How to Improve Your Credit Score
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If you’re trying to improve your credit score, the first thing you’ll want to do is understand how credit works and which actions can positively impact your credit score. Fortunately, the basics aren’t too hard — pay bills on time and don’t carry a lot of credit card debt. But the details and complexities can also be important, especially when you’re about to apply for an important loan and want as high a score as possible.
The most important factors that affect your credit score
Your credit score is based entirely on the information within one of your credit reports from either Equifax, Experian or TransUnion. However, different types of information in your report can impact your scores in different ways. These credit scoring factors are generally broken into five categories.
The 5 factors that influence your credit score
Credit scoring models (the computer programs that analyze your credit report) are complex, but credit scoring factors are broken down into five groups. In order of importance for FICO Scores (the most commonly used credit score by lenders), they are:
- Payment history: This is the history of your payments on credit accounts, including loans and credit cards. Having a long history of paying your bills on time helps your credit score, while missed, late or defaulting on payments will hurt it. Even accounts that don’t traditionally get reported when you make on-time payments, such as cellphone bill payments, will hurt your credit if you miss several payments and your account is sent to collections. Bankruptcy filings often get put into this category as well, as they represent an inability to pay creditors.
- Current balances: Your current debt load is also important in determining your credit score and is often referred to as your credit utilization ratio. This is a comparison of the reported balance on your revolving accounts (e.g., credit cards) to their credit limits. Having a low ratio, meaning only using a small portion of your credit limit, is best for your scores among both individual accounts and across all your revolving credit accounts. Installment accounts, such as car loans and mortgages, aren’t factored into your credit utilization ratio, only those accounts with revolving balances, such as credit cards or home equity lines of credit.
- Credit history length: Having a long history of using credit responsibly positively impacts your credit scores. This includes the average age of all your accounts, and how recently you’ve used different accounts. That’s why personal finance experts recommend keeping old accounts open and active. Plus, applying for too many new accounts will reduce your average age of accounts, so apply sparingly for new credit.
- Credit mix: Lenders like to see how well you manage different types of accounts, so having experience handling both installment accounts (such as student, auto and home loans) and revolving accounts (generally credit cards and retail cards) can help your credit score.
- New credit: Applying for a lot of new credit in a short amount of time raises a red flag to lenders. Credit applications generate a hard inquiry of your credit reports each time a lender checks them to determine your creditworthiness. These can temporarily knock down your credit score by a few points each time, and stay on your credit reports for two years. However, credit scoring models also let you rate shop without hurting your score by deduplicating certain hard inquiries, such as for mortgage and car loans, that occur within a 14- to 45-day window (depending on the type of score).
While knowing the five categories is a good starting point, remember they are all interdependent upon each other. For example, if you’ve always paid bills on time and have an excellent credit score, a late payment could lead to a large score drop. However, if you already have a poor credit score and many missed payments, a new late payment might not lead to as large of a drop.
What’s a good credit score?
In addition to understanding how the information in your credit report can impact your score, it can be helpful to understand what’s considered a good score. The breakdown here can serve as a general guideline for base FICO Scores, which range from 300 to 850, and how having a score within a certain range can impact you when you apply for credit.
There are other types of credit scores with different ranges, including FICO’s industry-specific scores for auto lenders and card issuers that range from 250 to 900. Also, creditors may have their own internal definitions for what they consider to be good or bad credit, and your credit score may be only one of many factors that creditors consider when evaluating your application.
Check your credit reports for errors
Once you understand what impacts your credit score, one of the first things you want to do is review your credit reports for incorrect negative information that could be hurting your scores. You can get a free copy of your credit reports from each of the major credit bureaus, Equifax, Experian and TransUnion, at least once every 12 months on annualcreditreport.com. Also, know that due to COVID-19, you can now access your credit reports every week until April 2021.
While credit bureaus won’t remove accurately reported negative information from your credit reports, you can dispute inaccurately reported information and ask the bureau to verify, correct or delete the item you’re disputing.
