Did you know that as of 2007 the average American household had almost $10,000 in credit card debt? Credit card debt that is carried from month to month as an outstanding balance can be devastating as it means you can end up paying thousands in late fees and finance charges. However, these expenses are not the only problem. Any debt that you have negatively effects your credit score. Many people don't think about or even know what their credit score is.

If you aren't aware of your credit score and its impact on your overall financial well-being then you could be denied for many business opportunities which could have helped your finances as well as your business. Your credit score can work against you if it is low. Having a high credit score was essential to my online business success.

So what exactly is the formula used to determine a credit score? The exact formula was developed by Fair, Isaac, & Co. and is a closely guarded secret. Basically, your credit score demonstrates how risky you are as a borrower based on your past and current financial situation. Credit bureaus use this formula to figure out your credit score. The higher your credit score, the better credit risk you are determined to be. A higher credit score means that you are less of a financial risk, and much more likely to pay back any loan.

For example, if you apply for a business loan your bank will look at your credit score. If you have a high credit score it means that you have little or no debt and pay your bills and loans on time. This means that the bank can feel more comfortable approving your loan because they know they will be more likely to be paid back in full and on time.

Developed by Fair Isaac Corporation, a publicly traded company, credit score is represented by a number between 300 and 850. The median American average credit score is 725. Credit scores of 600 and below represent "poor" credit, also known as "subprime." 720 and above is considered to be a good credit score. Credit scores in excess of 750 are considered to be excellent.

While Fair Isaac Inc. will not reveal the exact algorithm used to calculate a credit score, Fair Isaac has provided some details used in determining how the score is calculated. The makeup and weighting of each component in a credit score is as follows: punctuality of previous payment history - 35%, the ratio of current debt to current available credit - 30% (that's why it's best to pay off your credit card balances each month), length of credit accounts and credit history - 15%, types of credit accounts used - 10%, recent requests of credit history and recently obtained credit - 10%.

Recently, credit scores are being used in ways above and beyond the traditional lending decision. In the fall of 2004, a Texas utility company began using credit scores to individually set prices for electricity. Many insurance companies are now using credit scores to rate the quality of potential customers, especially for small business owners. Many employers are now also using credit scores as part of their decision-making process in hiring new applicants. I believe these trends will continue, making a high credit score even more important with each passing year. Now is the time to start taking steps to get your credit score into the excellent range.

Here are several steps you can take to greatly improve your credit score.

1. Pay your bills on time.

The largest component of your credit score is your payment history. As such, the most important step in getting and keeping a high credit score is to pay your bills on time. If you have a low credit score because of late payments in the past, you can immediately start to raise your credit score by making your loan payments on time.

To get and keep a high credit score, you must follow this rule religiously. If you currently have blemishes on your credit report from previous late payments, it is possible and advisable to negotiate with the lender or collector to remove the late payments from your credit report. The smaller and more local the lender is, the more likely you will be to succeed in your negotiations. This is the most effective way to raise your credit score significantly in a short period of time.

Collection agencies are usually paid on commission and will aggressively try every avenue to collect a debt, and thus get paid for their work. To improve your credit score be sure to get your agreement in writing. You can be verbally promised anything by a collection agent, but trying to get him to enforce a verbal promise after you have paid will likely be next to impossible.

2. Learn to spend less than you can afford.

Amounts you owe is the second largest component used in determining your credit score. If you consistently spend all that you can afford, your amounts owed will be higher, your credit ratio of debt vs. available credit will suffer, and your credit score will be lowered. To get and keep a very high credit score, you must learn to not only spend within your means, but spend even less. Overall, not only will you raise your credit score by doing this, but you will have extra income available to save and invest for your future.

3. Have the credit reporting agencies remove incorrect information.

Obviously, if there is incorrect information in your credit report that is to your advantage, don't ask the credit reporting agency to remove it. However, very rarely is incorrect information beneficial to you. Periodically check your credit report to verify accuracy of content. If there is incorrect information that negatively affects your credit score, contact the credit reporting agency and have it removed.

You do not have to pay for view your credit score if you have been declined credit in the past 30 days. If you haven't been declined credit in the past month, you might still be able to view your credit score for free. You are entitled one free viewing per year. To obtain your free copy, go to AnnualCreditReport.com.

AnnualCreditReport.com is a centralized service for consumers to request free annual credit reports. It was created by the three nationwide consumer credit reporting companies - Equifax, Experian and TransUnion.

AnnualCreditReport.com provides consumers with the secure means to request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies in accordance with the Fair and Accurate Credit Transactions Act (FACT Act). This is the only site where viewing your credit report is 100% free without strings attached or gimmicks hidden in fine print.

Nearly every site claiming a "free credit report" is simply an attempt to sign you up for their credit monitoring services. Most times you are not even aware that you are signing up for these services as that information is conveniently buried in the fine print. You'll only discover that you been "enrolled" when you see the charge on your monthly creidt card statement. So do be careful about free credit reports that are not so "free."

4. Don't apply for credit too often.

Multiple credit inquiries in a short period of time will lower your credit score, as will new credit. Remember this point when you are out shopping and the department store clerk offers a $5.00 discount for applying for a new store credit card.

The discount seems tempting, and you may want the new card, but don't do this too often as it will lower your credit score. Try to keep your new credit inquiries to 3 to 4 times per year. This will help boost your credit score. Remember: a higher credit score will result in reduced costs on credit cards as well as auto and mortgage loans.

