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.
3. Pay off balances and keep balances low
One factor that goes into determining your credit score is called “credit utilization.” It’s the number you get when you divide the credit you’ve used by the total of all your credit lines. If you have a utilization ratio of 30% or more, your credit score will suffer.
For this reason, paying down your cards is one of the fastest ways to boost a score. Keep paying down your credit card balances, and keep those numbers low to see your score climb over time. This may require you to make frequent payments to a card per billing cycle.
4. Apply for and open new credit accounts only as needed
While getting access to additional credit can raise your score momentarily through that utilization score we talked about, it also comes with risk. If you have a hard time keeping balances low, it’s probably not a good idea to open more credit lines.
Each time you apply for a card, the lender will do a credit check (also called a “hard inquiry”) as well. Too many hard inquiries can cause your score to dip. Consider how any new account will affect your spending habits and score before you apply.
5. Don't close unused credit cards
If you feel tempted to use credit in an unhealthy manner, you may have also considered closing your credit accounts. But there are better options, such as restricting access to your physical card. When you close an account, you do a few things that can harm your score:
- Your utilization ratio will go up, because your available credit goes down
- The overall age of your credit accounts may drop, especially if you are closing an old account
You may lose access to earned perks, miles, or statement credit once the account is closed as well. If you must close an account, consider a newer account first, and only after you’ve redeemed any perks you earned.
6. Ask your utility and phone providers to report on-time payments
If you fail to pay a monthly bill, you will get reported to the credit bureaus. But this isn’t always the case for on-time payments. Inquire about having your payments to utility and phone companies reported to the credit bureaus. This can help establish a history of timely payments and get your score closer to where you want it to be.
7. Consider a debt consolidation plan
If you're really overwhelmed by minimum monthly payments, or you feel that you aren't making progress on large credit balances with high interest rates, it may be time to call the professionals. Debt consolidation plans are an effective way to reduce rates and see more of your money go to the principal.
Plus, it could lower your monthly payment amounts on each card, giving you more money to put toward the debt. This could lower your credit score temporarily while you get payments underway, but some people find the trade-off worth it.