How To Improve Your Credit Score

Introduction

If there’s one thing that influences your finances more than anything else, it’s undoubtedly your credit score. Having a higher credit score gets you access to more credit at better rates, while a lower credit score limits the opportunities available to you. So making an effort to improve your credit score, regardless of where you currently stand, is always worthwhile.

What Is a Credit Score?

Your credit score is a three-digit number that lenders and creditors use to determine how much credit they can offer you, and at what terms.

Credit card issuers, lenders, and other financial institutions report your payment history and other activity to one or all of the three main credit bureaus — Experian, Equifax, and TransUnion. Those agencies compile your credit reports, which may be different depending on who reported what to which bureau.

Then credit scoring companies, like FICO and VantageScore, use the information in your credit reports to calculate your credit score. These numbers can also vary, depending on which credit report is used, and how the scoring model weights each factor.

So you actually have several different credit scores at any given time. But they all tend to fall within the same range, and there’s almost always an opportunity to coax them upward.

What Is the Importance of Your Credit Score?

Your credit score affects almost every aspect of your financial life, from what you can borrow to where you can live, and sometimes even what job you’ll be offered. Every loan or line of credit you have will likely be included on one or more of your credit reports. And in the future, every loan or line of credit you try to get will be influenced by that score.

If your score is too low, you might get denied credit. If not, your terms — like interest rate, credit limit, and even annual fee — will almost certainly be less favorable than what you could get with a higher credit score. It can even affect your car insurance rates.

So being dedicated to building and maintaining good credit is one of the best things you can do for your future self. It might seem complicated at first, but it gets easier once you understand how credit works.

What Is the Best Way To Build Credit?

In order to build credit, you need to have credit. So the best way to build credit is to get and use a credit card, and pay off your full balance each month before the due date. This will establish a positive payment history, which should boost your score over time.

How To Raise Your Credit Score

Many small things can contribute to a higher credit score, and doing them in tandem can potentially boost it even more.

Pay bills and credit cards on time

This tip is the most important, so it has to go first. Pay every bill on time, every time. No exceptions. Your payment history makes up 35% of your FICO Score and 40% of your VantageScore, so no matter which way you slice it, this factor has the biggest impact on your credit score.

Understand your credit score and report

Key aspects of your credit history, like whether you pay late or on time, get reported to credit bureaus for inclusion in your credit reports. Credit-scoring companies use those reports to calculate your credit score. This is the foundation of your financial life, and you can build it up (or tear it down) from there.

Obtain and review credit reports regularly

Since the variables can change, the results can vary — and mistakes can be made. So it’s important to check your credit reports on a regular basis. The law gives you free access to each of your three credit reports once a year, but you can now get them every week at AnnualCreditReport.com.

Dispute inaccuracies on credit reports

When you get your credit reports, check for information that could be incorrect, or even fraudulent. If you find any errors, contact the credit bureau and file a dispute. They generally have 30 days to investigate, and another five days to notify you of their findings.

Become an authorized user

If you want to build credit without getting your own credit card, becoming an authorized user on somebody else’s card could be an option. However, not all creditors report authorized user activity to the credit bureaus. Some banks only report activity if the authorized user is the primary cardholder’s spouse. And the plan could backfire if your activity is reported, but the card gets maxed out or the primary account holder has poor payment habits.

Use a secured credit card

If you can’t get an unsecured card because you don’t have a long enough or strong enough credit history, consider getting a secured credit card instead. This option requires you to put down a deposit first, and your credit line will typically be equal to your collateral. So if you provide a $200 deposit, you can usually charge up to $200 on your card. After using your secured card for a few years, and paying on time every month, you can often graduate to an unsecured credit card and get your deposit back with interest.

Consider alternative credit reporting

If you pay your rent and utility bills on time, you may think that counts toward positive payment history. But typically this won’t get reported to the credit bureaus — unless you fail to pay. The good news is you can have these items included in your report by paying a subscription fee to a service like ExtraCredit, Rent Reporters, or SimpleBills. Also, Experian Boost automatically looks for bill payments in your bank account for free — although it only affects your Experian credit report, not Equifax or TransUnion.

