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Take Charge of Your Credit

By Ron Mead

If bad credit is holding you back, you can start nursing your ailing credit record back to health today with a few strategic moves. We've all made our financial mistakes. Sometimes it takes a mistake to teach ourselves a lesson. But a few financial mistakes do not spell the end of our financial lives.

If you don't understand how your credit score works, you will also be at the mercy of any company that tries to tell you how you can improve your score - on their terms and at their price.

In general, your credit score is a number that gives lenders an idea as to how much of a credit risk you are. Credit scores range from the low 300's to the highest score of 850. The higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates. Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there.

However, credit scores are a lot like GPAs or SAT scores from college days - while they provide a quick look into your financial background, they will be interpreted on an individual basis. Some lenders put more emphasis on credit scores than others. So let's take a look at what your score is and how it's calculated.

1. The amount you owe vs. your available credit. This is sometimes referred to as your "utilization rate". This is computed as a percentage with the amount you have as debt divided by the total amount available on that account. For example, if you had an account with a limit of $1000 and you had a balance of $300, your utilization rate would be 30%. Now, here is the important part ... you always want this figure to be 30% or less! That's very important. The closer you are to your credit limit, the more negative impact this will have on your credit score.

2. Your payment history. This includes all of your history for all of your activity, positive and negative. This includes late payments, bankruptcies, foreclosures, IRS liens, etc. The age of the activity will also play a factor with the more recent issues having more weight than older ones.

3. The length of time you have had your accounts ... the older, the better. So from this you can deduct you never want close an account, just get the balance below the 30% level. Also, only open new accounts if absolutely necessary.

4. The type of credit. It's best to have a variety of types of credit ... a mortgage, an installment loan and a couple of revolving accounts would be the ideal mix.

5. Credit inquiries. If you have too many inquiries in a short period of time, your score will be lowered. The systems used to compute your score view this as potentially risky, the thinking being you might positioning yourself for a spending spree. While this is a factor, it is not as important as some consumers think.

Your insurance company is likely to question you about your health, your lifestyle choices, i.e. do you smoke, are you overweight, because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on.

Similarly, credit bureaus and lenders also look at general patterns. Since people with too many debts tend not to have great rates of repayment, your credit score may suffer if you have too many debts. Understanding this can help you in two ways:

1) It will let you see that your credit score is not a personal reflection of how "good" or "bad" you are with money. Rather, it is a reflection of how well lenders and companies think you will repay your bills.

2) It will let you see that if you want to improve your credit score, you need to work on becoming the sort of debtor that studies have shown tend to repay their bills. Making a whole lot more money is not always the answer. You just need to be a reliable borrower! This realization alone should help make credit repair far less stressful!

Credit reports are put together by credit bureaus, which use information from their client companies. Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on that record. If you are late paying a bill, the clients notify the credit bureaus. Unpaid bills, overdue bills or other problems with credit count as "dings" on your credit report and affect your score.

Your age, sex, and income do not count towards your credit score. The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.

Your current credit situation wsn't created in a couple of weeks and it won't be corrected in a couple of weeks either ... no matter what those credit repair services tell you. Improving your credit score is not difficult, just time consuming, so ... pick out a couple of things to work on for a month or two and then pick out a couple of more. You will see your scores steadily improving over time.
Ron Mead, "The Probate Guy," holds a degree in Finance and has worked in the financial/real estate arena for the past 30 years. He is a well known real estate investor, specializing in Probate Real Estate for the past 13 years, and currently has the #1 rated Probate Real Estate course on the Internet. For additional information on Improving Your Credit Now, visit Ron at =>

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