How to Improve Your Credit Score
There are times when it pays to have the highest credit score possible. Maybe you’re about to buy a home, refinance your mortgage or apply for an auto loan or credit card. In these moments, having a higher credit score may save you thousands of dollars in interest in the ensuing years.
Whether you’re starting out with a pretty good credit score and just want to give it a boost, or if your score is weak and needs some serious TLC, there are steps you can take to improve it.
7 tips to improve your credit score
Getting errors off your credit report can give you the quickest and most significant boost to your credit score. Once you’ve reviewed your credit report and successfully disputed any errors that may be dragging your score down, other improvements take some time.
These tips can help you develop responsible credit habits and improve your score.
Pay bills on time
A history of on-time payments is the most significant factor in your credit score calculation, so get in the habit of paying your bills on time, every time.
If you have trouble remembering to make your payments, set up payment reminders or enroll in automatic payments through your bank or lender.
Keep balances low
High balances on credit cards and other revolving credit accounts have a more significant impact on your score than mortgages, student loans, or car loan balances. Try to pay off your credit card balance in full each month and never use more than 30% of your available credit limit.
Only open a new account when necessary
Don’t open new credit card accounts just to increase your available credit. Because your credit score takes into account the average age of your credit accounts, this strategy lowers the average age of your open accounts. This strategy could actually hurt your score rather than improve it.
Pay off credit card debt
It’s tempting to move debt around to take advantage of low- or no-interest introductory offers. This can be a good strategy for paying your debt off faster. But do this only if you have a plan for paying off the debt before the introductory period expires. It’s better to have no credit card debt than it is to have zero-interest balances on several cards.
Don’t close unused cards
If you have trouble resisting the urge to spend, cut your card up or freeze it in a block of ice, but don’t close the account. Doing so will lower the average age of your credit accounts and hence lower your credit score.
Plan your rate shopping
Are you considering refinancing your mortgage or buying a car? Credit scoring models differentiate between shopping for several new credit lines and shopping for the best rate on a new loan, so plan to do your rate shopping within a 30- to 45-day time frame.
Keep your debt-to-income ratio low
Your debt-to-income ratio is all of your monthly debt payments divided by your gross monthly income. Although your credit report does not include your income, Millstein says you will be asked for this information on credit applications.
“If you want to qualify for a mortgage,” Millstein said, “lenders want to see a debt-to-income ratio of 43% or lower.” If this ratio is too high, it could explain being denied for credit even though your credit score is strong.
How long does it take to improve my credit score?
If negative information shown on your credit report is accurate, there’s no “quick fix” for improving your credit score. How quickly you can improve your score depends on what kind of information is included in your report.
Late payments, accounts sent to collections and Chapter 13 bankruptcies remain on your report for seven years. Chapter 7 bankruptcies stay on your credit report for 10 years. But the impact of these items lessens over time, especially if you add a lot of positive information to your credit report, such as on-time payments. In fact, you may be able to get approved for a home loan as little as one year after a bankruptcy is discharged, depending on your circumstances.
Beware of any credit repair services that promise to quickly and dramatically raise your credit score or have negative information removed from your credit report even though the information is accurate. These are often scams that are just interested in taking your money. They cannot remove accurate information from your credit report or do any negotiating with creditors that you can’t do on your own.
If you’re having trouble managing your credit, get help from a reputable credit counselor. The U.S. Department of Justice maintains a list of approved credit counselors.
What are the most important factors for calculating a credit score?
Companies use a mathematical formula or scoring model, to calculate your credit score based on information included in your credit report.
Important factors that make up your credit score include:
Payment history accounts for 35% of your FICO Score. Lenders want to see that you have a history of making on-time payments. The occasional late payment won’t seriously damage your credit score. But a history of frequent, seriously delinquent payments will negatively impact your score.
Late payments remain on your credit report for seven years from the date of the missed payment. If the late payment information on your credit report is accurate, you’ll have to wait seven years for it to fall off your report. However, the impact of the late payment on your credit score will lessen over time.
If the late payment information is inaccurate, follow the credit reporting agency’s instructions for disputing incorrect information.