Manage credit card utilization

Your credit utilization ratio (CUR) measures how much of your available revolving credit you’re actually using at any given time, expressed as a percentage. Using less than 30% of your overall credit lines is preferred, and charging more than that or maxing out your cards is a red flag for potential creditors. If you can keep your spending at less than 10% of your revolving credit, even better.

Reduce high credit card balances

It may be easier said than done, but because your CUR is heavily weighted in calculating your credit score, it’s important to pay down your debt. At the same time, reduce your spending on credit so you don’t end up back in the same place.

Ask for higher credit limits

Another way to lower your credit utilization is keeping your spending the same (or less), but getting more credit. The simplest way to do this is to ask for a credit line increase on one of your current cards.

Limit new credit applications

If the goal is more credit so you can lower your credit utilization ratio, you could also apply for a new credit card. However, that will usually result in a hard inquiry, which could lower your credit score slightly. Doing this too many times makes you look desperate for credit, which is another red flag for creditors. The best bet is to always see if you pre-qualify first, which is just a soft inquiry. Then only apply if you’re pre-qualified and the card fits your needs.

Avoid closing old credit accounts

If you have an old account that you’re not using, you might be tempted to close it. But that’s not a good idea because it can negatively affect both your credit utilization ratio and the length of your credit history. In fact, continuing to use the card for small purchases and then paying off the balance in full will not only help boost your credit, but prevent the older card from getting closed for inactivity.

Diversify credit types

Your “credit mix” plays a role in determining your credit score, and that means having different types of credit. That’s revolving credit, like credit cards, as well as installment accounts, like a mortgage or auto loan. That doesn’t mean you should rush out and apply for a loan, which will also result in a hard pull. But if it makes sense for your situation, a record of on-time payments to both account types shows potential creditors that you can properly handle an assortment of credit.

Consider debt consolidation

Sometimes paying a bunch of different credit cards and loans with high interest rates can get to be too much, and it becomes hard to pay down your debt. If you qualify for a low-interest debt consolidation loan or balance transfer credit card, it might be a good idea to move your debt and reduce your monthly payments to one. However, be cautious of debt settlement programs that ask you to stop paying while they negotiate a discounted payoff. This debt relief option may be suitable as a last alternative before declaring bankruptcy, but it won’t increase your credit score.

Deal with collections accounts

If you’re already delinquent on credit card accounts, chances are some of them have or will be charged off and sent to collections. This doesn’t mean you no longer owe the debt — it’s just been reassigned. While it might be tempting to avoid collections agencies, that won’t help your credit score. Instead, negotiate a lower balance or manageable payment terms, and ask for your debts to be marked as fully paid once you’ve paid them off.

Protect your personal information

Identity theft involves someone else using your personal information to create fraudulent accounts or charge items to your existing credit cards. This can wreak havoc on your credit score. So protect your identity by being cautious about when and how you reveal personal information, leaving your Social Security card in a safe place at home, and using strong passwords for online accounts.

Monitor credit reports for fraud

The best way to catch fraud and potential identity theft is to review your credit reports regularly. If you find any accounts you never opened, addresses you’ve never lived at, or jobs you never had, file a dispute with the credit bureau and report the identity theft at IdentityTheft.gov.

Track credit progress with monitoring tools

Using the latest technology won’t raise your credit score by itself, but it could help give it a boost. For example, setting up AutoPay for at least the account’s minimum due will make sure you don’t miss a payment. Even getting text or email alerts when payments are due, or when unusual account activity is detected, should help you manage your finances. Look into mobile apps from your bank or creditor, and consider budgeting services like Rocket Money or PocketGuard, all of which may offer you free access to your credit scores or credit report summaries.

Bottom Line

Improving your credit score is a fairly simple process, but it’s not always easy. There are many parameters involved, and some of them are dependent on other factors, which makes it a bit like a building a house of cards. If one part falls over, the whole thing can come crashing down.

But hands down, making on-time payments is the best way to build your credit score, followed by keeping a healthy credit utilization ratio. Sometimes you need more credit in order to make these two things happen, so if you decide you’d like to explore that option, always see if you pre-qualify before submitting the application.