How To Improve Your Credit Score: 3 Essential Strategies Made Easy
Understanding your credit score is a key part of personal finance. A good credit score can open the door to lower interest rates, more favorable loan terms, and can even influence your ability to rent an apartment or secure a job. Though there are countless companies out there offering to quickly improve your credit score, the reality is that credit repair takes time, effort and consistency.
Whether you’re starting from scratch or looking to go from average credit to excellent credit, the following steps will inform you about improving your credit.
1. Build Positive Credit History
Your payment history represents 35% of your FICO® score, making it the most important factor for many individuals.
Paying bills on time indicates your reliability as a borrower. Doing so may require changing some of your financial habits, which is a slow and steady process. Be patient with yourself as you build a positive credit history.
These tips can help set you up for success.
Make payments on time. Your payment history is the single biggest factor in determining your FICO® score. If you can commit to making all payments on time from now on, you will begin or continue to build this area of your report. This means payments on all kinds of debt, from personal loans to auto loans to utility bills.
Set up automatic bill payments. Have you forgotten to make payments from time to time? One of the easiest ways to ensure you’re staying on top of due dates is to set up automatic payments. Late payments can severely impact your credit score, so automating this process helps keep your payments on track.
Get credit for monthly payments. Some credit scoring models will take into account your monthly bill payments when calculating your score. Rent payments can also positively impact your credit score if they are reported. Services are available that can report these payments to credit bureaus, helping to build your credit history.
Use different types of credit. Demonstrating responsibility with multiple types of credit can raise your score. This is referred to as your credit mix. In general, it can be helpful to have both installment loans and credit cards, as long as you pay on time.
Keep old accounts open. Keeping old credit card accounts open — even if you’re not using them — can help extend your credit history and potentially boost your score. A long credit history allows you to show consistency and responsibility in your credit management, so the longer your history, the better chance you have at it benefiting your credit score. If you don’t yet have a credit history, it may benefit you to start one now. Just make sure not to open multiple new accounts too rapidly.
Limit your applications for new credit. When you shop around for a loan, make sure to be mindful of the period of time in which you do so. Applying for too many new loans, lines of credit or credit cards in a short time may hurt your credit. Viewing your own credit report or score will not harm your credit when it is considered a soft credit inquiry.
Fix errors in your credit report. One of the best reasons to request a credit report is to verify that there is no inaccurate negative information contained in it. For instance, if a late payment is incorrectly listed for one of your accounts, or if your amount owed is too high, your credit score may be unfairly harmed. If you find an error in your credit report, follow the Federal Trade Commission guidelines.
2. Pay Down Balances
Reducing your outstanding debt can be a crucial step in improving your credit score. When it comes to your FICO® score, the amount of money you owe is a close second in importance to your payment history. It represents 30% of your score.
Generally speaking, the more debt you have, the more your FICO® score may be dragged down. But not all debt is equal, and high amounts of debt owed on revolving accounts, such as credit cards, can have a larger impact.
Here are some tips to start bringing your balances down.
Start with the right balance. Paying off your revolving debt, such as credit cards, might improve your credit score a lot more than paying off installment loans, such as a home mortgage or student loans. Erasing your credit card debt can sometimes raise your credit score by as much as 100 points in certain contexts.
Pick a strategy and stick with it. Two effective strategies for tackling debt are the Avalanche and Snowball methods. The Avalanche method involves paying off the debt with the highest interest rate first, which can save you money on interest over time. The Snowball method, on the other hand, focuses on paying off the smallest debts first, which can provide psychological wins that motivate you to keep going. Generally, the Avalanche method is considered to be the preferred strategy. But if you can pay off a debt quickly, it might make sense to do so (based on your circumstances).
Put windfalls toward debt. Extra money from holiday bonuses or gifts can be put toward your debt. This not only reduces your balances but also saves you interest in the long run. Similarly, applying your tax refund toward your debt can make a significant dent in your balances and help improve your credit score.
3. Keep Your Credit Utilization Low
It’s also important to keep your credit card utilization in check. Your credit utilization rate, also called a credit utilization ratio, is the percentage of your available credit that you are using at any given time. Like your total amount of debt, it contributes to your “amounts owed,” which accounts for 30% of your FICO® score.
Keeping your credit utilization ratio low is important because it tells lenders you are managing your credit responsibly. Experts recommend keeping your ratio below 30%.
Here are some tips to help.
Pay off credit card balances every month. Paying off your credit card in full each month demonstrates responsible credit use and keeps your credit utilization low — two factors that positively impact your credit score. Additionally, using a secured credit card, which requires a cash deposit that serves as your credit limit, can be an effective way to build credit.
Ask for a credit limit increase. A higher credit limit can help lower your overall credit utilization ratio, as long as you don’t increase your spending. A lower utilization ratio is viewed favorably by many credit scoring models.
Get a credit card and don’t use it. Opening a new credit card and not using it, or using it very sparingly, can also help reduce your credit utilization ratio. This strategy increases your available credit without increasing your debt, which can positively affect your credit score.
How Long Does it Take to Improve Credit?
