For many people, their credit score is something they keep close to their vest. It’s a number that can make or break your financial future, and so it’s natural to want to keep it as high as possible. But what do you do if your score isn’t where you want it to be?
Never fear! There are plenty of things you can do to improve your credit score. With a little time and effort, you can boost your score and get yourself on the path to a bright financial future.
Check your credit report regularly
The first step to improving your credit score is to check your credit report and identify any errors. You are entitled to a free credit report from each of the three major credit bureaus—Equifax, Experian and TransUnion—once every 12 months. You can request your report online from AnnualCreditReport.com, the website created by these credit bureaus to provide consumers with their reports.
If you find any errors on your report, you can file a dispute with the credit bureau online or by mail. Include a copy of your report with the error highlighted, as well as a statement explaining why you believe the information is inaccurate. The credit bureau has 30 days to investigate and respond to your dispute. If they find that the information is indeed inaccurate, they will amend your report and notify all three credit bureaus of the correction.
Know what factors impact your credit score
While there are many credit scoring models, the most common is the FICO® Score⁴, and it’s what we’ll focus on here. You have a FICO® Score for each of the three credit bureaus — Experian, TransUnion and Equifax. Lenders generally use your FICO® Score when considering your credit applications, so it’s a good idea to stay up to date on all three of your scores.
There are five factors that affect your FICO® Score:
Payment history (35%) – This is the record you’ve established by making on-time payments (and not making any late payments) on your debts, such as credit cards, student loans, utility bills, etc.
Amounts owed (30%) – This includes the amount of debt you currently have, as well as your credit utilization ratio (discussed below).
Length of credit history (15%) – A longer credit history can help your score, while a shorter one will have less of an impact. This factor also includes the types of credit accounts you have; for example, installment loans (such as auto loans) tend to be better for your score than revolving debt (such as credit cards).
Credit mix (10%) – A mix of different types of debt — including revolving and installment loans — can help your score. Having just one kind of account won’t hurt you here, but having several can help.
Newcredit (10%) – As you might expect, opening several new lines of credit at once can indicate greater risk to lenders. However, simply having new accounts isn’t enough to hurt your score; they also need to be used responsibly over time.
Understand how your credit score is calculated
Your credit score is calculated using information from your credit report. This includes your payment history, outstanding debt, credit utilization, length of credit history, and more. You can get a free copy of your credit report from each of the three major credit bureaus every year at AnnualCreditReport.com.
By understanding how your credit score is calculated, you can take steps to improve it. For example, if you have a high credit utilization, you can pay down your debt to lower your ratio. If you have a short credit history, you can work on building it up by making sure to make all your payments on time and keeping low balances on your cards.
There are many factors that go into your credit score, so there is no one-size-fits-all solution for improving it. However, by taking some time to understand how it works and making strategic changes to your finances, you can give yourself a boost.
Work to improve your payment history
Your payment history accounts for about 35% of your credit score, so it’s crucial that you make all your payments on time, every time. You can improve your payment history by paying all your bills on time, including credit cards, utilities, rent and mortgage. If you have trouble remembering to pay all your bills on time, set up automatic payments with your bank or sign up for a service like Mint that sends you reminders.
Keep your credit balances low
Your credit score is partly determined by how much debt you have relative to your credit limits. This is called “credit utilization,” and it makes up 30% of your score.
The lower your credit utilization, the better. That’s because it shows lenders that you’re not maxing out your credit cards, which could make you a risky borrower. Aim to keep your credit utilization below 30%. Even better: below 10%.
Use credit cards wisely
If you carry a balance on your credit cards, paying off as much of it as possible will help improve your credit score. Try to keep your balances below 30% of your credit limit, and aim to pay off your balances in full each month if possible.
In addition, using credit wisely can help improve your credit score. This means using credit only when necessary and making sure to pay off any balances you do have in full each month. If you can avoid using credit altogether, that’s even better!
Avoid opening too many new credit accounts
Opening several new credit accounts in a short period of time can represent greater risk to creditors. To mitigate this, FICO® Scores exclude inquiries for new accounts over the past 12 months. An important factor in FICO® Score calculation is something called your “credit utilization ratio” or ” balances to credit limits.” FICO® Scores will generally credit you for using less than 30% of your available credit, so keeping balances low relative to your credit limits will help improve your scores.
Don’t close old credit accounts
One common misconception is that closing old credit accounts will help improve your credit score. However, closing an account will actually have a negative impact on your score because it will lower your credit utilization ratio, or the amount of available credit you have compared to the amount you’re using. A lower credit utilization ratio indicates to lenders that you’re a responsible borrower who is not maxing out your credit cards, which can lead to a higher credit score. Therefore, it’s best to keep old accounts open and active by using them occasionally.
Manage your debt wisely
Assuming you have some debt, the first thing you should do is figure out how much debt you have and what kind of interest you are paying on that debt. You can do this by getting a copy of your credit report, which will show your outstanding balances and the interest rates you are paying.
If you have a lot of high-interest debt, you may want to consider consolidating your debt into a single loan with a lower interest rate. This can save you money in interest payments and help you pay off your debt more quickly.
Another option is to transfer your balance to a credit card with a 0% introductory APR on balance transfers. This can be an effective way to save on interest and pay off your debt more quickly. However, it is important to be aware of the fees associated with balance transfers and make sure you will be able to pay off the transferred balance before the introductory APR period ends.
Whatever option you choose, it is important to make sure you are making at least the minimum payments on all of your debts and that you are not adding to your debt load. If you are able to do this, you will start to see your credit score improve over time.
Use caution with credit repair services
There are a lot of companies out there promising to help you improve your credit score, but many of them are not legitimate. Be very careful before you sign up for any credit repair services, and make sure you understand exactly what they are offering. Beware of any service that asks you to pay upfront before they do any work. Also, be cautious of any company that guarantees they can improve your credit score. Remember, there is no easy fix when it comes to your credit score. If a company is promising results that seem too good to be true, they probably are.