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Credit scores have been developed to aid banks and lenders in making their decision towards a loan application. It helps gauge quickly if the loan applicant is capable of repaying the amount that is going to be lent to him or her. It is therefore a representation of one’s credit worthiness.

The first to develop a scoring model was Fair Isaac Company abbreviated as FICO. The FICO score became a standard in the industry.  I know I have stated it a million times throughout the site, but here it is a again. The formula considers five aspects. They are Payment History, Total Debt Amount, Length of Credit History, Credits Used, and Types of Credits Availed.

When these factors are used in the formula, a credit score is drawn. Under the FICO scoring range, the scores may be around 300-850. If one’s score is around the 700 range, you are perceived by banks as a good borrower. Go beyond that and banks will never turn down your loan plus you’ll get great interest rates from them.  The risky applicants are those that have scores below 500. There will be difficulty in getting loans approved if your scores are interpreted as bad. This is the main reason why people of modest earning must sustain a good credit score or rebuild it if it’s in a bad condition.

And here are the ways to start the recovery process. First, paying on time is a good habit. A tardy or a default on your card gets reported to the credit bureau and it will hurt your score.

Second, when it comes to paying bills you may use either cash or your credit card. Rule of thumb, use cash first if that’s available. Use a credit card only during emergency or if your cash is insufficient. When it comes to paying your credit card bill, never use the same card. Check which card has the least APR to lessen the damage just in case you’d run into the possibility of defaulting in your payment.  If you’ve been a good payer with your credit card for so long, it would be wise to check with your bank if they have a lower APR promotion available that you could switch your card under. This will help a lot at the time when you aren’t able to fully pay your balance. At least the new rate becomes the basis for computing your interest.  Remember the web of credit card debt is so sticky that when you fall trap in it, the means of escape is going to be steep especially if your card has been given a high APR.

Another instrument to improve your credit score is to do a debt clearance. This is a good way to save oneself from a mounting credit card debt. You could transfer all debts to an account that is offering the least APR at a longer term. Debt repayment would be convenient for you and once your debt is cleared, you’d notice a recovery of your credit score. Never close accounts all at once. That’s not the solution and that’s not debt clearance.

Lastly, create a financial map and see where all your earnings go. Ascertain that after expenses and spending, there is still some extra cash left for your savings. Most of the trouble with finances happens because of bad spending habits. So if your credit score is bad then that is indicative of a poor fiscal management. It would be timely to reassess your spending habits to guarantee that moving forward no default would occur.   It all takes a good financial discipline to rehabilitate an awful score.

The three major credit bureaus maintain records of all of the citizens’ financial payment history. These credit bureaus determine your credit score by using FICO (Fair Isaac Corporation) scoring systems. These credit reporting bureau sells the information that they collect (consumer report) to creditors so that these creditors can be guided on whether they can offer you credit or not. The Fair Credit Reporting Act (FCRA) regulates the activities of the three credit bureaus.

These three major credit bureaus collect the information independently so your credit reports may be different from one credit bureau to another.  Lenders do often request reports from each of these agencies so that they can get your complete financial profile. You can file for a True Credit 3-in-1 Credit Report which allows you to see the all the three credit reports from these respective bureaus. What you see from this report is your creditworthiness which is the same thing that your potential lender sees.

You have no cause for worry if you have a good credit report. You may be able to obtain credits to purchase goods and services, apply for a home mortgage loan, and apply for insurance and employment. However, the same information from these credit bureaus may be used against you. Check your credit reports annually so that you will know what personal information was given to your creditors.

Hard inquiry is when the lender makes an inquiry to one or the three major credit bureaus regarding all the information of your credit history. The information that the lender gets will influence his decision if they will lend you or not. Soft inquiry is when you do your own inquiry regarding your own credit history. If there are many hard inquiries done on your behalf this negatively affects your credit score so apply for a credit loan in moderation.

The contact details of these three major credit bureaus are:

1. Equifax: 800-685-1111 (general) or 800-525-6285 (fraud); P.O. Box 740241, Atlanta, GA 30374; www.equifax.com
2. Experian: 888-397-3742 (general and fraud); PO Box 2002, Allen, TX 75013, www.experian.com.
3. TransUnion: 800-888-4213 (general) or 800-680-7289 (fraud); P.O. Box 2000, Chester, PA 19022; www.transunion.com

Let us discuss about each of these three credit bureaus:

• Equifax is the oldest credit bureau in the United States, they started 1899. They manage the credit histories of individual consumers and businesses. Equifax offers security freeze on reports which prevents inquiries from being made for a certain period of time.
• Experian began credit reporting in the United States in 1996. They collect data from lenders, telecommunications and motor vehicle departments. Experian also offers fraud protection services and they operate in more than 65 countries worldwide.
• TransUnion began in 1968 but started as parent company for a rail car leasing operation. They only begun credit reporting services in 1969 when they purchase Credit Bureau of Cook County. They begun full coverage of the United States in 1988. TransUnion acquired TrueCredit.com in 2002 which offers report monitoring, fraud and identity theft services directly to consumers. TransUnion operates in 24 countries aside from the United States.

Not everybody who says that they will help you will really do. People who are claiming to help you with your credit have their own personal agendas so it would be wise not to listen to them if they say that you should dispute everything on your credit report. At first this would look like sound advice but later on you will realize that if you do this you will do more harm than good to your future credit. You will be surprise on how many enemies you will gain in the credit world by a simple action as disputing everything.

