Raising your credit score can make a big difference when it comes to getting a loan, and how much that loan will cost you. If you are getting ready to apply for some kind of credit, or you’ve already applied and have been offered less-than-great terms, it might be worth your while to take some time to improve your credit score before you apply again.
The best ways to improve your credit score involve diligent effort over time, but there are some quick ways to make a positive impact if you need to get your score into shape prior to an important loan application.
One of the most well-known types of credit scores are FICO® Scores, created by the Fair Isaac Corporation.
Before you start, it helps to understand how your FICO® credit score is calculated. For a deep dive into the subject, you can check out our “Understanding Your Credit Report and Score” course, available for free from our FIT Academy. It’s important to know what factors generally contribute to the score.
• Payment history -35% of your score
• Total debt and amounts owed -30% of your score
• Length of credit history -15% of your score
• New credit -10% of your score
• Credit mix -10% of your score
They’re listed here in order of weight of the total score, so the most important factor is your payment history, and smallest impact will come from new credit and credit mix.
This doesn’t mean that credit mix is a category you should ignore, only that the overall impact it has on your total score will be small, so don’t expect changes you make to your credit mix to do much.
The big impact comes from your payment history, so let’s look at what is included. First are the kinds of accounts that make up your payment history:
• Credit cards
• Retail Accounts (store credit, store credit cards)
• Installment loans (for something like furniture, appliances, or automobiles)
• Accounts with finance companies
In addition to the accounts you make payments on, information on various public records, like bankruptcy filings, lawsuit judgments, or wage garnishments are considered.
Your late or missed payments are also considered. This includes late payments toward debt collections and those public record items. Your score will be negatively affected by late payments, and the negative impact corresponds to how late the payment was made, how large the overdue amount was, how recently the missed payment occurred, and what proportion of your overall account activity includes late or missed payments.
The second biggest factor in your credit score is your total debt and amounts owed. A big part of this is your utilization ratio—that is, the percentage of credit available to you that you’re using on your revolving credit cards. If your total credit limit is $10,000 and you owe $5,000, your utilization ratio is 50%.
With this information in mind, let’s think about how to raise your score.
Quick ways to improve your score
Resolve overdue and collection items. We don’t mean pay them all off, necessarily. If you have a collection account on your credit that is outdated or inaccurate, dispute it and have it removed. Don’t agree to pay a debt that isn’t right just for the sake of your credit score. In fact, making payments may reset the statute of limitations clock on your debt.
With collection accounts it’s important to know which FICO® score model your lender is using. As long as both FICO® Score 8 and 9 credit-scoring models are in use, it’s a good idea to know how they differ. FICO® Score 9 isn’t a dramatic departure from its predecessor FICO® Score 8 but it does account for certain factors differently.
If you’ve paid off a collection account in full, it no longer counts against you with FICO® Score 9. With FICO® Score 8, paying off a collection account doesn’t necessarily help your score. That can be an issue, because collections can stay on your credit reports for a long time.
If the item is accurate, then paying it off might be the right thing to do, but you should take some steps to try to have the delinquency removed from the report. Ask collection agencies to agree in writing to remove the overdue account from your credit report in exchange for payment in full. (Be aware, they often say no!) Whenever you can, don’t deal with collectors at all—go to the original creditor and see if you can pay off the debt with them.
If a negative collection item has been on your credit for 7 years, or close to it, waiting until the 7-year mark and then asking the credit reporting agency to remove it may be a way to go. Sometimes Junk Debt Buyers purchase these old collection accounts (for pennies on the dollar), and they try again to collect from you. If that happens talk to certified credit coach and get a credit report review.
If you have more recent overdue items that haven’t been sent to collection yet, pay them off as quickly as possible. The longer they sit unpaid, the more they hurt your score.
Medical collections matter less with FICO® Score 9, that model deemphasizes the impact of unpaid medical collections accounts. Until recently, there wasn’t a significant distinction between medical collections accounts and other types of collections accounts.
