You know how important your credit score is. And with lenders reluctant to offer good loan terms to any but those with with the best scores, it is vital that you do what you can to improve your credit score. Credit Karma offers you a way to simulate the effects your actions have on your credit score.

A few months ago, I wrote about how Credit Karma offers great education tools — as well as free access to your credit score. Now, Credit Karma has added a practical tool that can help you figure out how you can improve your credit score. It also provides a handy guide to what might happen if you take on more debt, open a new credit line or even apply for an auto loan or home mortgage loan.

As I tinkered with the program, lowering and increasing my credit score, I found that one of the most effective ways to increase your score is to pay off debt. Paying off debt and having a good payment history largely erased the ickiness that I had gotten my simulation into by opening new credit card accounts, paying late and getting a car loan. And, of course, that bankruptcy I simulated didn’t help much, either.

Ken Lin, founder and CEO of Credit Karma, sent me this in an email regarding the credit score simulator:

We hope that consumers will be better able to manage their credit if they understand how their everyday financial behavior affects their credit score.

Overall, I think this a great tool. Before I make another credit and debt related decision, I’ll probably head over to Credit Karma to get a look at what it will do to my score.

images source: Screenshots from Credit Karma

Because a good credit score can save you thousands in interest charges and affect a variety of aspects of your personal finances, it is important to:

Improve your credit score.

You can get an idea of your credit score for free from Credit Karma. And then you need to take these steps to improve it:

1. Make all payments on time.
2. Lower your debt.
3. Avoid inquiring about getting more debt.
4. Choose debt that is “better.”

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A couple of weeks ago, I wrote a post about how if you want access to your credit score, you have to pay for it.

I was wrong. And I’m glad to be.

Ken Lin over at Credit Karma contacted and let me know that there is a free service that allows you to see your credit score — and track how you are doing. It’s his own Credit Karma Web site.

It’s not free to Credit Karma, though. The company pays TransUnion for a copy of your credit score, which is then displayed. So you will have to provide your Social Security Number and identifying information. However, Lin insists, the information is never shared with third parties.

You can login to keep tabs on what your credit score is doing, and the Web site offers a number of helpful hints and information on credit scores and reports in general. Here is a screenshot from the Credit Karma Web site:

You can see where you fit in terms of credit score on a national scale, and you learn about the different scales used by each of the three major credit bureaus. I found this an exciting and helpful personal finances tool.

Since Credit Karma does pay for the credit score (instead of you), the Web site has to make money somehow. It does so through ad revenue and when you click on various offers that are listed on the site, along with your credit score. I think Ken Lin sums it up pretty well with what he told me via email:

We pay for the scores through our advertising revenue much like a Yahoo or Google. With that said, we don’t sell or share consumer information, we just sell advertising space. We think this is a win-win-win. Consumers get free access to something they should have always had. Advertisers get to message consumers without compromising consumer privacy. Credit bureaus continue to make money from the sale of the credit score.

It is important to note that this is just one company’s score, and that others’ scores aren’t on here. But Credit Karma does give you a general idea of where you are at, and that can be very helpful in terms of getting an idea of how you can improve how your personal finances look to banks, employers and landlords.

When used in conjunction with annualcreditreport.com, Credit Karma can be a great tool for monitoring your credit and keeping tabs on your financial history.

image source: screenshot at Credit Karma.