The amount of time it will take before you see improvements in your credit score depends on the type of negative items in your credit file, if any, and how easily you can demonstrate improved credit responsibility. Remember that delinquencies and most public records remain on your credit report for seven years, while bankruptcies can remain for 10 years.
Once a blemish disappears from your credit record, it will no longer factor into your score. But even before that happens, negative items begin to matter less to your score as they age. There’s no way to say exactly how long it will take you to raise your credit score to your desired goal, but if you stick to solid financial habits, your credit score will usually climb. In the case of delinquencies and minor blemishes, you can often return your credit to good health in a matter of months, but many factors can come into play.
If you ever do have trouble making payments, be sure to notify your creditors ahead of time. And if you think you may benefit from seeking credit counseling, note that this will generally not harm your FICO® score.
How Is My Credit Score Determined?
The FICO® credit score range is 300 to 850. Below is a general breakdown of the FICO® scoring system. Keep in mind that the importance of each factor may vary depending on your unique credit history.
Payment history (35%): This category takes into consideration any late payments, charge offs, collections, foreclosures, bankruptcies or other similar negative items. The more recent and more severe the negative item, the worse it usually affects your score. On the other hand, if your credit accounts have a good payment history, your score will usually benefit.
Amounts owed (30%): This category factors in the amounts and types of debt in your credit history. Revolving debt is the most important component of FICO®’s amounts owed category, taking into consideration credit card and retail card debt. The higher your past and current credit card balances are in comparison to your credit card limits, the more adversely your score will usually be affected. Installment debt is generally not as important to your FICO® score as revolving debt, at least in the short term. It refers to loans that a borrower repays over an extended period of time. As with revolving debt, using a large amount of installment debt can factor negatively into your FICO® score.
Length of credit history (15%): If your credit history is very short, your credit score may suffer. This is because a longer history helps demonstrate stability and responsibility. Both the age of your credit file and the average age of the accounts in it play a role.
Types of credit in use (10%): If you have used various types of accounts (for instance, installment, revolving, auto, mortgage, etc.), this will benefit your credit score.
New credit (10%): Making many inquiries seeking new credit can harm your credit score, especially if the inquiries are over a short period of time and for different types of credit.
Credit scores are generally separated into five categories: poor, fair, good, very good and excellent. Some people refer to their credit as “bad credit,” but it’s not an official credit standing. A credit score above 700 is considered good, while a score above 760 is likely to get the best interest rates.
Keep in mind that many of the largest lenders, including credit card companies, have developed their own scoring systems for evaluating borrowers’ credit, and may not rely on FICO® scores.
Employment information won’t affect your credit score, though lenders may take this information into consideration in making approval decisions. A good history of rent, utility and insurance payments is not usually factored into your credit report or credit score. However, delinquencies on these payments can be reported to the credit bureaus and may show up in your credit report and credit score.
How to Check Your Credit Score
Numerous banks, credit card issuers, and lending institutions now offer free credit score checks to their customers, which may appear on statements or in their online account. Credit scores can also be purchased directly from the three major credit bureaus or FICO®. There are also websites that offer free credit scores to their users, while other platforms offer credit scores as part of a paid monthly subscription for credit monitoring services.
If you’re not sure which type of credit score to check, keep in mind that the most commonly used credit score is the FICO® score, which, according to FICO® , is used in more than 90 percent of lending decisions. Your VantageScore credit score is another important version.
If you find that a landlord, lender, insurer, employer or other party is going to factor your credit score into a decision that will affect you, you may want to be aware of where your credit score stands. If you find that this party relies on a score other than FICO® and VantageScore, you may wish to check that score instead. Otherwise, there’s no need to check your credit score.
When it comes to your credit report, however, it’s recommended that you check it on a routine basis to make sure it contains no errors.
How to Check Your Credit Report
While checking your credit score will make you aware of what many creditors and others see, it will not give you any explanation for your score. In order to understand the reasons for your particular score, you’ll have to find out what information is contained in your credit report, because it’s on this report that your credit score is based.
The Fair Credit Reporting Act requires that all national consumer credit reporting agencies
(including the three major credit bureaus — Equifax, Experian and TransUnion) provide you with a free copy of your credit report upon request once every 12 months. However, AnnualCreditReport.com now offers free reports from all three of the bureaus weekly.
Many imposter sites may claim to offer free credit reports, but the only website authorized to provide your free annual credit report is AnnualCreditReport.com.
Checking your credit report is a good idea because it allows you to ensure that all your information is accurate and up-to-date. It can also help you guard against identity theft, because the activity of an identity thief will often show up on your credit report. Checking your credit report does not lower your credit score.
The Bottom Line
Improving your credit requires patience and persistent effort. By setting a concrete destination for yourself — whether it’s a long series of on-time payments or a particular increase in your credit score — you will know exactly what you’re working toward. As you make progress, you will find inspiration in watching your credit improve. When you have achieved what you set out to do, you will have established the kind of financial responsibility that good credit is based on. And by maintaining those good habits, you will be able to feel confident in the health of your credit for years to come.
DISCLAIMER: This content is for informational purposes only. Enova, OnDeck and its affiliates do not provide financial, legal, investment, or tax advice.
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