I get asked this question a lot. The credit bureaus (and a lot of the so-called experts) will tell you that you just have to sit back and wait 7 years for bad credit to fall off your credit report.

Sorry, but this is not true.

The key is to know which factors influence your numbers so you can make better financial decisions:

1. Your payment history (approximately 35% of your score)
Have you paid your credit card bills on time? If not, then late payments, collection accounts, and other negative items can lower your credit score. So pay on time as often as possible!

2. How much you owe (approximately 30% of your score)
FICO scores look at the amounts you owe on all of your accounts. Also factored in are the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.

3. Length of your credit history (approximately 15% of your score)
The longer you've had credit the better. So, closing older accounts is not always a good idea. It is still possible to get a good score in a short period of time - if you've been responsible (by paying on time and not maxing out all of your credit).

4. New credit (approximately 10% of your score)
If you have recently applied for or opened any new credit accounts, this will have an affect on your credit score. So don't keep applying for credit every time you go shopping. And if you are making a big purchase, do your applications in a short period of time, and don't drag out your search for the best rate over a long period of time.

5. Other factors (approximately 10% of your score)
Other factors also can influence your score. For example, having different types of credit on your report (such as credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit) is normal for people with longer credit histories and can slightly improve your score.

How can you improve your credit score?

First of all, credit scores are not always perfect! Since your credit scoring relies on information found in your credit report, it may not be entirely accurate (since many credit reports contain errors). So, it's a good idea to get a copy of your credit report once a year, look it over, and make sure it is accurate.

And if you are planning a big purchase, do this a few months ahead of time so you have enough time to get the errors corrected.

P.S. Thanks to Couple Money for including us in their recent blog carnival.

With the recent mortgage crisis, Fair Isaac (who makes the popular FICO credit score used by most lenders) will be using a new system for calculating credit scores this year, called FICO 08. Here's an article from the Wall Street Journal that explains the new credit score better:

Basically, if you've only had a few "blips" on your credit report, your score might improve a little. And if you're a "repeat offender" it may go down a little.

But does your credit score really matter if you're trying to get out of debt?

I've heard this statement many times over the years from people struggling with debt: "I want to get out of debt, but I don't want to do anything to hurt my good credit rating."

That's what I used to think, too. Then when I had enough, I just said "screw this, I'll get out of debt first then fix my credit later". Guess what? It worked.

Hey, if you have a lot of debt, and have had any trouble paying your bills in the past, you've already hurt your credit - sorry to tell you. So there's no sense worrying about good credit when you've got too much debt in the first place (and isn't good credit only important when borrowing more money and getting further into debt?)

I know, it's the American way to keep borrowing, keep spending, and keep buying - even when you can't afford something.

And I realize most people have future plans, like buying a house, and don't want bad credit to get in the way.

So, you'll need to decide for yourself:

- Is it more important for you to do whatever it takes (including hurting your credit) to get out of debt?
- Or is it better for you to be safe, and protect your credit while getting out of debt?

Kris

UPDATE: I just read this article on FICO scores - it's from a marketing newsletter I read, so you may not enjoy it, but it is eye opening!