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Posted on May 21, 2008

In response to the housing and credit crisis and a looming recession, banks are tightening lending standards, according to a recently conducted survey by the Federal Reserve.

Your creditworthiness can be the difference between qualifying for a loan or not, and certainly plays a big part in the terms you qualify for. Unfortunately, lending decisions aren’t made by a committee of family and friends that know and love you—they’re made by a credit scoring system—most commonly, the Fair Isaac Corporation (FICO).

Like it or not, most credit decisions (even including rental, mortgage or job applications) are made based upon your credit score. Creditors use your credit score to assess your credit risk—that is, whether or not you are likely to repay your loans.

FICO credit scores range between 300 and 850 (and Vantage scores, another system, range from 501 to 990) and take into account your payment history, total outstanding debt, length of credit history, and the type of credit mix you have. The frequency and number of credit applications you’ve had are also taken into account, and then each factor is given a point value to determine your final credit score.

Once you’ve taken the important step to learn your credit score, use these tips from the experts at Money Management International (MMI), to begin improving your score:

1. Be patient – Time can be the best cure for imperfect credit. The federal Fair Credit Reporting Act (FCRA) states that derogatory information can only remain on your credit bureau file for seven years from the time the account is placed for collection, charged to profit and loss, or subjected to any similar action.

2. Pay debts on time and in full – Timely payments are critical when calculating your credit score, so set up automatic payments when you can. Try to pay more than just the minimum balances on debts—the more you pay, the faster it goes away.

3. Obtain a secure credit card – With a secured card, you can only spend what you have deposited, keeping you from spending beyond your means. After a history of on-time payments, your credit limit may increase and eventually allow you to have a credit card that is not secured by your savings amount.

“It’s also important to take the necessary steps to dispute any incorrect information on your credit report—and be sure to pull a report from each of the three credit bureaus, Equifax, Experian and TransUnion, as they all receive different information,” said Cate Williams, vice president of financial literacy at MMI. “While there is nothing you can do about negative information that is correct, the bureaus are obligated to adjust any incorrect information on your report.”