Q: How can I improve my bad credit score?

A: Improving your bad credit score consists of two main ideas: (1) Removing negative information already on your credit report, and (2) Having a positive credit profile as you move forward in your financial life.

You may challenge any information on your credit report that you think is inaccurate, or, if you have no ethical qualms about it, you can challenge information you only wish were inaccurate. Don't go overboard with the latter, however. The credit-reporting agency is not going to believe that every single negative item on your credit report is false! Please see Can bad credit be erased? for more information on removing items from your credit report.

But the other half of improving your credit score, having a positive credit profile as you move forward, is even more important. That's because negative information is erased from your credit report after seven years (ten in the case of Chapter-7 bankruptcy), but positive information can stay indefinitely! Just what is positive information? Here is roughly how the major credit-reporting agencies determine your credit score:

1. 35% — punctuality of payment

2. 30% — the amount of debt, expressed as the ratio of current balances to total available credit

3. 15% — length of credit history

4. 10% — types of credit used

5. 10% — recent inquiries

So first off, pay all of your bills on time. If you're late with a single payment, it can really ding up your credit score.

Secondly, don't be afraid of taking on new credit -- just be wary of taking on new debt. The distinction can be thought of like this: Say yes to the credit card with a $1,000 limit, but never go over $200 on it. This will result in having 80% available credit, which is good for your credit score (#2).

Third, the older your longest-running current account, the better. So don't rush to pay down your college loans or your mortgage or car loan -- apply those payment to reducing your current credit-card balances instead. It will be much better for your credit report.

Fourth, the types of credit used are important. The three types are revolving (credit cards), installment (car loan, etc.), and "consumer finance" -- which is typically bad news, (payday loans). Taking out consumer-finance debt can actually hurt your credit score, even if you pay your bills on time!

Finally, recent inquiries account for 10% of your credit score -- so don't apply for credit you don't really want or need. Saving 10% at Toys 'R Us could end up costing you thousands of dollars in extra interest!

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