Your credit score (aka “credit rating” or “FICO score”) is the financial industry’s standard for rating your ability and willingness to pay as compared with other consumers. It is the primary measure of risk that a lender uses to make a decision to lend money to you.

In the past several years, the term credit score and credit rating have been supplanted byt the term “FICO score.” This means the exact same thing. FICO is an acronym for the “Fair Isaac Corporation.” This was developed the company that developed the standardized scoring systems used industry wide to calculate your credit rating.

Your credit score is supposed to be an unbiased and reliable ranking that reflects, at a glance, how your credit history compares to that of other people.

Your credit score is a number between 300 and 850.

Obviously, the higher your score, the better credit risk you are supposed to be. As can be imagined, there are a multitude of advantages to having a high FICO score. It will be easier for you to get credit, at a lower interest rate and with better introductory terms.

With a high credit score, you have greater financial flexibility and will realize greater interest savings over the life of the loan. For interest a mere 1% better interest rate on a mortgage, can save you thousands.

So, what do you do If you apply for a credit card and you are denied because of bad credit? Here are some steps that you can take to improve your credit score and, thereby, increase your ability to get approved for a credit card or other unsecured personal loan in the future.

Your credit report contains your credit history, and you need to see what it says so that you can ensure that it is accurate. You are entitled to obtain a free copy of your credit report below, once a year, from each of the major credit reporting companies:

• Equifax
• Experian
• Trans Union

If you have been denied credit, under federal law you are entitled to know the name of the credit reporting company where the report was obtained and request a free credit report within 60 days.

Once you receive the report, you are entitled to dispute inaccurate information contained in your credit report.

With your free credit report in hand, it is now time to check all the information in it to ensure that it is accurate. When errors occur, and they do regularly, they might negatively impact your credit rating. 

When you find an error, the correct procedure is to inform the credit reporting agency in writing to have it corrected.

In your correspondence to the credit reporting agency, detail specifically the items you are disputing, include the names of creditors involved and enclose any documentation that you have as further evidence that an error was made. 

By law, the credit reporting agency will then be required to investigate the error, usually within 30 days, and either remove it or report back to you as to why they failed to do so.  By law, you can request that the agency send a corrected copy of the report to anyone who has received a copy of the report within the preceding six months. 

If the credit reporting agency does not remove the entry, you have the right to insert a statement into your credit file explaining your reasons for the entry or the fact that you dispute the entry.  By doing so, you will often give the lender an option to approve you despite the adverse credit entry.

Another reason many people, especially younger people, are denied credit is that their credit report contains too little information regarding the consumer's willingness and/or ability to pay off debt.

You still need to review your credit report to determine if it includes all of your accounts. Some credit issuers, such as department stores, gas stations, and utilities are not always included. Ask the credit reporting agency to list these files so they become part of your credit history.

You may be required to pay for this service but it is worth it in terms of creditworthiness and the money saved by potentially lower interest rates and terms.

A solid credit history is like a house, poor construction or maintenance can cause it to deteriorate to the point that it is not usable.  However, like a house, a solid credit history can be carefully rebuilt over time.

1.   Make All Bill and Loan Payments On Time

If you default on a loan or miss a payment on a credit card, this information is kept in your credit report for seven years. Bankruptcies remain on your credit report for ten years. Obviously, both types of adverse credit entries negatively impact your credit. But, as the entries become older, they carry less weight with respect to credit scores and creditworthiness decisions - particularly, if you have worked hard to offset them with positive credit entries.

You may have had a temporary situation such as an illness or loss of a job that caused you to default on a loan or miss a payment. If this is your situation, just start making timely payments now and from this point forward.

Doing so, will confirm to lenders that your situation was indeed temporary and that your circumstances have changed in such a way that you are a better credit risk. Again, you can also place a statement in the file to explain the reason, or reasons, for the adverse credit entry by initiating a dispute of the adverse entry, even if true.

2.   Reduce Your Debt But Do Not Close Any Of Your Accounts

Your credit score is based upon two factors (1) your ability to repay and (2) your willingness to repay.  If your debt to income ratio is too high, your credit score will decrease.  In an effort to decrease your debt to income ratio, you need to reduce your debt level. 

Develop a budget by listing income along with your monthly expenses.  Do not worry that you do not have exact figures at first.  Put something reasonable down and modify it over time as you begin to track expenses.  Another tactic is to estimate an expense by the week (or day) and multiply it out to get the estimated monthly expense. 

Unfortunately, many people actually fear finding out how much they spend each month on debt and non debt related expenses.  Trust me, I have been there as well.  I can tell you that, in the end, you will feel better knowing the truth, even if the truth is not that pretty.  Once you are armed with the facts, you can begin to take steps to change your financial situation. 

There are a number of books out there to teach you how to budget.  Get one and implement the program in the book.  With sound spending practices, you can reduce your debt level substantially over time.

3.   Seek Credit Counseling

Where there is too much month at the end of the money, you might find it helpful to seek help from a non-profit credit counseling service.

Legitimate consumer credit counseling services are available in every state, usually at little or no cost to the consumer.

These not-profit credit counselors can teach you to find ways to consolidate credit card debt. Also, they can assist you in contacting lenders to get help with debt and make a more manageable payment plan. Most important of all, the credit counseling service will assist you in creating a realistic and workable budget for the long term.

Be aware of credit repair services. Most of these are scams. Save your money.

The best way to increase your FICO score is to make timely payments to your creditors. This is the single most important factor that can build or break your credit rating. The second most important factor is to lower your debt level. These two factors combined demonstrate your (1) willingness to pay as well as (2) your ability to pay.

If you have some adverse entries on your credit report, these will fade over time if you begin making timely payments and reducing your debt levels. Adverse entries remain on the report for seven years, while bankruptcies remain for ten years. It is imperative that you do everything within your power to avoid missing a payment.

If you've been relegated to settling for bad credit loans, remember that credit repair agencies and other quick fix scams will not be able to repair your credit over night. In fact, none of these companies can do anything that you cannot do yourself.

Instead, negotiate with your lenders and seek credit counseling to ensure that you will not default on a loan.

By taking steps to protect your good credit or changing your habits to rebuild your credit score, you can maximize your ability to secure the credit which is so vital in our economy today.