How to Improve Your Credit Score
Maybe you want to buy your first, or second, home. Or you want to move to a new apartment in a competitive rental market, or you’re going to need a new car soon. Or maybe you just want to be prepared for some future unknown that might mean borrowing money. Whatever your reason, having good credit tends to play a large role in realizing most financial dreams.
But, while the goals may be exciting, the process of building credit…? Not so much. In fact, it’s not unlike a slow climb up a long ladder, and the best credit-building strategies for you will depend a bit on where you’re at on that ladder. Generally, if your score is…
- Zero, as in no credit score at all? Check out our tips on how to build your credit from scratch.
- In the low 600s? Check out our story on how to fix your credit for tips on dealing with past credit dings and for taking steps to move up the credit ladder.
- In the mid-600s? You’re doing fine. Keep reading this story to find out more about how to improve your score.
- Over 700? That’s fantastic! Skim this story to make sure you’re covering all your bases to continue moving your score higher and to see what moves to avoid.
- Above 800? Please step away from your phone or computer and go have some fun.
OK, you’re here because your score is in the mid-600s to high 700s, which is great, but you want it higher so you can score the best interest rates on loans, or to wow the landlord when you apply for that apartment with the gorgeous hardwood floors.
Keep credit scores in context
We can hear your future self sending a hearty thank you. Staying on top of your credit is a smart move, not least because making changes to credit can take time.
Important, yes. But don’t get too wrapped up in some specific number you’re trying to hit. With credit, the goal is more about watching your number go more or less up over time. (“More or less” because there will be ups and downs, such as when you open or close an account, and that’s OK.)
There are many different credit score algorithms, all attempting to measure our “creditworthiness” — how likely we are to pay back debt. Before agreeing to lend you money, the lender will look up your credit score. But — and this is important! — the lender decides which of many available credit scores to focus on, and the lender decides what number is the magic number that will prompt them to give you access to their money.
In other words, the credit system is complicated. For example, one of my credit cards is telling me today that my FICO is 827 (yay me — but keep in mind this is after decades of building credit). My other credit card, however, tells me my VantageScore is 764. That’s a 63-point difference! And if, tomorrow, I went out and applied for a car loan, the lender might be looking at some totally different number based on its own algorithm.
Given this situation, and how little knowledge any of us has as to how any particular lender uses credit scores, it makes sense to focus not so much on a specific target number but instead on the direction your credit score is heading. As in, hopefully, up.
Here’s what we know for sure: The higher your score, the more money you’ll save over time. And by “more money,” we mean potentially tens or even hundreds of thousands of dollars. Read our story on what credit is and why it matters to find out more.
How to increase your credit score
OK, here are the essentials to improving your credit score:
Pay on time
The single most important step you can take to consistently increase your credit score is to always, always, always make your debt payments on time, or early. In the FICO score model, your payment history accounts for 35% of your credit score —it’s the biggest factor in calculating your score. If you tend to forget your bill due dates, consider setting calendar reminders or set up automatic payments from your bank account.
investor.com Quick Tip: Pay bills before the due date.
It’s OK to make payments to your credit cards more than once a month. In fact, paying early and often can nourish your financial health in at least two ways: One, it can improve your credit utilization ratio by lowering your amount owed; and two, it will reduce how much you pay in interest. That means more money for your dreams.
Reduce your credit utilization
Your credit utilization ratio is a measure of how much of your credit limits you’re using. If you have credit card debt, lowering your credit utilization is one of the fastest ways to raise your credit score — it accounts for 30% of your total score in the FICO model.
The ratio is calculated by dividing the amount you owe by the amount of credit available to you. Say you’ve got a credit card with a $10,000 credit limit, and you owe $4,000 on that card. To find your credit utilization ratio, divide 4,000 by 10,000 to get 0.4. Multiply by 100 and you see that your credit utilization ratio is 40%.
What’s a “good” credit utilization ratio? The lower, the better. For reference, the average credit utilization ratio for people who have an 850 credit score — we’re talking credit score All-Star territory — is 4.1%, according to FICO, the credit score company.
