Your credit score is vital for your financial life. It’s what lenders will look at when deciding whether to offer you a loan or credit, and it will impact the terms they offer.
As you can see from our “What is a Good Credit Score?” infographic and video, credit scores range from 300-850, with general categories of:
- 300-550 Poor credit
- 550-620 Subprime
- 620-680 Acceptable credit
- 680-740 Good credit
- 740-850 Excellent credit
Improving your score from one category to another could potentially save you tens of thousands of dollars on a home loan, thousands on an auto loan, and may even lower your insurance premiums.
Knowing how to improve your score involves a solid understanding of how credit scores are calculated. While the precise methods used are trade secrets, generally, we do know what factors contribute to a credit score.
For FICO scores, the factors or calculation breaks down as follows:
- 35% Payment history
- 30% Debt amount owed
- 15% Length of credit history
- 10% New credit
- 10% Types of credit used
VantageScores, the FICO alternative from the 3 major credit bureaus, break down slightly differently, but with the same general categories.
If you’re thinking of buying a home or taking out a major loan, it’s worth your while to know your score and if you are in a lower tier, work on improving your credit score ahead of time. Here are 5 of the best ways to raise your score.
5 Actions You Can Take
Make Payments on Time
If you are already behind or have been in the past 6 months, this step isn’t a quick fix, but it’s the most impactful thing you can do to improve your credit score. Getting current AND making payments on time every month will steadily raise your score over time. Conversely, missing a payment will likely cause a quick drop in your score. With the credit scoring model you lose points for late payments, however, you gain points back for on-time payments. It takes time for the effects – both good and bad – to be seen and felt.
To keep all of your existing payments paid timely, set up automatic payments through your bank’s online payments tools.
Pay Down Balances
The second biggest factor in your score is your credit utilization rate, which is how much of your available credit balance you are currently using. This measures amounts owed against the credit limit and is measured for each account individually and all accounts combined. If you have $10,000 in total credit available and you owe $5,000, then your utilization rate is 50%. The lower the utilization rate, the better the impact on your score.
This is something you can affect that might have an immediate impact, so it’s a good thing to do in the short term to raise your score. If you have money saved up or get some extra cash, like a bonus at work or a tax refund, using it to pay down balances will give a quick boost to your utilization rate and improve your score.
Another way to improve your total balances owed is to get a credit limit increase. If you have a card with a $6,000 credit limit and you owe $3,000, then your utilization rate is 50%. If your credit card company then raises your credit limit to $9,000, your utilization rate instantly improves to 30%. By asking for credit limit increases, you can improve your score right away.
Bear in mind, though, that this strategy can backfire horribly if you actually use the newly available credit limits. It only helps your score if you stop borrowing. If your credit limit gets raised and you proceed to max out the card, then you’re far worse off than you started. So be very careful about asking for credit limit increases to improve your credit score.
Be caution when closing accounts, especially those that you’ve had for a long time as the length of credit history is a positive factor. Most importantly though, the available, unused amounts are also used to calculate your overall utilization rate.
Finally, you can open a new credit account to instantly add available credit, which may also improve your overall utilization rate. But this is the riskiest strategy of the lot, as every new credit account has the potential to sink you deeper into debt, and having the new inquiry on your credit history may have a short-term negative impact on your score.
Check your credit history for understanding and accuracy
Order free reports from annualcreditreport.com—get each of the three once per year. And you can skip buying your credit score from that site as it is now available for free from so many of your existing creditors. Then check the report to ensure it is accurate and up to date.
Studies have shown that 1 in 4 credit reports has errors serious enough to impact your ability to get credit. Since each of us has 3 credit reports, the odds are very good that one of your reports contains an error.
Get these errors corrected to ensure your score isn’t suffering because of a mistake or some other person’s activity that got reported to your credit history.
In addition to errors, old, outdated items could be impacting your score when they shouldn’t. Ensure your report is up to date and any old items have been removed—even if they are accurate, anything past the credit reporting time limit rules should be removed per the Fair Credit Reporting Act—if they appeared on your report for years, then they already did their damage, and it’s okay to have those negative items removed. See “What Can I Dispute On My Credit Report?” for more. Then check out our free Consumer Guide To Good Credit (.pdf) for info on how to file your dispute.
Know whether to open a new account or not
Our standard advice is not to open a new credit account if you are trying to improve your score. New inquiries for credit potentially lower your score, and the additional capacity for debt, if not managed wisely, could get you into even more debt. But depending on your situation, opening a new account might be necessary.
As we already discussed, improving your credit utilization ratio is important, and adding a new account may help you there.
Besides available balance, your “credit mix”, or types of credit used, is an important factor. If all of your credit accounts or loans are secured loans or personal loans, you might want to open at least one credit card account to show a healthy mix of credit types.
If you don’t have credit at all, then a secured card might be a good idea. Ask your local bank or credit union for information on a secured credit card that reports the payment history to the credit reporting agencies. This kind of account acts like a regular credit card, but is “secured” by a deposit—you give the financial institution $500 or $1,000, and you get a credit card with that limit. There’s no risk to the financial institution since they can take the deposit if you don’t pay. But it gives you a chance to prove you can handle a credit card, and establish a credit score in the process. See “What is a Secured Credit Card?” for more.
Opening a new account is risky, and we often advise against it, but there are specific circumstances when opening a new account is a good idea for the sake of your credit score. If you’re trying to improve your credit score, we think it’s a good idea to talk to a credit coach and get a before opening new accounts.
Preserve your credit history
Finally, the age of your credit history is 10% of your credit score—enough to push it from a “B” to an “A”.
Work to preserve this history by keeping old accounts open, especially the account you’ve had the longest. If you close old accounts, you shorten your credit history and may needlessly hurt your score.
Another important thing to do is resolve negative items on your account. We already talked about disputing inaccurate or outdated items, but more recent negatives should be resolved so you can rebuild your credit. Under the Fair Credit Reporting Act, consumers have the right to place a 100-word statement on their credit reports to help explain negative items.
By cleaning up and preserving your lengthy credit history, you can get that final boost that could take your credit score from good to great.