Seven steps to improving your credit score

If you want to buy a car, pay for school, or purchase your dream house, you'll need a loan. To get a good one, you need a good credit score.

Credit scores help determine if you are a good credit risk. Your credit score predicts the likelihood that you will repay money you borrow and make the payments on time. The higher your credit score, the better. Your credit report offers information about your financial history which determines your credit score. Lenders receive your credit information from the three main credit reporting agencies: TransUnion, Equifax, and Experian.

By improving your credit score, you increase your chances of getting the loans that you want and at the best interest rates possible. Here are seven tips you can follow to help increase your credit score.

1. Get a copy of your credit reports

Consumers can get a copy of their credit reports from each of the reporting agencies. It is always a good idea to check your credit report once a year and also several months before you plan to apply for a loan. Make sure your credit report is accurate. Check for any mistakes in the report, such as wrong home address, incorrect Social Security number, and unauthorized purchases. If you discover any errors, contact the credit reporting agency. It can take a minimum of 30 days to resolve a disputed item or to correct information on your credit report. The toll-free numbers for the reporting agencies are Equifax: (800) 685-1111, Experian (888) 397-3742, and TransUnion: (800) 916-8800.

2. Pay bills on time

Paying bills late, having accounts sent to collection agencies, and declaring bankruptcy will negatively affect your credit score. The solution is to make payments promptly. This is especially important in the months before you apply for a loan. If you are already late with a payment, try to get current as quickly as possible. If you know you will be late with a payment, talk to your creditor and try to make payment arrangements. Try to negotiate with the creditor to keep some of your late payments out of your credit reports.

3. Pay off credit card debt instead of moving it around

Debt consolidation may not be a good move because the ratio of credit card balance to credit limit is important. If you owe the same amount but have fewer open accounts, this will lower your credit score.

4. Reduce balances on credit cards

Lenders look at how much money you owe on your credit cards and your credit limit. It is best to have your balance 25% or below the total limit you have on your cards. Try to pay off as much of your credit card balance as possible before approaching lenders.

5. Don't apply for new credit

Too many recent credit inquiries will lower your score. Opening new accounts in a short period of time can be viewed negatively. Only apply for new loans if it is really necessary.

6. Don't close unused or paid-off accounts

The zero balances in these accounts could improve your score. Closing an account does not remove it from your credit report.

7. Use a credit counselor

If you think your finances are getting out of control, contact a legitimate, non-profit credit counselor. A good credit counselor can negotiate lower interest rates on your behalf and set up a debt repayment plan.

There are steps you can take to improve your credit score, but there are no quick fixes. Be wary of companies that claim they can repair your bad credit in a short period of time. It is not possible. Increasing your credit score takes effort and time, but it is worth it in the long run.