Clearing up any negative items in your payment history is your first task when working to improve your credit, and can give you a quick positive lift to your score if a negative item disappears altogether.
Clean up any other problems on your report. Take some time to review your entire credit report, or talk to a professional about getting a credit report review. Anything anywhere on your report that is outdated or inaccurate should be disputed and removed. It’s well known in our industry that credit reports frequently contain errors, and 1 in 4 reports have errors serious enough to impact one’s credit score. So don’t assume everything you see on your report belongs there. Verify everything and request removal of anything that isn’t right.
Don’t close old accounts. While you’re cleaning up your credit report, be careful not to close any old accounts. For one, the age of your credit history is 10% of your overall score, so you could negatively impact your credit by shortening your credit history.
The other thing to consider pertains to your payment history. The number of accounts you have with late payments is a factor. If you have 10 accounts and only 1 of them has a late payment, then your score will be better than someone with 10 accounts where 3 of them have late payments. But close one of those old accounts, and now 1 out of 9 accounts have negatives, and your score may drop. If you have old accounts on file with no negative items in your payment history, they’re helping you more than they’re hurting you, so let them stay open.
Improve your credit utilization ratio. As we mentioned before, that’s the percentage of your total credit available that you’re using. In our example, you had $10,000 in total credit, and were using $5,000, for a total credit utilization ratio of 50%.
It’s best to get that ratio down to 30% or lower. So in that scenario, paying down the debt to $3,000 would get you to 30% and improve your score. Even better, try to get your utilization ratio down to 10% or less for the best possible credit score.
There is another, more dangerous, way to improve your credit utilization ratio. That is to open a new account that increases your overall credit available. So if you owe $5,000 toward at total limit of $10,000, you’re at 50%. Open a new card with a $10,000 limit, and now your ratio goes down to 25% ($5,000 is 25% of your total $20,000 limit). The math works here, but this strategy is dangerous, because you’ll add a tremendous amount to your capacity for debt, and if you end up using that new credit, you’ll be much worse off than you started. We don’t typically recommend people employ this strategy, because most consumers who are looking for ways to pay down debt or improve their credit probably don’t need the extra temptation of a new credit account. If you are thinking of opening a new credit account just to improve your utilization ratio, talk to a credit coach about other options first.
Another way to improve your utilization ratio without opening a new account is to ask for an increased credit limit. If you have had a generally good payment history, you can ask your creditor(s) to increase your limit. If your $10,000 credit balance gets raised to $15,000 by your creditor, then the $5,000 you owe puts you at a 33% utilization ratio—much better than 50% and easy enough to pay down to 30% or less. The other benefit is that getting your credit limit increased by an existing creditor can sometimes happen without a hard inquiry on your credit—that’s what impacts the 10% of your credit score for “new credit”. Getting an increased credit limit without applying for a new card is better for your score than opening a new credit account.
Besides these quick ways to improve your credit, there are lots of long-term actions to take to improve your credit score over time, and keep it good going forward. Don’t ignore these important steps as you work to improve your credit score quickly.
The most important step is to make all of your monthly payments on time, every time. Don’t underpay, and don’t pay late. Establishing a solid payment history over time is the best way to truly improve your credit in the long term.
It’s also important to pay down balances, and keep them low. Aim for that 10% (or less) utilization rate. There is absolutely no need to carry ongoing credit card balances to obtain a credit score, pay your cards off in full each billing cycle to avoid expensive finance charges.
Finally, check your credit report regularly. Some kind of credit monitoring service is probably the best way to maintain a good understanding of what is on your credit report and become aware of any problems right away. There was a time when a person could reasonably check their own credit without the need for an ongoing monitoring service, but since the Equifax breach, the recent Capital One data breach, and countless other smaller breaches over the years, it’s become necessary to recommend a good credit monitoring service for everyone interested in maintaining healthy credit and protecting their personal financial data.