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Credit Scores, free reports, and helpful credit information

Updated: May 4th / 2011

Credit is a popular subject. It is something that most people deal with on a daily basis. In this article, we explain what credit is, how it works, how to read a credit report and information on how to improve your credit score.

What is a credit score?

A credit score is a figure used by creditors as an indicator of how prone you are to repay your loans.

Who uses credit scores?

Credit scoring is used by creditors, insurers, landlords, employers, utility companies, and others to determine your credit behavior.

How is a credit score calculated?

There are various credit scoring formulas used for evaluation purposes. Each credit scoring system is accurate for its own use. Credit reports that are available online use a formula created for consumers which approximates these various algorithms. Credit scores differ from one formula to the next, but they are generally similar. A standard credit scoring algorithm uses several components from your credit profile:

Payment history: A consistent record of on time payments help your credit score. Outstanding debt: Try to keep balances below 30 percent of available credit. Credit account history: Established credit history is important.Recent inquiries – Lenders checking into your credit create a hard inquiry to your credit file. Apply for new credit and loans in moderation. Types of credit – A good credit profile has a balanced mix of credit accounts and loans.

What is a good credit score?

A score above 630-650 is seen by most lenders as a creditable score. Scores under 630-650 may create problems when trying to apply for new credit.

How can I improve my credit score?

Pay your bills on time: Late payments and collections have negative effects on your score.

Accuracy: Check your credit report regularly, if you find an inaccuracy on your credit profile contacts the creditor associated with that account or the credit reporting agencies to correct it promptly.

Magic Formula: Keep your balances between 30% – 50% of your available credit.

Time: The longer you have positive credit, the higher your score.

Avoid Excess Inquiries: A large number of inquiries into your credit report over a short period of time is a flag to potential lenders that you may be taking on excessive debts.

Tips to Remember:

Long running, positive credit is important. If you are consolidating your debt, do not close your oldest loans or credit card balances completely.

Keep your debt to income ratio between below 10% -30%. Your debt payments should not exceed 30% of your monthly income. So if your monthly income is $3000, your total payments to lenders shouldn’t be over $900. 10% -20% is a better ratio to shoot for.

Before you consolidate, miss a payment or file bankruptcy:

Did you know that you can ask lenders (especially credit card agencies) to lower your interest? Call your lenders and ask:

“I have been offered to do a balance transfer by another credit agency, this would lower my interest on my balance with you by a substantial amount. But, I have always appreciated your quality of service, so I was wondering if instead of transferring my balance, could you offer me a lower rate?”

You’d be surprised how often this works.

You don’t need to buy a credit report if you are a US resident

Starting in 2004- 2005, the US government passed a law which entitles all residents of the United States the ability to obtain a free credit report. Depending on where you live you might be able to get your free credit report now.

Update 2011: The Fed Gov has made it super easy for get your free credit report from

From the Federal Trade Commission:

Q: How do I order my free report?

A: The three nationwide consumer reporting companies have set up one central website, toll-free telephone number, and mailing address through which you can order your free annual report. To order, click on, call 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. The form is on the back of this brochure; or you can print it from

Do not contact the three nationwide consumer reporting companies individually. They are only providing free annual credit reports through, 877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order from only one or two. The law allows you to order one free copy from each of the nationwide consumer reporting companies every 12 months.

For more info see the the link Your Access to Free Credit Reports on the Federal Trade Commission website.

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