information just before you pay your bill, it may appear as though you have maxed out your credit lines,” said Housser.

6. Do use credit. Don’t try to protect the credit score by not borrowing anything. The credit agencies rely on past payment history to gauge how borrowers will do in the future. “If you don’t borrow, they have no information to rely on,” Housser said. A student loan, car loan or small credit card helps build a credit history.

For more information about how to build and protect a credit score, read some of the available online material on the subject, such as the library of articles at www.bills.com/credit.
Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at http://www.bills.com/blog. Since 2002, Bills.com has served more than 30,000 customers nationwide while managing more than $500 million in consumer debt. Bills.com is a division of Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young’s Entrepreneur of the Year Awards.