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How to Improve Your Credit Score
By Susan Doktor MONEY RESEARCH COLLECTIVE
Understanding the ins and outs of credit can help you accomplish your financial goals and spend less on any loan you take out. The following guide aims to help demystify this topic and provide practical tips on becoming creditworthy.
Table of contents
- Why is good credit so important?
- What’s the fastest way to increase your credit score?
- How to improve your credit score FAQs
- Summary of our guide on improving your credit score
Why is a good credit score so important?
If you’ve reached adulthood and don’t know how credit works, you’re at a significant disadvantage. Being creditworthy, as measured by credit bureaus like Experian, TransUnion and Equifax, has a tremendous impact on your finances.
Whether you’re renting an apartment, applying for a job, purchasing a new home or taking out an auto loan, having good credit puts you in a more competitive position. For example, employers may check your credit score before offering you a job, a landlord might decide whether or not to rent you a condo based on what your credit profile reveals, and all lenders will pull your credit report to determine if you qualify for a mortgage.
A higher credit score will earn you the lowest interest rate and decrease the overall cost of any loan you take out. In short, people with higher credit scores have a leg up in the financial world.
Prospective homeowners who have never downloaded a free credit report and have no idea what their credit files contain can benefit from reviewing their reports and checking for any incorrect items. Download a copy of your credit reports from the three major credit bureaus by visiting annualcreditreport.com and dispute any incorrect details directly with the credit bureau. It may take a few weeks, but these changes will help increase your score.
However, you will not find your credit score on your credit reports. To check your credit score, you must either sign up for an account with one of the credit bureaus or verify whether your credit card issuer allows you to access it for free.
Alternatively, you can sign up for a free service such as Credit Karma to see your VantageScore. While your VantageScore will be different from your FICO score, it will give you a better idea of your credit standing.
Read our article on VantageScore vs. FICO for more information on the differences between credit scores.
What constitutes a good credit score?
According to Equifax, the average credit score in the U.S. is 714. Credit bureaus consider credit scores between 670 and 739 to be good scores. To earn the most competitive interest rates — whether from a credit card company or an auto finance company — you’ll need very good (740–799) or excellent credit (800 or above).
What’s the fastest way to increase your credit score?
If you have a low credit score, you’re likely anxious to build credit fast. Your FICO credit score, the most widely used today, is based on five primary criteria.
Here’s a list of these factors in order of importance and how they figure into your credit score. Paying attention to these criteria is the fastest way to fix your credit.
1. Payment history (35%)
The fastest way to improve your credit score is to ensure all your credit accounts are in good standing. Pay your bills on time and prioritize your credit accounts instead of obligations you could pay later without denting your credit score.
To help you prioritize payments, look into any grace periods associated with your bills. For example, you may be able to pay your monthly mortgage statement up to two weeks after its official due date. But your Visa card may offer no such leniency.
Always try to pay your bills on or before their due date unless you’re 100% positive that there is a grace period. To avoid late or missed payments, consider setting up automatic payments and opt to pay your bills online instead of by mail. And if you do pay via postal mail, be sure to account for the days when your check will be in transit.
2. Credit utilization (30%)
At various times in your life, you may have more or less access to credit. The maximum amount you can borrow from any individual creditor is your “credit limit.” As you progress in your career and earn more money or establish a history of paying your bills on time, credit card companies will usually grant you credit limit increases.
Don’t view credit limit increases as an invitation to spend outside your means or maintain high balances on your cards. Instead, stay below your credit limit as much as possible. Credit bureaus look at the amount of money you owe on your credit accounts against the credit you’ve been extended. That ratio, expressed as a percentage, is called your credit utilization rate.
Try to keep your credit utilization below 30%, but don’t bring it down to zero either. Putting small amounts on your credit card and paying on time gives credit bureaus evidence that you know how to handle credit.
3. Length of credit history (15%)
Believe it or not, you’ll have to owe some money to earn a great credit score. Borrowing and faithfully repaying the money you owe over a long period amounts to your credit history. One reason it’s sometimes challenging for younger people to secure a loan is that they have no credit history. You may not even have a credit score if you’ve just reached adulthood.
Credit bureaus want to see how well you can meet your credit obligations and reward good credit behavior. And since credit bureaus look at the average age of consumers’ various accounts, the sooner you can establish credit, the better.
Secured credit cards are one way to establish a positive credit history. Pretty much anyone can get a prepaid credit card. Credit card issuers consider them no-risk options because you pre-fund your account with your money. Your available credit will equal the amount of money you have “on file” with the creditor at any given moment.
One great way to build credit is to use a prepaid credit card to buy coffee during the week or pay for a streaming service subscription. When your bill comes due, pay it before the due date. Do that for a year or so and you will have built a positive credit profile.
4. Credit mix (10%)
Credit bureaus look for three types of credit in your credit file: installment loans, revolving credit and open credit.
