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Six steps to better credit scores

By sbup Staff
Banks are tightening their lending restrictions -- and in the process, once credit-worthy borrowers are finding out that their credit scores no longer guarantee them the best interest rates on loans. If you're considering borrowing money in the near future, the sooner you get to work boosting your credit, the better. Here are six steps to get you started.

1. Fix any errors on your credit reports: You can download one free copy of your credit report per year from each credit bureau -- TransUnion, Experian and Equifax -- at www.AnnualCreditReport.com. Check your reports for any errors. If you find one, submit a dispute online to the bureau that listed the error. It has 30 days to provide an answer. 

2. Buy your credit score: Experian offers a few different products that let you view online or print out your credit report and score (see their offerings here). If you are above the threshold for good credit -- 720 in low risk areas and 740 in regions where home prices have fallen dramatically -- then you don't need to worry about boosting your score. "It's pretty hard to get movement in the upper numbers," says Gail Cunningham, vice president of public relations at the National Foundation for Credit Counseling. "But if you're borderline or below, then you should try everything you can to get your score up to where you qualify for the best rates."

3. Automate your bill payments: The most important element in the credit scoring model is based on how you pay your bills. "A lender doesn't want to see that you've made a short payment, a late payment or skipped a payment altogether," says Cunningham. "Financial hiccups like those can stay on your report for seven years, and a single late payment can ding your credit by 100 points." Setting up automatic payments can ensure you won't miss a payment because you were away on vacation or misplaced a bill due to a messy desk.

4. Lower your balances: Lenders want to see a debt-to-credit ratio below 30%. That means if you have $10,000 of available credit on your credit cards, you should keep your balances below $3,000 at all times. If you regularly charge over the 30% mark but pay off your balances each month, be sure to make your payments before applying for a new loan.  Use sbup’s credit card debt calculator to see how long it will take to pay down your balances.

5. Stick with existing credit: "Lenders get nervous when you are actively looking for new credit," says Cunningham. "Don't try to get too much new credit at once: Go slowly and start small." You can still shop around for the best mortgage rates -- just don't apply for a credit card and a car loan at the same time as a mortgage.

6. Avoid credit cleaning companies: Anything that can be legally done to improve your credit, you can do yourself. Companies that guarantee an improvement in your score will charge you money for steps you can take for free. Some even advocate illegal practices, such as piggybacking on someone else's good credit.

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