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Getting ready to apply for a mortgage or loan and want to get the best rate? Or just want to make sure you always get approved for the best rewards credit cards? You might want to start taking steps now to improve your credit score.
Your credit score is based on many factors, including your payment history, amounts owed, length of credit history and more. And while, in many cases, there is no quick fix for a low credit score, there are things you can do to start improving your score today.
Here are six steps you can take to improve your credit score.
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Credit Score ranges are based on FICO® credit scoring. This is just one scoring method and a credit card issuer may use another method when considering your application. These are provided as guidelines only and approval is not guaranteed.
1. Make Sure Your Credit Reports Are Accurate
The three leading credit reporting agencies—Experian, TransUnion and Equifax—collect your credit information from companies where you have open accounts. These can include banks, credit card companies, retailers, auto and mortgage lenders and even utility companies. And while they work to collect accurate information, they don’t always hit the mark. An FTC study found that 26% of participants had a potentially material error in one of their credit reports.
The first step when looking to improve your credit score is to ensure that all accounts and negative marks on your report are actually yours. The agencies are required by federal law to provide your credit report for free once every 12 months and do so through AnnualCreditReport.com (available for free every week through April 21, 2022).
Request your reports and make sure everything is accurate. If something is amiss, you can file a dispute with the reporting agency and the bank or lender associated with the incorrect information.
2. Understand Your Risk Factors
When you request your free credit reports from AnnualCreditReport.com, you only receive the report. You don’t see your actual credit scores. But for those who want to significantly increase their scores, purchasing a full credit report with scores can be beneficial.
Experian, TransUnion and Equifax include a list of risk factors along with purchased scores. Your credit score takes into consideration as many as 300 risk factorsand knowing what your risk factors are will let you know where you can make improvements.
Your risk factors might list a specific account that is hurting your score or too many credit card applications in a short period. Even not having a mortgage can show up as a risk factor. You won’t be able to fix everything—don’t buy a house to increase your credit score—but you might spot some factors you can change.
3. Always Pay Your Bills on Time
If you could do one thing to improve your credit score, it would be to make all your payments on time. Every time.
Thirty-five percent of your FICO credit score hinges on your payment history. For someone with a high score, even one payment that is 30 days late could result in a 90 to 110-point drop, according to Equifax. And the impact is even greater if the payment is more than 30 days late.
A late or “delinquent” payment stays on your credit report for seven years. The impact on your overall score declines over time, but that negative mark still matters.
If you have a missed payment on your report or want to avoid putting your credit score at risk, put all recurring bills on auto-pay and set payment reminders for other accounts. This keeps a payment from slipping through the cracks.
4. Manage Your Credit Utilization
After payment history, the next most significant factor in your credit score is the amount of debt. Since credit reporting agencies don’t have your income information, they use a factor called “credit utilization” instead of a debt-to-income ratio. Utilization represents 30% of a FICO credit score.
Utilization is the amount of debt outstanding on your revolving credit sources like credit cards or home equity lines in relation to your available credit. Have a $4,000 balance on a credit card with a $10,000 limit? Then you have a 40% utilization ratio. Your utilization matters both overall and per credit source.
It is commonly recommended to keep your credit utilization below 30%. But those with the highest scores typically have a 10% or less utilization rate.
There is, however, a catch. Your credit card balances are usually reported before your payment due date. Even if you pay your bill in full each month, the reporting agencies may still mark you down at a higher utilization.
You can control your credit utilization by:
- Paying down revolving credit debt, focusing first on cards or lines that are close to their limit
- Requesting an increase in your credit line if you are a good customer with a solid payment history
- Paying more than once in a billing cycle; adding in a payment mid-month may lower the balance that is reported to the agencies
5. Get a Credit Card If You Don’t Have One
Irresponsible use of a credit card can be a negative for your credit score and your finances. But used wisely, a credit card can be one of the fastest ways to improve your credit, as it impacts the most important aspects of your score.
By signing up for a credit card and paying on time each month, you build a positive payment history. Then, by keeping spending on the card low, you create a low utilization ratio. Credit cards also positively impact your credit mix and new account aspects of your credit score.
If you are nervous about overspending with a credit card, consider getting a card with no annual fee and using it only for one or two recurring expenses. Get a credit card, place a small, recurring payment on it, then set the credit card to auto-pay and put it in the drawer. You won’t have to worry about missing a payment or racking up a big bill, but you’ll be building your credit history fast.
Related: How To Build Credit At 18
6. Do All Your Rate Shopping at Once
Hard credit inquiries (meaning, requests for your credit report from lenders when you are looking for a new loan or applying for a credit card), can negatively impact your credit score in the short term. However, rating agencies have gotten smarter about accommodating responsible shoppers who want to evaluate their lending options.
If you’re shopping for a mortgage, student loan, or auto loan, plan ahead so you can keep your rate shopping within 30 days. You want to make sure the inquiry made for one potential lender doesn’t lower the score the next lender might see. FICO scores ignore inquiries made 30 days prior to scoring. Keep in mind that some older scoring models only ignore inquiries from the past 14 days, and you might not know which scoring model your potential lender is requesting. In general, a tighter shopping window is safer.
Over the long term, credit scoring models can differentiate between multiple inquiries for a single loan and a search for many new loans or credit lines.
So don’t shy away from rate shopping because you’re worried about your credit score. If you focus your shopping window, it will have minimal impact on your score, and the purpose of a good score is to save money on interest. No use paying more in interest to preserve a good score.
Don’t Expect Changes Overnight
While disputing errors on your credit report or paying down credit card debt can result in a higher score in the short term, improving your credit score is a long-term process. It can take months. Credit reporting agencies need to see consistent, responsible behavior and trends before significantly changing scores. Don’t give up too soon.
Monitor your credit reports, pay all your bills on time and make strides to pay down revolving debt. It may take time, but it will pay off.
Related:How Long Does It Take To Build Credit For The First Time?