Down here on Planet Earth, a more realistic goal is to keep your credit utilization ratio to 30% or less. If you move your ratio from above 30% to below 30%, you’re highly likely to see your credit score improve. Here’s how to go about that:
- If you have multiple credit cards, focus on paying down the one with the highest balance-to-credit-limit, that is, the highest credit utilization ratio.
- Consider both the individual balance-to-credit-limits on each card but also your overall total balance-to-credit-limit (all credit cards added up); both factors matter.
- Once you’ve gotten your ratio down to 30% or less, aim for 10% or less. Again, the lower the better. (Bonus: The lower your credit card balances, the lower your interest payments. And if you pay off your credit card debt in full every month, you will not only continue to build your credit, you’ll also free up money that otherwise would have gone to interest payments. You don’t need to carry a balance to increase your credit score.)
- Don’t worry here about car loans, student loans and home loans. These are installment loans — as opposed to “revolving credit,” which is credit cards. Installment loans don’t get counted in your credit utilization ratio.
Tackling this part of the credit improvement process can be satisfying because the results can happen relatively fast, which in the world of credit scores means within one or two months.
investor.com Quick Tip: What score do I need to be approved for a rewards credit card?
The companies that offer rewards cards usually require a credit score in the “good” or higher range, which is about 670 points or above on the FICO scale. However, there are exceptions to this, including some secured credit cards that offer rewards, and some newer cashback card issuers (such as Jasper and Petal) that cater to those with less-established credit. Always read up on the features and requirements to make sure a credit card is the right one for you. Check out our guide to rewards credit cards.
Ask for a higher credit limit
You can ask your credit card issuer if they might consider raising your credit limit. This is another avenue to the “reduce your credit utilization ratio” tactic described above. By raising your credit limit, you’re reducing your utilization ratio.
Keep in mind: This doesn’t always work. It will depend on the credit card issuer’s current practices and how much of a credit risk they consider you to be. Your account must be in good standing. If your balances are currently quite high relative to your credit limits, they might decline giving you access to more credit.
And, there’s a potential downside: Asking for a higher credit limit could lead to a hard inquiry on your report. It doesn’t hurt to ask the credit card issuer if they might consider giving you a higher credit limit via a soft inquiry, rather than a hard inquiry.
Check your credit reports
Be sure to download all three of your free credit reports — one each from Experian, Equifax and TransUnion — from annualcreditreport.com. (Check out our article for details on how to pull all three of your credit reports for free.)
You want to make sure there aren’t any errors causing problems on your credit report. For example, if an old account is listed as “unpaid” but you know you paid it, consider advocating to get that updated.
You can start by submitting an online dispute at the credit-reporting company (Equifax, Experian or TransUnion). If that doesn’t work (and often it won’t), then reach out directly to the company that’s reporting that debt as “unpaid.” The more evidence you can bring to bear when you call them — including date and amount of final payment — the likelier your success.
Become an authorized user
Asking a parent, relative or friend to be added to their credit card account as an authorized user will add their credit history (for that particular card) to your credit report.
This strategy is useful for people who are just starting out on the road to building their credit, but if your credit file is relatively thin, this strategy can help give it some heft. You’ll need a parent, relative or friend who has been using a credit card for a while, who pays on time, and who is willing to add your name to their account as an authorized user.
You don’t need to actually use the credit card (and maybe suggest to the kind person helping you with this strategy that you’ll cut it up or hide it in the freezer). Also, be sure to confirm that the credit card issuer reports authorized users to the three credit reporting companies (Equifax, Experian and TransUnion); if not, becoming an authorized user on that card won’t help your credit.
Mix up your credit mix
The credit-score algorithms demand that you have at least one credit account, such as a loan or a credit card. But they love it when you have a few different accounts, including both revolving accounts (aka credit cards) and installment loans (car loan, student loan, mortgage, personal loan, credit-builder loan). In an ideal world, you have something like two to four credit cards and one or two installment loans.
