Your credit score is one of the most important measures of your financial health. It tells lenders at a glance how responsibly you use credit. The better your score, the easier you may find to be approved for new loans or lines of credit. A higher credit score can also open the door to the lowest interest rates when you borrow.
The good news is that there are several things you can do to improve your credit score. It takes some effort and, of course, some time. Here’s a step-by-step guide to achieving a better credit score.
1. Review Your Credit Reports
To improve your credit, it helps to know what might be working in your favor (or working against you). That’s where checking your credit history comes in.
Pull a copy of your credit report from each of the three credit bureaus: Equifax, Experian, and TransUnion. You can do that for free through the AnnualCreditReport.com website. Then review each report to see what’s helping or potentially hurting your score.
Factors that can contribute to a higher credit score include a history of on-time payments, low balances on your credit cards, a mix of credit card and loan accounts, older credit accounts, and minimal inquiries for new credit. Late or missed payments, high credit card balances, collections, and judgments can be major credit score detractors.
Check your report for errors that could drag down your score and dispute any you spot so they can be corrected or removed from your credit file.
2. Get a Handle on Bill Payments
FICO credit scores are used by more than 90% of top lenders, and they’re composed of five distinct factors:
- Payment history (35%)
- Credit usage (30%)
- Age of credit accounts (15%)
- Credit mix (10%)
- New credit inquiries (10%)
As you can see, payment history has the most impact on your credit scores. That is why, for example, it’s better not to have paid-off debts, say of your student loans, expunged from your record. As long as you paid off your debts responsibly and on time, it works in your favor.
Thus, a simple way to improve your credit score is making sure to avoid late payments at all costs. Some tips for doing that include:
- Creating a filing system, either paper or digital, for tracking monthly bills
- Setting due-date alerts, so you know when a bill is coming up
- Automating bill payments from your bank account
There’s one other option, too: charging all your monthly bill payments to a credit card. This strategy assumes that you’ll pay the balance in full each month to avoid interest charges. Going this route could simplify bill payments and improve your credit score if it results in a history of on-time payments.
3. Aim for 30% Credit Utilization or Less
Credit utilization is the amount of your credit limit you’re using at any given time. 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 balance in full each month. If you can’t always do that, a good rule of thumb to follow for credit usage is keeping your total 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 to keep tabs on your balance so that you can stop adding new charges.
There’s one other thing you can do to improve your credit utilization: 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 first. It’s possible to be approved for a higher limit in under a minute; the credit card company may do a soft pull of your credit score first. You can also request a credit-limit increase over the phone.
4. Limit Requests for Credit: Soft Inquiries vs. Hard Inquiries
A soft inquiry is a credit check that does not affect your credit score. These include checking your own credit, giving a potential employer permission to check your credit, checks done by financial institutions with which you already do business, and credit card companies that check your credit to determine if they want to send you pre-approved credit offers.
- Get control of your bills to avoid late payments, the biggest part of your credit score.
- Aim for 30% or less credit utilization.
- Fatten up your credit history.
- Don’t close old credit cards.
- Deal with delinquencies.
Hard inquiries, however, do affect your credit score—adversely—for anywhere from a few months to two years. These occur when you apply for a new credit card, a mortgage, an auto loan, or some other form of new credit. The credit bureaus assume that your request for additional credit means that you are at greater risk of not paying off your current debts. So if you are trying to improve your credit score, it’s best to avoid applying for new credit of any kind.
5. Make the Most of a Thin Credit File
Having a thin credit file means you don’t have enough credit history on your report to generate a credit score. An an estimated 62 million Americans have this problem. The good news is that there are ways you can fatten up a thin credit file and improve your credit score.
One is Experian Boost. This is a new program that tracks personal financial data, such as your banking history and utility payments, and includes them in your Experian FICO credit score. It’s free to use and designed for people with no or limited credit who have a positive history of paying their other bills on time.
UltraFICO is similar. This free program uses your banking history to help build a FICO score. Things that can help you out include having a savings cushion, maintaining a bank account over time, paying your bills through your bank account on time, and avoiding overdrafts.
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. Rental Kharma and RentTrack, for example, 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 impact 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.
6. Keep Old Accounts Open and Deal With Delinquencies
Your credit age represents the average age of your credit accounts. The older your average credit age, the more favorably you might appear to lenders.
If you have old credit accounts you’re not using, don’t close them down. While 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 thus 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 those. If you have an account with multiple late or missed payments, for instance, get caught up on the past due amount, then work out a plan for making future payments on time. That won’t erase the late payments, but it can improve your payment history going forward.
If you have charge-offs of collection accounts, decide whether it makes sense to 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 remain for 10 years.
7. Use Credit Monitoring to Track Your Progress
Credit monitoring services are an easy way to see how your credit score changes over time. These services, many of which are free, monitor for changes in your credit report, such as a paid-off account or a new account that you’ve opened. They typically also give you access to at least one of your credit scores (from Equifax, Experian, or TransUnion), which is updated monthly.
Here’s another good reason to use credit monitoring: It can help you prevent identity theft and fraud. For example, if you get an alert that a new credit card account is being reported to your credit that you don’t remember opening, you can contact the credit card company to report suspected fraud.
The Bottom Line
Improving your credit score is a great goal to have, especially if you’re planning to apply for a loan to make a major purchase, such as a new car or home. It can take several weeks, and sometimes several months, to see a noticeable impact on your score once you start taking steps to turn it around. However, the sooner you begin working to improve your credit, the sooner you can see results.