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It used to be that “humans” decided your credit worthiness. For example, you knew your banker by name and your handshake was all the collateral you needed. Those days are long gone. Now a set of numbers – your FICO score – decides your credit worthiness and your banker may be thousands of miles away.

Although there are several credit models, the most commonly used is FICO, based on a model created by Fair, Isaac Company. Their consumer website is myfico.com, and you can find information about the FICO credit scores there.

Your FICO credit score controls your interest rate and how much credit a lender will give you. So taking care of your score, and keeping your credit clean will save you money.

Preserving your FICO score, and improving it, is not difficult, but it may take time. Despite the books, courses and consultants offering to help you improve your credit score, only 3 basic steps come into play. Here are the 3 steps everyone must use to earn, preserve and improve their score – based on three credit examples.

Step One: Obtain a Credit History

There are many reasons you may have no credit history. Maybe you’re just starting out, maybe you pay cash for everything and have never needed a loan. Anyway, if you have no credit history, your FICO score is likely to be low.

The easiest way to raise your score is to get a small loan, and pay it off on time. In general, installment loans carry more credibility than credit cards. In other words, you will improve your credit score faster if you buy goods with an installment loan, rather than getting a credit card.

Another way to earn a better credit history is to take $1000 and open a 6-month CD account at a financial institution. Now, get an installment loan for $1000, using that CD as collateral. Now, here’s the trick. Take the $1000 loan, and open another 6-month CD account at another institution. Take another loan for the $1000 at the second institution. Do this one more time.

Now what you have is 3 loans. Pay the minimum payment for 6 months. In the last month, cash out your CDs and pay the loans off. You now have a credit history, and did not go into long-term debt to get it.

Step Two: Preserve Your Good Credit History

Keep a stable source of income, pay your bills on time and avoid high credit card debt. Read more of this >>