Look closely to see if there is any error you can dispute, such as an account that’s been reported as late even when you made all the payments on time or accounts opened fraudulently in your name. You can file a dispute online and by mail, and include details or any documentation that proves the error. If the bureau corrects or removes the negative item, your score could improve as a result.
Pay your bills on time
As your payment history is the single most important credit scoring category, making sure all your payments are timely will contribute to building an excellent score. You may want to sign up for autopay on your accounts to make at least the minimum payment and avoid accidentally missing a payment.
If you use a budgeting app, you could also link your credit cards to the app to monitor their activity. This could be particularly important if you have an older credit card that you rarely use, but its information is stored in online accounts. You don’t want to miss a payment because you assume the card isn’t being used when it could accidentally get selected.
Accidental missed payments can also occur after a move if you forget to disconnect or make final payments on old utility and telecom accounts, or paper statements don’t get forwarded to you in time.
Lower your credit utilization rate
One of the fastest ways to improve your credit score is to reduce the amount of debt you’re carrying.
Utilization is based on your reported balances versus credit limit. Often, credit card balances get reported around the end of the statement period, which is about three weeks before the bill’s due date. As a result, even if you pay your bill in full each month, you could have a high utilization rate that’s hurting your credit.
The utilization calculation itself is quite simple: reported balance divided by credit limit. For example, if your card’s reported balance is $500 and its credit limit is $1,000, then the credit utilization ratio is 50% (500/1,000). Your overall utilization ratio, which is when you add up all your credit limits across several cards and divide the total amount owed across all the cards, is also configured.
Here are a few ways you can try to lower your utilization rate and improve your scores:
Make multiple credit card payments throughout the month
Rather than waiting for your credit card bill’s due date, try to pay down the balance before the end of your statement period. Doing so can decrease the balance that’s reported to the credit bureaus, leading to a lower utilization rate. Issuers make frequent payments easy online, so you could pay weekly or biweekly instead of monthly.
Increase your credit limits
You could also ask your credit card issuers to increase your card’s credit limit, which can lower your utilization rate even if your balance stays the same. However, be careful as some issuers will review your credit with a hard inquiry (which can hurt your score) before deciding whether to increase your card’s credit limit or not.
Apply for a balance transfer card with a 0% intro APR
You may also be able to save money and lower your overall utilization rate by opening a credit card with a promotional 0% APR offer. Then, transfer current credit card balances to that account to pay off the debt while it’s not accruing interest. As long as you don’t close any credit cards or increase your balances, your overall utilization rate will lower, and as you pay down your transferred balance with timely payments, your score should rise even more as that card’s utilization rate decreases.
Research debt consolidation loans
Another option that will quickly boost your credit score is to reduce or pay off any credit card debt with a debt consolidation loan. And, because consolidation loans are generally personal loans, a type of installment account, the new debt isn’t included in utilization calculations.
Wait for negative items to fall off your credit reports
While you work to add positive information to your credit report, the impact of negative items also decreases over time. Eventually, negative items will fall off your credit reports and won’t hurt your scores anymore. Most negative items can stay for up to seven years, but there are a few exceptions:
- Late payments: 7 years
- Collection account: 7 years
- Chapter 13 bankruptcy: 7 years
- Chapter 7 bankruptcy: 10 years
- Hard inquiries: 2 years
Keep tabs on your progress
As you work to improve your credit score, you can monitor your progress with one of the many free or paid credit-score tracking programs. But don’t be surprised if you see different scores — that’s not necessarily an error. A credit score will depend on the credit scoring model and whether it’s analyzing your credit report from Equifax, Experian or TransUnion. They may vary slightly, but if you see a big variation, it’s wise to review your credit reports to see what may be causing the disparity.
Some programs may give you access to multiple scores or scores based on your several different credit reports, but often you’ll only get one score type based on one credit report. We’ve created an overview of free credit-score tracking options, which scores they track, the credit report the score is based on, how frequently the score is updated and whether the program also comes with credit monitoring.
You could use several programs to track your various credit scores. However, even tracking one score can be helpful as many credit scores trend in the same direction. Just be mindful of which score you see and know that creditors may use a different score when you apply for a new account.