How Do I Improve My Credit Score?
Are you about to apply for a mortgage or loan and want to get the best rate possible? Or maybe you just want to increase your odds of being accepted for the best rewards credit cards. If that's the case, you may want to start working right away to improve your credit score.
First things first:
What is a Credit Score?
A credit score is a number between 300 and 850 that rates the creditworthiness of a consumer. The higher the credit score, the more attractive a borrower is to potential lenders.
Credit scores determine whether a person will be approved for everything from credit cards to car loans, mortgages, and apartment leases. The interest rate and the amount of the down payment are also based on the borrower's credit score. Scores could even be used by local utilities to figure out how likely it is that a new customer will pay their bills on time when they open a new account.
The two most common scoring models are FICO and VantageScore, which are based on information reported by the three major credit bureaus—Experian, Equifax, and TransUnion. Each scoring model gives weight to different factors that represent a borrower's creditworthiness, such as payment history, outstanding balances, and credit length. Individual lenders, on the other hand, may calculate scores using their own proprietary algorithms.
What’s a ‘Good’ Credit Score?
Subprime borrowers are usually people with credit scores below 640. Most of the time, subprime mortgages have higher interest rates than regular mortgages because the lender is taking on more risk. Borrowers with bad credit may also need a shorter time to pay back the loan or a co-signer.
On the other hand, a credit score of 700 or higher is usually good, and a borrower may get a lower interest rate, which means they will pay less in interest over the life of the loan. Scores above 800 are considered to be very good.
Credit score ranges are set by each lender, but the average FICO score range is often used:
- Excellent: 800–850
- Excellent: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
Note: A person's credit score can also affect how much of a deposit they need to make to get a smartphone, cable service, utilities, or to rent an apartment. And lenders look at borrowers' credit scores often, especially when deciding whether to change a credit card's interest rate or credit limit.
How Do I Improve My Credit Score?
1. Make Sure Your Credit Reports Are Accurate
Before you can work on improving your credit, it helps to know what might be going in your favor (or against you). This is why you should check your credit history. Your credit information is collected by the three major credit reporting agencies, Experian, TransUnion, and Equifax. Banks, credit card companies, retailers, auto and mortgage lenders, and even utility companies are examples of these. And, while they work hard to gather accurate data, they don't always succeed.
The first thing you need to do to improve your credit score is make sure that all of the accounts and negative marks on your report are accurate. Federal law requires the agencies to give you a free copy of your credit report once a year through AnnualCreditReport.com. You can get a free copy of your report every week until April 21, 2022.
Make sure you get your reports and check them over carefully. You can dispute inaccurate information with the credit bureau and the financial institution that made the error.
2. Pay Your Bills on Time
Making all of your payments on time is the single most effective way to raise your credit score. Without fail. More than 90% of the best lenders use FICO scores to decide whether or not to give credit. These are based on five different things:
- Payment History (35%)
- Credit Utilization (30%)
- Length of Credit History (15%)
- Mix of Credit (10%)
- New Credit (10%)
Your payment history has the most effect on your credit score, as you can see. This is why it is better to keep old student loans or other debts that you have already paid off on your record. If you pay your debts on time and in a responsible way, it helps you.
So, one easy way to improve your credit score is to never be late with a payment. Here are some ways to do that:
- Setting up a paper or digital filing system to keep track of monthly bills
- Setting up due date reminders lets you know when a bill is due.
- Having your bank account automatically pay your bills
TIP: You could also put all or a portion of your monthly bill payments on a credit card. This plan is based on the idea that you will pay off your whole balance every month to avoid paying interest. If you always pay on time, taking this route may make it easier to pay your bills and improve your credit score.
3. Keep Your Credit Utilization Below 30%
The next most significant factor in determining your credit score, after your payment history, is your total debt. Instead of a debt-to-income ratio, credit reporting agencies use a factor known as "credit utilization" because they lack your income information. Utilization accounts for 30% of your FICO score.