Credit utilization ratio
The amount you owe accounts for 30% of your FICO score. Your credit utilization ratio is the percentage of your available credit currently being used. Using a high percentage of your available credit could indicate that you are overextended and may be more likely to miss payments.
VantageScore recommends keeping your overall utilization rate at or below 30%. So if you have three credit cards, each with a $1,000 limit, you’ll want to keep your combined balances below $900 across all three cards (30% of $3,000).
Number of accounts
Having several open credit accounts on your report is not necessarily a bad thing, but having a large number of accounts with balances could potentially hurt your credit score. In general, it’s better to have a large number of accounts with zero balances than to carry balances on several credit card accounts. Keep in mind some banks may close your unused credit card accounts if you aren’t using them.
You don’t necessarily want this to happen, because it could lower your average credit age (another factor in your score) and it could reduce your available credit limit, which will in turn impact your utilization rate. For example, let’s say you have three cards with a total limit of $10,000 and you carry a $2,000 balance on the three cards combined. Your utilization rate is a very healthy 20%. But, if one of your cards is closed, your total limit is reduced to $5,000 and you still carry $2,000 in balances, you now have a high 40% utilization rate.
Age of open accounts
Length of your credit history accounts for 15% of your FICO Score. In general, having a longer credit history translates into a higher credit score.
Credit scoring models consider the age of your oldest account, the age of your newest account and the average age of all of your accounts. So it’s a good idea not to close old accounts, even if you’d paid off the balance and are no longer using the card. If anything, charge one small item to your accounts each month and set the bill to be paid in full via autopay.
History of use
Credit rating agencies presume that your past credit usage behavior can help them predict your future behavior. So many credit scoring models consider not only how long you’ve had credit accounts, but how long it’s been since you’ve used certain accounts. A person who’s had a credit card for 10 years and never used it may have a lower score than someone who’s only had credit for two years but used it frequently and responsibly during that time.
The type of credit accounts you use makes up 10% of your FICO Score. Most consumers use a number of different accounts, including mortgages, car loans and credit cards. If your experience has been limited to repaying a car loan, you may be considered higher risk than someone who’s managed credit cards responsibly.
New credit inquiries
Applying for and opening several new credit accounts in a short amount of time can be considered risky behavior by credit rating agencies, so new credit accounts for 10% of your FICO Score.
When you apply for a new credit account, the lender requests your credit report or credit score. This action places a “hard inquiry” on your credit report. Too many hard inquiries may signal to the credit rating agencies that you are having trouble paying your bills or are overspending. Thus they may negatively impact your credit score.
However, credit scoring models do take into account that you may be rate shopping. So if you apply for the same type of loan – such as a mortgage or auto loan – with several lenders within a short time frame (30 to 45 days), those hard inquiries generally won’t impact your score.
Negative information such as bankruptcies, foreclosures and collections can have serious and long-lasting impacts on your credit score. Each of these items remains on your credit report for seven to 10 years. However, the older they are, the less impact they have on your score.
How can I check my credit score?
Because your credit score is calculated based on information from your credit report, it’s a good idea to check your credit report at least annually to ensure it’s in good shape and free of errors or signs of identity theft.
Steven Millstein, a certified credit counselor, former credit repair attorney and founder of Credit Zeal, says the best place to start is with the free credit report that you can access online, every year at AnnualCreditReport.com. You can order copies of your credit report from the three credit rating agencies (Experian, Equifax, and TransUnion) more often, but there may be a fee involved.
However, your free credit report doesn’t show your credit score. That’s a separate item that must be obtained by other means. You can purchase it directly from the credit bureaus, but there are many free options today as well.
Check your credit score anytime using LendingTree’s Free Credit Score tool.
It’s especially important to check your credit score before applying for credit, because your credit score may make or break the deal.
If your credit score needs some help, the best thing you can do is make your payments on time and make a plan to pay down your balances. It will take some time to see the results of your efforts, but those actions are the cornerstone of a high credit score. It’s impossible to know how much of an improvement these tips will make because every credit history is different. But with time and responsible handling of credit, you’ll soon enjoy the benefits of a higher credit score. If you have tried the steps above and still find yourself falling short when trying to improve your credit score, click here to learn more about our professional credit repair services.