How to Improve Your Credit in 3 Easy Steps

Today, you can obtain your credit reports and scores for free -- here's how

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Just a few years ago, anyone could get credit -- and for cheap. Banks were falling over each other to sell you a mortgage, and credit card offers clogged mailboxes across the U.S. But the world has changed. Easy credit ultimately gave banks a hard time. Losses from bad mortgages piled up as the housing bubble burst. As unemployment climbed, credit card defaults jumped. Banks pulled back in response and tightened credit, which means that it's more important than ever to make sure your credit history is as pristine as possible -- not only to qualify for a new loan, but also to obtain the lowest possible rates. Luckily, knowing where you stand is relatively easy and doesn't have to cost you a penny.

Step #1: Get Your Free Credit Reports

Everyone should understand their credit history. Doing so is important for two reasons. First, by monitoring what is going on within your credit profile, you can detect fraud and identity theft -- which have become huge problems over the past decade. Second, by understanding the positive and negative credit events in your past, you can better see how to improve your credit outcomes in the future.

So how do you get the info? You've probably seen those mildly amusing commercials for services where you can sign up for a service to keep track of your credit background and score. Paying for a credit surveillance service is one way to keep an eye on your credit profile. But these services can be expensive, so they aren't for everyone. Instead, you can start by getting your credit reports for free at www.annualcreditreport.com.

If you haven't already, go to the website above. It is not a gimmick; it is not a shady website. It is the real thing. By law, each of the three major credit agencies, Equifax, Experian, and TransUnion must provide you one free credit report per year. This provides the opportunity to periodically ensure that no one has bought a car in your name, used your Social Security number to obtain a credit card, or perpetrated any other fraud that could harm your credit. It allows you to see how your credit profile evolves.

One nice aspect of the free credit report law is that you don't have to get them all at once. For example, this week, I got my Equifax report. In December, I'll get my Experian report. Then in April, I'll get my TransUnion report. If you stagger your reports, then you can check in on your credit profile every four months, instead of only once per year.

Step #2: Know Your Credit Score

Having a spotless credit report is only a part of the battle. Most lenders also consider your credit score. Even if you never miss a payment on any of your debt, however, your credit score might not be as high as another person's score. The formula is complex. It takes into account factors like the length of your credit history, how much debt you've got, what types of credit you use, and how much new credit you've applied for -- in addition to your payment history.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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