5. Keep your credit card balances low.

Keeping all of your credit card balances below the 50% threshold of available credit will raise your credit score. Keeping all of those balances below the 25% threshold will improve your credit score even more. Paying off all your balances completely every month will raise it the most. If you have an upcoming large loan request, financing a new home purchase for instance, please see the next step for a quick solution to this problem.

You should take action at least 60 days in advance of the loan request to allow time for the information to get reported. Don't try to improve your credit score 3 or 4 days before you apply for a big loan. Take action early.

6. Ask for an increase in your credit lines.

One of the determining factors used to compute your credit score is the ratio of outstanding credit balances to available credit. The lower this ratio is, the more it will help to raise your credit score. For this reason, you should ask the providers of your current credit cards to raise your credit limit on each card. Be careful, however, to only ask those companies that will grant your request without running a new credit report on you. Many credit card companies will automatically grant a request to raise your credit limit every 6 months provided there were no late payments in the preceding 6 month period.

Remember, though, frequent credit inquiries will lower your credit score, so ask first if a request for a higher credit limit will require a new credit check.

7. Transfer balances if necessary.

It is quite normal for many people to carry a high credit card balance on a low- or no-interest credit card, while at the same time have a very low or no balance at all on their high interest credit cards. While this makes perfect sense from a financial standpoint, from a credit score standpoint it doesn't.

Let's say you have 3 credit cards, each with a $7,500 limit. Three of those cards have a zero balance, and the fourth has an $7,000.00 balance. This will lower your credit score because one of the cards is at nearly 90% outstanding credit to available credit ratio. To get a higher credit score, you should transfer the balance evenly among all 3 cards, resulting in a 25% ratio on each card. This one simple step will give you a higher credit score.

8. Establish long-term accounts.

Roughly 10% of the factors that are used to determine your credit score relate to the length of time you've had your accounts. It is quite common for people to hop from credit card company to credit card company constantly seeking to take advantage of a low introductory interest rate. Again, this makes sense from a financial point of view, but it can lead to a lower credit score. You will be awarded a higher credit score if your accounts have been open and active for a longer period of time. Multiple new accounts lower your score, whereas a stable number of credit accounts that have been used for years upon years will significantly raise your credit score.

9. Pay more than the minimum payments.

The credit score formula was designed to measure the ability and likelihood of a borrower to pay back a loan. If you are simply making the minimum payments on your credit accounts, how likely is it that you have the financial capacity to increase your debt load with a new loan? Alternatively, if you are making more than the minimum payments, isn't that de facto evidence that there are extra funds in your budget? One of the surest signs that a borrower has reached the limit of his debt load capacity is a pattern of merely paying the absolute minimum due. Double up on your payments to raise your credit score.

10. Don't have any credit cards maxed out.

One item that has significant negative consequences on your credit score is using all of your available credit. If you want a high credit score, you simply must not use all of the available credit on any of your credit cards. Even worse than reaching your credit limit on any card is actually going over your limit. Not only will you likely incur overlimit fees, you will really lower your credit score. Keep those balances low for a high credit score.

11. Have an emergency fund.

If you establish a sizeable emergency fund, this will not directly raise or lower your credit score. However, the purpose of these 14 steps is to help you get and maintain indefinitely a high credit score. Without an emergency fund, your credit score could severely suffer in the event of a financial emergency such as an accident or extended illness. If you have an emergency fund to draw on in time of need, this will eliminate the temptation or necessity of having to tap the available credit lines on your credit cards. An emergency fund is really an umbrella of safety to protect your high credit score.

12. Have a balanced mix of different credit types.

While this step is not going to be responsible for huge increases in your credit score, it will help improve it nonetheless. If you have 10 credit accounts on your credit report, it is better to have several different types of credit such as a home mortgage, an auto loan, and a few department store cards and a VISA and MasterCard. You would score higher with this balanced mix of credit types than if all 10 accounts were credit accounts at various department stores. Having several consumer finance company credit accounts will negatively effect your credit score.

13. Don't close unused accounts.

One of the determining factors that effects your credit score is the length of time you've had each account. While you might not want to continue to pay an annual fee on a credit card that you opened when you were a student in college, the annual fee might be worth the resulting benefits to your credit score from having a credit account that is over a decade old. The older an account is, the more it will boost your credit score (provided, of course, that the account has a good payment history).

14. Borrow great credit from a relative.

You may be wondering how it is possible to borrow credit from another person. This is easy to do and is especially useful to young adults who have yet to establish credit (although anyone can benefit from this technique regardless of age). If you have a relative or close friend with excellent credit history, have them add you to one of their credit card accounts. Ideally, they should add you to an account that they have used for years, has a high credit limit, low or no balance, and has a perfect payment history with not one late payment. When you are added on this account, the payment history of this account is also recorded on your credit report because you share the account. Presto!

You now have a great credit reference on your account. This is perfectly legal and can be used to immediately raise your credit score.

Summary

I cannot stress enough how important a high credit score is to small business success. Nearly every small business will need a source of credit at some point. The higher your credit score, the easier it will be for your small business to obtain credit.

Additionally, as your small business grows, the credit needs of the business will likely grow with it. In my online business, I purchase advertising in the form of clicks (known as ppc advertising) every single day. All the major search engines online accept and prefer payment by credit card.

In the beginning, a credit card that had a $1,000 limit was sufficient. But as I got more experienced and proficient and business grew, the balance on the credit card needed to grow right along with it. $5,000 was needed for a limit, then $10,000, then $20,000 and so it went.

Without a high crdit score, getting these increases would have been impossible, and that in turn would have made growing the online business nearly impossible.