Installment credit is when you borrow a lump sum of money and pay it off in fixed monthly payments. Mortgages and auto loans are examples of installment credit. Credit cards and HELOCs, on the other hand, are examples of revolving credit. Revolving credit allows you to borrow money incrementally and make payments over time.
With open credit — the type of credit utility companies extend you — your monthly balance and payments will vary. You aren’t charged interest, except perhaps if you don’t make payments for several consecutive months. At that point, a utility company may charge you a late fee, usually a lump sum.
While having a good mix of credit accounts can help your score, that doesn’t mean you should go out and apply for different types of credit if you currently don’t have a good credit mix. Remember that new credit applications entail hard credit inquiries, which can affect your score for up to a year.
5. New inquiries (10%)
You can’t get credit without applying for it. Periodic hard inquiries on your credit report are necessary for you to build a positive credit profile. But credit bureaus look askance when you try to open several new lines of credit over a short period.
Take some time between opening new credit lines. Don’t be tempted by all of those “10% off your first purchase” offers for opening an account with a store. The amount you save can be negligible compared to the negative impact that opening too many accounts too quickly can have on your credit score.
How long does it take to improve your credit score?
The time it will take you to improve your credit score will depend on how complicated your credit problems are. Your score can go up in just a couple of months if, for example, you have one or more credit accounts in arrears and can get them all up to date by making those payments immediately. But even if you keep your accounts in good standing moving forward, a history of late payments may still follow you and depress your credit score for a long time.
Other issues will slow the credit score improvement process. For example, if your credit utilization is high and you don’t have the funds to bring your balances down all at once, you’ll have to keep whittling them away as you can afford to do so.
If you file for bankruptcy, that negative remark will stay on your credit report for about seven years and you’ll have to build your credit again from scratch.
Sometimes bad credit is due to being a victim of identity theft. Identity theft can have serious financial consequences and take some time to unravel. Depending on the extent of the fraud, you may have to address issues with your bank accounts, various types of loans and credit card companies. All of that takes time, patience and attention to detail. That’s why some people turn to credit repair companies to help them fix their credit.
There are also a few ways to make modest improvements to your credit score in short order. One of these is Experian Boost, a free service that allows customers to add additional data to their credit files. For example, your utility bills don’t reflect in your credit score. But if you pay yours religiously, having that data in your credit report can bolster your credit score.
How to improve your credit score FAQs
How do I improve my credit rating?
The first step in improving your credit rating is to download a free credit report from each of the three major credit bureaus (you can download all three from annualcreditreport.com) and see where you're failing to meet the credit criteria that matter to credit reporting agencies. Once you understand how credit scores are calculated, you can make a plan to achieve excellent credit.
The factor that has the most impact on your score is payment history. Depending on your situation, you may want to consolidate some of your high-interest debt, such as credit card debt, and set up automatic payments on your open accounts. You should also try to limit the number of new credit cards you apply for and maintain. Having too many open credit accounts is detrimental to your score.
What affects your credit scores?
The five factors that credit bureaus use to determine your credit score are payment history, credit utilization rate, length of credit history, credit mix and the number of new credit inquiries recorded in your credit file.
What does it mean to have a bad credit score?
What's generally referred to as bad credit is a FICO credit score under 620. For context, excellent credit amounts to a score of 800 or higher, with 850 being the highest credit score you can get. If you have a credit score of 670 or above, you're considered to have good credit.
While you may be able to get a loan with a 620 credit score or higher, you'll likely be charged a high interest rate. Some loans are easier to get with a bad credit score, government mortgages among them. But if your score is below 620 and you apply for a personal loan, you'll likely be turned down.
How are credit scores calculated?
The three major credit bureaus — Experian, Transunion, and Equifax — collect your credit information and issue credit reports. Credit scores are calculated based on the information contained in those credit files.
There are two basic credit scoring models: FICO and VantageScore. Each model uses the same categories of information to calculate a score; they just place different values on each factor. That means credit score ranges vary slightly between these two models. For example, a good credit score falls in the 670–739 range with FICO and the 661-780 range with VantageScore.
Which credit accounts should I pay off first?
Generally speaking, you should pay off your balances on high-interest credit cards. Credit card companies charge some of the highest rates compared to other lenders — usually higher than mortgage lenders.
Summary of our guide on improving your credit score
The key to establishing excellent credit is understanding how credit works. So pay attention to the criteria we’ve outlined and develop a plan to meet them. It will take time, but these steps will help you increase your credit score.
Here’s a recap of some of the things you can do to maintain good credit:
- Make on-time payments on all of your credit accounts.
- Keep your credit utilization ratio below 30%.
- Establish credit early and practice good credit habits.
- Download your free credit scores periodically so you can see the progress you’re making.
- Don’t apply for too many new credit accounts at once.
- Try to establish all three types of credit: installment loans, revolving credit and open credit.
- Never add an authorized user to your credit cards unless you are confident they won’t spend lavishly.
