'GMA' Quick Tip: Improve Your Credit Score

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Don't let a low credit score get in the way of your buying a home or getting a business loan. "Good Morning America" personal finance contributor Mellody Hobson is here with a few simple tips to help you improve your credit score.

Your credit score is a quick reference tool for lenders. It allows them to quickly determine whether you will be able to pay back a loan without them having to study your credit history at length. You can think of it like a grading system that uses a high score of 850 and a low score of 300. Most Americans fall around the 723 median mark. This little number can affect everything from the interest rate you are charged for a loan on a home or a car. Now let's get you above the median.

You probably heard that closing a credit card drops your credit score. This is technically true since it affects your credit usage, a component of your credit score that measures how much of your available credit you are using. A short-term hit to your score can equal a long-term gain. I would consider canceling all but one credit card. By decreasing your total credit you are using more of your available credit and your score will drop temporarily -- this is the short-term hit. However, if you pay your bills on time you will lessen future opportunities to get into debt and make it easier to get a great credit score with little work -- that's the long-term success. Keep in mind that once you get down to one card, do not charge up to the maximum, even if you you pay your bills on time. Most experts say you should use 20 percent or less of your available credit to help maintain or build good credit.

Finally, check your credit report once a year. The only place to get free annual copies of your credit report from all three reporting agencies is annualcreditreport.com Make sure you thoroughly check all three credit reports for fraud or errors, and report any that you find immediately. You'd be surprised how small errors can have major impacts on your life.