How to Improve Your Credit Score
8 strategies that will get you a better credit score
If you would like to improve your credit score, there are a number of simple things that you can do. It takes a bit of effort and, of course, some time. Here’s a step-by-step guide to achieving a better credit score.
Why Does a Good Credit Score Matter?
A good or excellent credit score will save most people hundreds of thousands of dollars over the course of their lifetime. Someone with excellent credit gets better rates on mortgages, auto loans, and everything that involves financing. Individuals with better credit ratings are considered lower-risk borrowers, with more banks competing for their business and offering better rates, fees, and perks. Conversely, those with poor credit ratings are considered higher-risk borrowers, with fewer lenders competing for them and more businesses getting away with criminally high annual percentage rates (APRs) because of it. Additionally, a poor credit score can affect your ability to find rental housing, rent a car, and even get life insurance because your credit score affects your insurance score.
Make sure that you pay at least the minimum balance due on time.
Pay down your credit card balances to keep your overall credit use low.
Don’t close old credit card accounts or apply for too many new ones.
1. Review Your Credit Reports
To improve your credit, it helps to know what might be working in your favor (or against you). That’s where checking your credit history comes in.
How often should you check your credit score?
You should check your credit score regularly to check for errors, but make sure that you are doing so through soft inquiries so that your score isn’t dinged. Many banks offer free credit monitoring to their customers; check with yours to see if you can enroll in their service and get alerts whenever your score changes.
How can you quickly improve your credit score?
Check your credit score to see why it is low.
Pay down your revolving credit as much as possible to lower your credit utilization percentage.
Have any inaccurate things removed (especially late payments).
Be added as an authorized user to an old account with perfect payment history, ideally with a low utilization rate. Ideally, this is done by a friend or relative, and they do not even have to give you the card. You can also pay certain credit repair services that will broker a deal between you and a stranger to do this.
2. Get a Handle on Bill Payments
More than 90% of top lenders use FICO credit scores, and they’re determined by five distinct factors:
Payment history (35%)
Age of credit accounts (15%)
Credit mix (10%)
New credit inquiries (10%)
As you can see, payment history has the biggest impact on your credit score.1 That is why, for example, it’s better to have paid-off debts (such as your old student loans) remain on your record. If you paid your debts responsibly and on time, it works in your favor.
So, a simple way to improve your credit score is to avoid late payments at all costs. Some tips for doing that include:
Creating a filing system, either paper or digital, for keeping track of monthly bills
Setting due-date alerts, so you know when a bill is coming up
Automating bill payments from your bank account
3. Aim for 30% Credit Utilization or Less
Credit utilization refers to the portion of your credit limit that you’re using at any given time.2 After payment history, it’s the second most important factor in FICO credit score calculations.
The simplest way to keep your credit utilization in check is to pay your credit card balances in full each month. If you can’t always do that, then a good rule of thumb is to keep your total outstanding balance at 30% or less of your total credit limit. From there, you can work on whittling that down to 10% or less, which is considered ideal for improving your credit score.
Use your credit card’s high balance alert feature so you can stop adding new charges if your credit utilization ratio is getting too high.
Another way to improve your credit utilization ratio: Ask for a credit limit increase. Raising your credit limit can help your credit utilization, as long as your balance doesn’t increase in tandem.
Most credit card companies allow you to request a credit limit increase online; you’ll just need to update your annual household income. It’s possible to be approved for a higher limit in less than a minute. You can also request a credit limit increase over the phone.4. Limits Your Requests for New Credit—and the Hard Inquiries with Them
There are two types of inquiries into your credit history, often referred to as hard and soft inquiries.3 A typical soft inquiry might include you checking your own credit, giving a potential employer permission to check your credit, checks performed by financial institutions with which you already do business, and credit card companies that check your file to determine if they want to send you pre-approved credit offers. Soft inquiries will not affect your credit score.3
Hard inquiries, however, can affect your credit score—adversely—for anywhere from a few months to two years. Hard inquiries can include applications for a new credit card, a mortgage, an auto loan, or some other form of new credit. The occasional hard inquiry is unlikely to have much of an effect. But many of them in a short period of time can damage your credit score. Banks could take it to mean that you need money because you’re facing financial difficulties and are therefore a bigger risk. If you are trying to improve your credit score, avoid applying for new credit for a while.
Does removing hard inquiries improve your credit score?
Yes, having hard inquiries removed from your report will improve your credit score—but not drastically so. Recent hard inquiries only account for 10% of your overall score rating. If you have erroneous inquiries, you should try to have them removed, but this step won’t make a huge difference by itself.
5. Make the Most of a Thin Credit File
Having a thin credit file means that you don’t have enough credit history on your report to generate a credit score. An estimated 62 million Americans have this problem.4 Fortunately, there are ways to fatten up a thin credit file and earn a good credit score.
One is Experian Boost. This relatively new program collects financial data that isn’t normally in your credit report, such as your banking history and utility payments, and includes that in calculating your Experian FICO credit score. It’s free to use and designed for people with limited or no credit who have a positive history of paying their other bills on time.5
UltraFICO is similar. This free program uses your banking history to help build a FICO score. Things that can help include having a savings cushion, maintaining a bank account over time, paying your bills through your bank account on time, and avoiding overdrafts.6
A third option applies to renters. If you pay rent monthly, there are several services that allow you to get credit for those on-time payments. For example, Rental Kharma and RentTrack will report your rent payments to the credit bureaus on your behalf, which in turn could help your score. Note that reporting rent payments may only affect your VantageScore credit scores, not your FICO score. Some rent-reporting companies charge a fee for this service, so read the details to know what you’re getting and possibly purchasing.
A new entry into this field is Perch, a mobile app that reports rent payments to the credit bureaus free of charge.
6. Keep Old Accounts Open and Deal with Delinquencies
The age-of-credit portion of your credit score looks at how long you’ve had your credit accounts. The older your average credit age, the more favorably you appear to lenders.
If you have old credit accounts that you’re not using, don’t close them. Though the credit history for those accounts would remain on your credit report, closing credit cards while you have a balance on other cards would lower your available credit and increase your credit utilization ratio. That could knock a few points off your score.
And if you have delinquent accounts, charge-offs, or collection accounts, take action to resolve them. For example, if you have an account with multiple late or missed payments, get caught up on what is past due, then work out a plan for making future payments on time. That won’t erase the late payments but can improve your payment history going forward.
If you have charge-offs or collection accounts, decide whether it makes sense to either pay off those accounts in full or offer the creditor a settlement. Newer FICO and VantageScore credit-scoring models assign less negative impact to paid collection accounts. Paying off collections or charge-offs might offer a modest score boost. Remember, negative account information can remain on your credit history for up to seven years—and bankruptcies for 10 years.