8 steps to great credit

Lenders are more likely to lend you money and charge you a lower rate of interest if your credit history and score are good. In addition, your report may be used by insurance companies to determine your policy rate, and by potential employers as a gauge of your character (in states where it's not illegal to do so). It's in your best interest to build the best credit rating you can by following these steps.

1. Establish a credit history.

In order to have the best credit rating possible, you must create a track record. If you currently don't have any credit history, you may want to consider applying for a gasoline company credit card. Not only are these usually easy to obtain, but gas cards can be a great way to charge regular small purchases each month without being tempted to overspend.

2. Pay your bills on time.

Late payments can quickly wreck a respectable credit score, and they're easily avoidable. Your best bet for ensuring timely payment each month is to arrange for your regular bills to be paid via direct debit from your bank account. If you do this, however, take care you maintain a sufficient bank balance to cover them so you don't end up getting hit with charges for having insufficient funds. If you're not good about mailing things, pay bills online (this is almost always possible with PayPal or a debit card).

3. Review your credit reports regularly. You can request a free credit report from each of the three bureaus (Experian, Equifax and TransUnion) once a year (go to www.annualcreditreport.com) and you can purchase your credit scores for a nominal fee. You can also request your free credit report and score through LendingTree®. It's truly free -- unlike other sites, you won't be asked for your credit card number. Review your files at all three bureaus, and if you find mistakes or missing information, contact the bureau to resolve the issue. Instructions for reporting errors are on each bureau's Web site.

4. Reduce your debt.
One of the biggest factors in your credit score is your credit utilization ratio, which is the amount of credit you're using divided by the total amount of credit available to you. If you have three credit cards with $2,000 limits, your total available credit is $6,000. If you've put $3,000 in purchases on your cards, your utilization is $3,000 / $6,000, which is .50 or 50 percent. For the best scores, your utilization should be 30 percent or less. You can decrease your utilization by paying down debts, increasing your amount of credit (only if you're disciplined enough to leave it alone), or both.

5. Make sure lenders report your high credit limits.
Here's a tip that few people know about: Some credit card issuers do not report your high credit limit to the bureaus, so your account may appear to be maxed out even when it's not. If they don't, FICO uses the highest balance of the account as the high credit limit, which can be really inaccurate. For example, if your card balance is $1,200 and your limit is $12,000, you're at a very healthy 10 percent ratio, but if your limit is not reported, your score won't reflect this. Correcting the problem -- by asking credit card companies to report your limit -- may improve your score considerably.

6. Confirm your good credit history has been reported.
When you check your credit report, you may find there's no record of a loan you successfully paid off or a credit account that you've kept current. If so, ask the lender to report this positive history to the credit bureaus or send a letter to the bureaus yourself, along with copies of the statements showing you've paid on time.

7. Don't apply for, or cancel, accounts you don't need.
If your credit report shows you've applied for a lot of different kinds of credit in a short period of time, your credit score may drop, especially if you have a short credit history or few existing accounts. (However, multiple inquiries within 30 days for home and auto loans are counted only once.) That's why it's usually a bad idea to sign up for cards you're not likely to use. If you have already opened a number of accounts, however, don't rush to cancel them. Closing accounts, especially ones you've held for a long time, will reduce your available credit and may shorten your credit history, which can lead to a lower score.

8. Monitor your credit regularly.
If you're actively trying to improve your credit, it's a good idea to track it regularly. You can pull a free report from each bureau once a year through www.annualcreditreport.com, and by staggering those requests you can see a new report every four months. In addition, you can check your credit report and score for free any time through LendingTree (it's updated monthly) and see your progress as your VantageScore improves over time.

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