When you want to boost your credit score, there's some common advice you hear. That's because there are a few simple steps that form the foundation for building excellent credit.
Here are two rules, in particular, that you need to follow when you're working toward an excellent credit score:
#1: Don't use more than 30 percent of your credit limit.
#2: Pay your bills on time. All of them, not just your credit card bill.
If you don't follow the basic rules, you won't even make it into the realm of fair credit, let alone achieve excellent credit. Rule #1 focuses on your credit utilization ratio, which is the amount of credit you've used compared to the amount of credit you have available. About 30 percent of your FICO score is based on your ratio, so that's why you must pay attention to this.
Rule #2 has an even stronger influence on your credit score. Your payment history contributes a whopping 35 percent to your FICO score. So if you're only considering your utilization ratio and your payment history, you're looking at a staggering 65 percent of your score.
Other Factors to Consider
Once you've got this part of your score covered, think about the other variables that contribute to a healthy score. There are five factors that are considered when your credit score is calculated: amount owed, which is the amount of credit you've used (30 percent), payment history (35 percent), types of credit used (10 percent), length of credit history (15 percent), and new credit (10 percent).
Now, if you're keeping low balances and paying your bills on time, your credit is probably in decent shape. To kick your score up from decent to great, you need to pay attention to the lesser-known factors that make up your score. For instance, the types of credit used don't have a huge impact on your score, but it does contribute a little and so it deserves some attention.
What Is "Types of Credit Used?"
This doesn't refer to different types of credit cards, so don't run out and start applying for new cards. This means that it's good to have a mix of credit, such as revolving credit and installment loans.
For instance, if you have credit cards, that's a revolving line of credit. With credit cards, there isn't a monthly obligation unless you use the cards that month. On the other hand, with installment loans, you agree to pay a set amount every month for a specified period of time.
Examples of installment loans include mortgages, auto loans, and student loans. If you've successfully paid off an installment loan, or at least make your installment payments on time, then that's a plus to have in your credit history.
If you've got a credit card, a mortgage, an auto loan, and maybe a student loan, then you have a good mix of credit. While this type of mix can enhance your score, it's never a good idea to take on credit that you don't need. But if you happen to need a new or used car anyway, then taking on a loan for six months at a very low rate isn't a bad idea if you'd like to use this strategy to boost your score a little bit. Remember, though, that it won't have that impact immediately because you've just taken on the new debt.
How Credit Scores Differ
There are many different versions of credit scores, so it's important to remember that the factors involved and the weights applied to each factor might vary from score to score. We've talked about FICO scores because 90 percent of lenders use a version of that score.
There are many free scores available, though, and these can help you keep track of your credit health. You might see, for instance, that you have only a "B" grade when it comes to the amount of credit used. This tells you that to bump up your score, you need to improve this area.
You can get a free credit score right here on LendingTree. You'll get an overview that shows what areas of your credit life look good and what areas need improvement. And you don't have to worry about this hurting your score. This is called a "soft pull" and it has no impact on your credit score.