Utilization is the relationship between how much credit you have left on your credit cards and home equity lines and how much credit you have available. Have a $4,000 balance on a credit card with a $10,000 limit? Thus, the utilization ratio is 40%. Utilization is critical on a global and per-credit-source basis.
It is generally advised to keep credit utilization below 30%. However, those with the highest scores have an average utilization rate of 10% or less. However, there is a catch. Typically, your credit card balances are reported before your payment is due. Even if you pay your monthly bill in full, the reporting agencies may still assign you a higher utilization rate.
You can regulate your credit usage by:
- Getting rid of revolving credit card debt by paying off cards or lines that are close to their limit first;
- If you are a good customer with a good payment history, you can ask to have your credit line increased.
- Paying more than once in a billing cycle; adding a payment in the middle of the month may lower the reported balance to the agencies.
4. Get a Credit Card If You Don’t Already Have One
Irresponsible credit card use can harm your credit score and your finances. However, when used wisely, a credit card can be one of the quickest ways to improve your credit score because it affects the most important aspects of it. Signing up for a credit card and paying on time each month helps you establish a good payment history. Then, by keeping your card spending low, you create a low utilization ratio. Credit cards can also help you improve your credit mix and open new accounts.
If you are worried about spending too much with a credit card, you could get one with no annual fee and only use it for one or two expenses you have to pay every month. Get a credit card, put a small payment on it every month, set it to pay for itself, and put it in a drawer. You won't have to worry about missing a payment or racking up a big bill, but your credit history will grow quickly.
Excellent Resource: First Credit Card? | How To Choose?
5. Reduce Credit Demands
There are two kinds of checks on your credit history, which are often called "hard" and "soft."
A typical soft inquiry could be you checking your own credit, allowing a potential employer to check your credit, financial institutions you already do business with checking your credit, or credit card companies checking your file to see if they want to send you pre-approved credit offers. Your credit score would not change because of soft inquiries.
Hard inquiries, on the other hand, can hurt your credit score for a few months to two years. Applications for a new credit card, a mortgage, an auto loan, or some other type of new credit can be hard inquiries. The occasional tough question probably would not make much of a difference. But doing a lot of them quickly can hurt your credit score. Banks might think that you need money because you are having money problems and are thus a bigger risk. If you want your credit score to go up, do not apply for new credit for a while.
6. Use a Thin Credit File to Your Advantage
A thin credit file means that you do not have enough information about your credit history for a credit score to be calculated. This is a problem for about 62 million Americans.
There are ways to add to a thin credit file and get a good credit score, which is good news.
Experian Boost is one of them. This fairly new program gets information about your finances that is not usually in your credit report, like your banking history and utility bill payments. This information is then used to figure out your Experian FICO Score. It is free to use and made for people who have little or no credit but have paid their bills on time in the past.
UltraFICO is also like this. Your banking history is used by this free program to help build your FICO score. Having a savings cushion, keeping a bank account over time, paying your bills on time through your bank account, and avoiding overdrafts are all things that can help.
Renters also have a third option. If you pay rent every month, there are a few ways to get credit for being on time. Rental Kharma and RentTrack, for example, will report your rent payments to the credit bureaus for you, which could help your score. Keep in mind that reporting rent payments may only change your VantageScore, not your FICO Score. Some companies that report rent charge a fee for this service, so read the fine print to find out what you are getting and possibly buying.
7. Maintain Late Accounts and Old Accounts
The longer you have had your current account, the better. The length of time you have had your credit accounts is part of your credit score. The longer your average credit history, the more appealing you are to lenders.
Do not close old credit accounts that you are not using. Even though the credit history for those accounts would stay on your credit report, closing credit cards while you have balances on other cards would lower your available credit and raise your credit utilization ratio. That could make you lose a few points. If you have accounts that are late, charged off, or in collections, do something to fix them. Suppose you have a number of late or missed payments on an account. You should pay off what is already due and then figure out how to make future payments on time. That will not eliminate the late payments, but it will improve your payment record in the future.
