Have you applied for a loan or credit card, only to be told that your score is too low? Even if you’ve never experienced this, it’s common to want to focus on ways to improve your credit score. Before you fill out your next credit application, learn how credit scores work and the things you can do to get it to the next level.
How are credit scores calculated?
While there isn’t just one credit score that banks and lenders focus on when making credit decisions, there are some consumer-friendly models that can help you understand your credit-worthiness. These scores include the FICO score, which is collated by Experian and ranks you on a scale of 300 to 850.
We don’t know the exact algorithm that creates the figure. However, we do know that the actions you take that would make this score go up or down would likely affect the other types of scores offered by other companies like TransUnion and Equifax.
FICO, for example, looks at some very specific financial actions to create their score. These factors include:
- Your payment history
- Your total available credit (also known as total credit limit)
- The amount of credit you are using (also known as credit utilization)
- The age of your credit accounts
- The type of credit accounts you have open
- The number and frequency of credit applications you’ve made
Some factors, such as making all of your payments on time, affect your score greatly. Other factors, such as the age of your accounts, don’t matter quite as much. It’s the big picture that most creditors see, and that’s why credit scores can be a useful indicator of your ability to handle credit.
7 tips to improve your credit score
Moving the needle on your credit score takes a committed attitude and patience. Not every action will have the same effect, and some positive score changes might be small at first. The good news is that you could see an impact on your credit score in as soon as 60-90 days, depending on the action you take. Begin by using this list of recommended financial activities. Doing even just one can help.
1. Review your credit reports
Lenders will ask to see a copy of your credit report every time you apply for credit. When was the last time you did the same? With each consumer getting access to one free credit report from each of the three credit bureaus, you have no excuse to be in the dark about your credit. You can ask for these each year, and it’s recommended you check them for errors and dispute any mistakes you see.
2. Set up automatic payments or reminders
The best way to make sure your credit cards are paid on time is to schedule it to happen automatically. If you struggle to maintain a healthy balance in your checking account, however, this could cause you to overdraw your account. Instead, consider setting reminders in your phone calendar, or use a free budgeting app that will alert you to when payments are due.