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Improve Your Credit Score With These Simple Secrets

A look at the credit scoring system and how you can make it work for you

En español | If you want to have a great credit rating, you have to know how the credit scoring system works.

See also: What factors affect your credit score?

FICO credit scores, which are the most widely used credit scores, range from 300 to 850 points. But the VantageScore is an important credit score, too. The VantageScore ranges from 501 to 990 points. (In case you haven't heard of it, the VantageScore was jointly developed by the three credit bureaus: Equifax, Experian and TransUnion).

When I recently checked my credit scores, I was happy to see that I continue to have a stellar credit rating: My FICO score was 798 and my VantageScore was a perfect 990.

I'm not telling you this to brag. On the contrary, I want you to see how it's possible to go from having awful credit to having a pristine credit record.

You see, back in my college days and well into my early 30s, I often mismanaged credit and debt. As a result, my credit was awful and I wound up in debt. Fast forward to 2011, and I have zero credit card debt and excellent credit, too.

debt challenge secrets to improve credit score row of credit cards

Photo by: Ian McKinnell/Getty Images

For starters, it's important to understand what criteria are used to calculate your credit scores. With the FICO system, here's how your credit is evaluated:

  • Payment history – 35 percent of your score
  • Amount of credit card debt owed – 30 percent
  • Length of credit history – 15 percent
  • Mix of credit – 10 percent
  • Inquiries or new credit – 10 percent

The VantageScore attributes slightly different weightings to these categories, but it, too, evaluates each of these areas.

Knowing this, it's clear to see that the single best way to boost your credit scores is to diligently pay your bills on time. This is vitally important because your payment track record constitutes the largest component of your credit scores: 35 percent.

If you do nothing else to your credit, but simply pay your bills on time for the next six to 12 months, you should see your credit scores begin to rise. You can also quickly improve your credit standing by:

  • reducing credit card debt
  • disputing mistakes in your credit report
  • adding positive information that may be missing to your credit files (such as the credit limits on your credit cards or data about loans you paid off)
  • actively monitoring your credit reports to spot identity theft and to learn how your own actions (such as paying down debt or opening new accounts) impact your credit scores; and
  • limiting inquiries by only applying for credit when it's necessary

Achieving a great credit rating and learning to master your credit may take some time, but probably not as long as you think, and it's definitely doable. By putting the above-mentioned tips into practice, you can increase your credit scores as quickly as possible, while safeguarding your finances as well.

As mentioned, your biggest focus should be on being timely with all credit payments because if you are late on a bill, you risk potential damage to your credit score – not to mention late fees and interest rate hikes. All of these possible consequences, however, can only be done within the context of existing federal laws.

For example, the Credit Card Accountability, Responsibility and Disclosure Act, also known as the Credit CARD Reform Act, went into effect in 2010. Among other things, it prevents credit card issuers from retroactively increasing your interest rate, unless you've been 60 days or more late paying your credit card bill.

Also, the CARD act requires your credit card company to give you 45 days' notice before an interest rate hike, up from 15 days' notice. You can legally reject a rate hike and close the account. Under this scenario, you would have the right to pay off the debt over five years at your original interest rate.

If you don't close the account, and you accept a rate hike, it's important to know that there are limits on how long banks can impose so-called "default rates" (i.e. higher interest rates) after you've been late paying a bill.

Under the CARD act, default rates can only be charged for six months, provided you pay your credit card bill on time during that period. After six months, your credit card issuer must restore your rate to its previous level.

When it comes to your credit rating, though, a late payment can haunt you a lot longer. The Fair Credit Reporting Act allows negative information (such as late payments) to be included in your credit reports for up to seven years.

Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, television and radio personality, and a regular contributor to AARP. You can follow her on Twitter and on Facebook.