If you have charge-offs or accounts in collection, decide if it makes sense to pay them off in full or make a deal with the creditor. If you pay off collections or charge-offs, your score might go up a little bit. Remember that negative account information can stay on your credit report for up to seven years, and bankruptcies for 10 years.
8. Think About Combining Your Debts
If you owe money on more than one thing, you might be better off getting a loan from a bank or credit union to pay off all of them at once. Then you will only have to worry about one payment, and if you can get a loan with a lower interest rate, you will be able to pay off your debt faster. That can help you use less of your credit, which can make your credit score go up.
Another way to pay off multiple credit card balances is to use a balance transfer credit card to pay them off. Most of the time, these cards offer a period when you do not have to pay any interest on your balance. But watch out for balance transfer fees, which can cost you anywhere from 3% to 5% of the amount you are moving.
Useful Resource: Is it Smart to Pay off Credit Card Debt Using Another Credit Card?
9. Keep Track of Your Progress by Keeping an Eye on Your Credit
Credit monitoring services make it easy to keep track of how your credit score changes over time. Many of these services are free, and they check your credit report for changes, like a paid-off account or a new account you have opened. Also, they usually give you access to at least one of your credit scores, which are updated monthly by Equifax, Experian, or TransUnion.
A lot of the best services for keeping an eye on your credit report can also help you avoid identity theft and fraud. For example, if you get a notice that a new credit card account you do not remember opening has been added to your credit file, you can call the credit card company to report possible fraud.
Why Is It Important to Have a Good Credit Score?
Credit scores show how well you can handle debt. The higher your credit score, the more responsible you appear to lenders. The FICO model, for example, says that a credit score of 850 is a perfect score.
What do you get if you have a high credit score?
Better loan terms and easier approval are the simplest answers. Most people will save hundreds of thousands of dollars over the course of their lives if they have a good or great credit score. Good credit gets better rates on mortgages, car loans, and anything else that involves borrowing money.
Better credit scores are seen as indicating lower-risk borrowers, so more banks will compete for their business by giving them better rates, fees, and perks. On the other hand, people with bad credit are seen as higher-risk borrowers, so there are fewer lenders competing for them and more businesses can get away with charging high annual percentage rates (APRs).
A bad credit score can also make it hard for you to rent an apartment, rent a car, or even get life insurance. This is because your credit score affects your insurance score.
To Sum Up:
Your credit score is one of the best ways to figure out how healthy your finances are. It gives lenders a quick idea of how well you handle credit. The better your credit score, the easier it will be to get new loans or credit lines. When you borrow money, having a good credit score can also help you get the best interest rates. There are a number of quick and easy things you can do to improve your credit score. Even though it might take a few months for your credit score to go up, you can start working on it in just a few hours.
How Often Should You Look at Your Score?
You should check your credit score often to see if there are any mistakes, but be careful not to hurt your score by doing so. Check with your bank to see if you can sign up for free credit monitoring and get alerts when your score changes.
How Can You Raise Your Credit Score Quickly?
It can take time to raise your credit score, and you probably would not see a big jump overnight. But you might be able to speed up the process by getting as much of your revolving credit as possible removed (especially late payments) or by being added as an authorized user to someone else's old account with a perfect payment history and a low credit utilization rate. This should be done by a friend or family member, who does not even need to give you the card.
Does Avoiding Hard Inquiries Raise Your Credit Score?
Yes, getting hard inquiries off your credit report will help your score, but not by a lot. Only 10% of your overall score is based on how many hard inquiries you have had recently. You should try to get rid of any wrong inquiries, but this step would not make a big difference by itself.
I hope this information was helpful. If you have any questions, feel free to reach out. I’d be happy to chat with you.
About the Author
Renee helps clients make sound financial decisions in her role as a Financial Planner at Vincere Wealth. Having a trusted advisor steer you toward wise choices now can have a major impact on your financial future. Renee is especially proud of her work educating and empowering women in the areas of personal finance, budgeting, and debt management.
If you're interested in an investment advisory or financial planning relationship, please consider Vincere Wealth Management.