That said, it’s absolutely imperative that you don’t go out and start applying for a bunch of credit cards and loans, because those applications can hurt your credit. And, more importantly, you don’t want to apply for credit solely to improve your credit score. Applying for a new loan should be done only if it makes sense for your overall financial situation and your long-term goals.
Call it one of the benefits of aging, but the longer you have a credit history, the higher your credit score will go. Your job is to wait, be patient, and try to focus on the tips above.
I know… b o r i n g.
What not to do
While you’re busy taking steps to raise your credit score, make sure you avoid common pitfalls that send it in the wrong direction.
Don’t jump at any and all new credit offers
There are often very good reasons for applying for a new credit card or loan. But it’s also true that applying for credit can hurt your credit, in a couple of different ways:
Average account age: The more new accounts you get approved for, the shorter the average age for all of the accounts on your credit report. Credit score algorithms often factor average account age into your credit score, and the older, the better.
Hard inquiries: Most applications for credit result in a “hard inquiry” on your credit report. A hard inquiry happens when a lender checks your credit to decide if they want to approve your application.
Hard inquiries stay on your credit report for two years, and the more you have on your credit report, the less happy your credit score will be. (“Soft inquiries” — such as when you download your own credit report or check your credit score, or when a lender or credit card issuer looks at your credit because they want to offer you credit — may also show up on your credit report, but they don’t affect your score.)
Of course, when you’re thinking about, say, buying a home or a car, it’s smart to shop around for the best loan with the lowest interest rate. But what’s good for your wallet isn’t always good for your credit score. Each hard inquiry as you shop could potentially be bad for your credit score.
The good news? There are some consumer protections in place, such that if you shop for the same type of loan — a mortgage, a car loan — in a short timeframe, all of the hard inquiries will be counted as one hard inquiry.
The rate-shopping window can be anywhere from two weeks to 45 days — the time frame varies by credit score algorithm. (For example, VantageScore, and older versions of FICO scores, consider multiple inquiries for one type of loan within a two-week window as a single inquiry, while newer versions of the FICO score provide a 45-day window.)
Keep in mind that shopping around for the best loan may save you thousands of dollars over the life of the loan, so the small credit ding from applying for multiple loans may well be worth it.
Here are some tips to manage your hard inquiries:
- Plan to combine all of your loan shopping within a short-ish timeframe.
- Focus on one type of loan, e.g. a mortgage, within that timeframe and avoid shopping for other types of credit at the same time (otherwise you may ding your credit just as you’re applying for a loan).
- Research potential loan terms before submitting an application. Can you weed any loans out before submitting an application?
- Ask if you can get prequalified — without a credit pull — to see what terms the lender might offer you (note that the loan terms might change once the lender pulls your credit).
Think twice before closing old accounts
The length of your credit history — that is, how long your accounts have been open — is a key piece of your credit score, counting for 15% of your overall FICO score. Be sure to keep credit accounts open even if you don’t use them so their history remains on your report. (Note that some score models continue to count the age of the closed account for seven to 10 years after the date of the last payment.)
There’s another reason to keep credit card accounts open: Your available credit limit on that card is factored into your credit utilization ratio. Closing that account will eliminate that available credit, which could hurt your utilization ratio, which comprises a hefty 30% of your overall FICO score.
Note that some credit card issuers will close accounts if you don’t use them; it’s smart to charge an occasional purchase to keep the account open, or to put a subscription or recurring bill on that account. Just be sure to remember to pay the bill on time (or early!).
But keep accounts open only if it makes sense in the context of your overall financial health. For example, if you have an old credit card that you don’t use and it’s charging an annual fee, then either ask if the company might switch you to a no-fee card, or close the account and accept the likely decrease in your credit score. Your overall financial health may sometimes end up leading to a drop in your credit score, and that’s OK. As long as you keep making on-time payments on your loans and credit cards, your score will rise again.
Next steps: Continue learning how to build your credit with the next article in our series.