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Here, we explain some steps you can take to help improve your credit score.
A great credit score is more than just a vanity metric. It also makes it easier for you to get the best loan terms, lowest interest rates and most rewarding credit cards, among other perks that are good for your finances.
Although what counts as a “good” credit score can vary, generally speaking, if you’ve cracked the 700s, then you’re in decent shape. If you’re in the 800s, you’re in the excellent zone.
If there’s room for improvement, raising your score is a surprisingly uncomplicated process, once you know the biggest factors affecting your score. Here’s how to get started.
1. Figure out the state of your credit.
First, know your three digits.
There are dozens of scoring models in use by lenders. Matt Schulz, senior analyst at CreditCards.com, suggests examining just one. “FICO is the gold standard for credit scores,” he says, “so it’s the most important one when it comes to knowing where you stand with your credit.”
You can order your score online through myFICO.com for a fee, but an increasing number of credit card companies offer cardholders their score for no extra cost, either on a bill or online. Plus, your credit card provider will likely update that score every month and may even alert you to any significant changes.
Next, get a copy of your credit report. You’re legally entitled to three free credit reports every year, one from each of the three credit bureaus: Experian, TransUnion and Equifax. These provide details on what’s affecting your score, with a view into what lines of credit you have in your name and which ones show payment problems that may be lowering your score.
“One of the quickest ways to make a bump in your score is to remove any errors on your credit report that aren’t yours,” Schulz says.
2. Get current on past-due payments.
The most significant component of your FICO score (35%) is your payment history — ideally, you pay at least the minimum due on time, every single month.
Your credit score may also drop if you’re late on your mortgage, student loans, car loans and more.
The extent to which a late payment hurts your score can vary, but according to FICO someone with a strong credit history and a score of 780 could fall to as low as 670 if they are 30 days late on a payment.
So check your reports to see if you’re behind on any payments, and if you are, get caught up as quickly as possible. If you need to, set up auto pay or calendar reminders so you pay those bills on time every month.
3. Lower your balances.
After the timeliness of your payments, the next most important component of a FICO score is the amount of money you actually owe, which makes up 30% of your score.
You may have heard that you should keep your credit utilization ratio (how much of your available credit you use) to 30%. But Schulz recommends that as a maximum — most people with a credit score of 800 or more have an average credit utilization ratio of just 7%. So really, the lower the better.
According to a recent CreditCards.com report, 22% of survey respondents also believe that carrying a balance on a credit card is one way to build your credit. But it’s simply not true. “It’s kind of the cockroach of personal finance myths, because you just can’t seem to kill it,” Schulz says. “Job number one for anyone with a credit card is to pay that balance off in full as soon as you possibly can.”
So how can you keep your credit utilization low?
- Spend less. If you’re spending too much of your available credit but not paying it off, there may be a bigger issue here. Evaluate your spending and set a budget you can stick to.
- Increase the frequency of your payments. Consider paying off your balance twice a month instead of just once. You'll improve the chances that your balance is low when your lender reports your information to a credit bureau.
- Ask your credit card companies to raise your limits. You can also drop your credit-utilization ratio by increasing the amount of credit you have available to you, assuming, of course, that you’re also not increasing your spending. Contact your cardholders to see if they’re willing to bump up your limits; if you’re a long-time customer with a good payment record, they may be willing to oblige. You might want to open additional lines of credit if you can’t get a bump on your current cards, but that’s probably not the best idea. Not only could it tempt you to spend more, your score gets dinged when you apply for new credit. Plus, the more cards you try to open, the more desperate you appear for credit, which makes you appear riskier to lenders.
If you’re thinking of opening a new card to take advantage of a balance transfer offer that lowers your interest rate (and thus helps you pay down your debt faster), weigh the pros and cons. The small dip in your score could be worth it if you get a low annual percentage rate that saves you in the long run, Schulz notes. But if the promotional rate shoots up before you get a chance to pay off those transferred balances, you could find yourself back in the same debt cycle.
4. Stop closing old accounts.
If you‘ve paid off a credit card and want to celebrate by closing the account for good, hold off. The length of your credit history accounts for 15% of your FICO score. So rather than close old accounts, keep them open with a zero balance. You might have to make a periodic small charge so your credit card company doesn’t automatically close the account due to inactivity, but make sure to pay off that amount right away. The longer you can prove that you’re responsible with credit, the more attractive you’ll be to future lenders and credit card companies.