Credit report disputes are one of the techniques that you can employ to repair your credit. The dispute is accomplished by submitting a written dispute to the credit bureaus online or via mail. The credit bureau is required by law to investigate your allegations and remove the disputed items that they may find as inaccurate or unverifiable.

Too much of anything is bad is a wise saying indeed. Your actions can backfire if you make too many disputes or if you dispute almost everything on your credit report. Here are some reasons why it is not wise to dispute everything:

• Too many disputes may be considered frivolous (silly; not worth to be given attention; inconsequential) as such is the case the law allows the credit bureaus to refuse to process your dispute(s). Any exception to the rule is when you are a victim of identity theft since this is really a justifiable reason. Although you must provide proper documentation on said issue showing that the accounts that are opened under your name is really not yours.
• If everything on your credit report was removed this may look like a clean slate but this is far from the truth. If you have nothing on your credit report then you do not have a credit score.  For FICO’s purpose you need to have at least one account that has been open for around six months. You cannot get a credit card without a credit score that is what it all boils down to.

Having two or three disputes at a time is a good idea. That way the credit bureaus will not think your overdoing things. Always send copies of the documents that you use as evidence for your dispute but keep the original ones in your possession. Sending these documents through certified mail with a return receipt request will give you the proof that you need to file a complaint.

If you find any trouble with the credit bureau you can file your dispute with the Federal Trade Commission. The positive and helpful thing that you can do is to focus all of your time and energy towards working to get a better credit score by simply paying on time and reducing your debts.

Many consumers have a misguided notion that once they close their credit cards their debts go away. There is no truth found in this concept but on the other hand a delinquent credit card debt may hurt your credit score. There are some credit cards that you must not close.

• Do not close a credit card that still has an outstanding balance. When you initiate this move your total available credit is reduce to zero. Keep this in mind the amount of debt that you have is 30% of your credit score so a maxed out credit card has a negative effect on your credit score.
• Closing out your present credit card will lower your total available credit which in turn will increase your credit utilization. Credit utilization is the ratio of your credit card balance to your credit limit. To find out how much of credit utilization you have simply divide your credit card balance by your credit limit then multiply this by 100. Having low credit utilization will be good for you because this shows that you are only using a small amount from the credit that was loaned to you.

The FICO (Fair Isaac Corp.) score model looks at your credit utilization in two parts. It scores your credit utilization for each credit card separately. Then it calculates your credit card balances comparing them to your total credit limit. To keep low credit utilization you need to decrease your credit card balance or increase your credit limits so that your credit score will increase.

• Keeping a set of different credit cards will add to your credit score points since creditors will think that you know how to handle the use of your credit cards.
• Keep your oldest credit card account. Lenders often see borrowers with short credit histories as a high risk borrower than those with longer credit histories.
• Keep your credit card who offers the best terms. If your credit card offers a low interest rate with no annual fee and have additional benefits then keep it. A credit card that charges you for less when making purchases is way much better than the credit cards that charge higher fees.

It is a wise move to decide closing a newer credit card when you no longer need this as long as this card does not have an outstanding balance. The right way to close your credit card is by sending a written request to your credit card issuer. For your personal records and for future reference purpose the credit card issuer should answer back with a written confirmation that your credit card account is closed in good standing. If you are a victim of identity theft and fraud your creditors will recommend that you close your credit card to avoid the damage that the credit card may give you. Choose wisely on what credit cards you need to close as well as which one to keep. Make sure that your credit score will not be affected in any way.

Credit scores are determined by various factors but the most important thing to consider is the percentage of available credit because the higher this percentage is, the higher your credit score will be. Credit scores are affected by new credit card accounts since the scoring formula or FICO (Fair Isaac Corp.)Score considers the opening of these new accounts as an increase in your personal debt which in turn increases the lender’s risk when he approves for a new loan coming from you. Opening a new credit card usually causes a minimal drop on your credit score but luckily the effect is short-lived. If you make a consistent on the dot payments and do not max out on your available credit then your credit score soon climbs up.

For example you have two credit cards both having an outstanding debt of $5,000 each so your total debt amount to $10,000 in credit card debt. Let us also say that both of these credit cards have maxed out. Since you have no available credit your percentage is zero.

Let’s say you decided to open a third new credit card with a $10,000 limit and you transferred both of your previous card balances into this one, as long as you leave the two previous cards open, you will have three credit cards with a total credit limit of $20,000($5,000 on each of your previous cards plus $10,000 on the new one) because of your $10,000 debt you have a total of another $10,000 in available credit so you have 50% credit available. The change from having 0% to 50% could raise your credit score by 100 points or more. A good advice would be that do not close your old neither credit cards nor use them.

Before you make the decision to do credit card balance transfers you need to follow some simple rules:

• Do not let your debt pile up. If you become complacent and maxed out on your new credit card your financial situation will go from bad to worse.
• Look out for high transfer fees. Some credit card companies offer a 3% all-at once transfer fees and sometimes they charge no transfer fees at all. Read the fine print before you sign up for your new card. Better ask your credit card company representative if there are balance transfers fees involve or none at all.
• Do not apply for a new card when you want to improve your credit score. Typically you will recover on your credit score after six months.
• Your credit score is determined by your overall credit profile and not the number of credit cards that you presently have.

Your main goal should be to have credit card balances that are down to zero. Once you have adapted this wise habit of taking better control of your finances better stick to it if want not to have worries on any new credit card interest rates ever again.