Key tips to improve your credit rating

"Bad credit? No credit? We can help." We've all heard those very words uttered in a television or radio commercial. But what happens when you really do have bad credit? Unfortunately in modern society, money and credit make the world go 'round. When you have a bad credit rating, it can affect everything from renting an apartment to buying a house.

Is it possible to improve your credit rating? Absolutely. The bad news is that it takes discipline and it won't happen overnight, but the good news is that you can do it yourself by following a few tips diligently. Here's how.

What is a credit rating?

A credit rating, also known as a FICO score, is a three-digit number that is assigned to every person who has ever had credit. It is based on a person's credit history, including their ability to pay loans and other financial obligations back on time. Creditors use the FICO score and credit history to predict the likelihood that a person will repay a future loan on time. In other words, if you have a history of defaulting or not paying loans and credit cards back on time--or not at all--then your credit rating will be lower. Creditors will see you as high risk and you will find it difficult to get any kind of credit, whether it's a mortgage or a credit card. If credit is offered, the interest rate is usually much, much higher than it normally would be.

It's as easy as one, two, three, four, five

By following these steps you should be able to improve your credit rating in a reasonable amount of time.

1. Pay your bills on time.

Sounds simple and it is, but you'd be amazed at how many people are late on their bills month after month. You've heard of the piece of financial advice that says pay yourself before you pay others? Well, skip it. When you have bad credit you need to pay others first and on time.

2. Pay off debt, don't acquire new debt, and avoid transferring balances.

Make your monthly payments and add a few extra dollars if you can. And just because you see your credit card balances creeping down, that's no excuse to start making new purchases, either. Avoid transferring balances to credit cards with teaser rates unless you are really on top of your finances. Then again, if you were really on top of it you wouldn't have a bad credit rating, would you?

3. Keep balances low on credit cards.

If you must make a purchase, be sure you can pay it off immediately, otherwise, pay cash That way if you don't have the money, you won't buy it, or you'll wait until you do have the money available.

4. Keep old accounts open.

Just because you've paid off an old account and closed it out doesn't mean it won't show up on your credit report. Most financial experts today recommend not closing old accounts that have been paid off. Fewer credit accounts increase what's called the utilization ratio, a fancy term for describing the amount of total debt divided by the total credit you have available. What this means is that it appears that you are "maxing out" your accounts, which in turn causes your credit rating to drop.

5. Contact a lender to arrange a payment plan if you have trouble making payments.

Contact the lender directly to arrange a payment plan. Most lenders are willing to work with you because they want their money. It also shows good faith effort on your part, and it goes without saying that regular payments, even if they're small, are better than no payments when it comes to improving your credit rating.

If you would like more information on changing your credit or would like to check your credit rating, click here.