When it comes to your overall financial health, your credit score is an essential part of the puzzle. Credit scores are used extensively when applying for any sort of credit card, mortgage, or other form of debt. Beyond that, your credit score can also impact your ability to rent an apartment or even get a job. Suffice it to say, your credit rating is hugely important in the modern era.
So, how do you improve your credit score?
It starts with understanding the various factors that influence your credit rating. Next, specific steps can be taken to help improve your credit score. Let’s start with the basics.
Understanding the Elements of the FICO Credit Score
FICO is the most commonly used credit scoring model, with more than 90% of financial institutions using it for risk assessment. So while there are other models, it’s FICO that you should pay the closest attention to. Here are the 5 factors that contribute to the FICO credit scoring model:
- Payment history
- Credit utilization
- Length of credit history
- New credit
- Credit mix
This list is in order of importance – so payment history has the biggest impact on your score, followed by credit utilization, etc. Below, find more detailed information on each of these factors and how they affect your credit score.
1. Payment History – 35% of FICO score
Payment history makes up 35% of your credit score. This means that it’s by far the most important factor that contributes to your credit rating.
Payment history is straightforward: the scoring factor takes into account how many on-time payments you’ve made, and if you’ve had any missed or late payments. Payments for both revolving credit (credit cards, etc.) and installment loans (mortgages, etc.) are taken in to account.
To improve this credit scoring factor, simply make on-time payments every month on all your lines of credit.
2. Credit Utilization – up to 30% of FICO score
Credit utilization makes up up to 30% of your credit score. It’s the second-most important factor.
Credit utilization refers to the percentage of available credit that you’re actually using. So for example, if you have a $10,000 credit limit and you have a balance of $3,000, your credit utilization is currently 30%.
This factor is calculated very frequently, and it does not take into account your past behavior. It’s more of a snapshot factor, that only looks at what’s going on right now. Also, remember that credit utilization looks at all your credit accounts. If you have multiple lines of credit, your credit utilization will be the percentage of your total credit limit that’s in use (across all your accounts).
To improve this credit scoring factor, try to keep your credit utilization low – ideally under 30%. You can also keep older cards open to maintain your credit limits.
3. Length of Credit History – 15% of FICO score
Length of credit history makes up 15% of your credit score.
The factor looks at all your credit accounts and determines how long you have had a credit profile. In general, the longer your credit history, the better your score for this factor will be.
To improve this credit scoring factor, keep old accounts open and in good standing.
4. New Credit/Age of Accounts – 10% of FICO score
New Credit makes up 10% of your FICO score.
This factor looks at how many new credit accounts you have opened in the last few years. It takes into account your average age of accounts, as well.
Opening new accounts will not necessary ding your credit score. However, opening several new accounts can significantly reduce your average age of accounts, and potentially send a negative signal to credit issuers.
To improve this credit scoring factor, try to only open new credit accounts when they are actually needed. Don’t open more than one at once unless absolutely necessary.
5. Credit Mix – 10% of FICO score
Credit Mix makes up 10% of your FICO score.
This factor looks at the different types of credit accounts you have and have had in the past. Generally speaking, having a mix of account types is beneficial. So, someone with 2 credit cards, 1 car loan and 1 mortgage will likely score higher in the credit mix factor than someone with 4 credit cards – even though they have the same total number of accounts.
To improve this credit scoring factor, try to use a variety of credit types if you have a need for them.
How to Improve Your Credit Score
Now you understand the basics of how credit scores are calculated. But how do you actually improve your score?
Using the knowledge we just gained about credit scoring factors, we can make specific changes in order to signal the credit bureaus that we are trustworthy users of credit.
Below, find our unique method to finally get your credit score where you want it to be: the CreditLiftoff Credit Score Improvement Guide!
CreditLiftoff Credit Score Improvement Guide: 10 Ways to Improve Your Credit Score
Below, find many different methods you can use to improve your credit rating. While each method can help, these are generally listed in order of importance – so you should start at the top of the list.
1. Monitor and Understand Your Credit Score
You can’t fix a problem that you don’t first understand, which is why our #1 recommendation is to monitor your credit score and work to understand why it is what it is. Only then can you start to make positive changes that will improve your credit.
The best way to do this is to use a free tool like Credit Sesame (or Credit Karma). These free services analyze your credit data to show you an approximate score. But more importantly, they show you the factors that are influencing your score. They also help you watch out for fraudulent account openings, incorrect credit reporting, and more. You can also request a full free credit report once per year to get a more complete picture.
Bottom line: By knowing your current credit score and understanding any factors that may be affecting it, you can make more informed choices about how to improve your FICO score.
2. Pay Off Your Bills on Time
Paying off your bills on time is one of the most important things you can do to build credit and maintain a good credit rating. Payment history makes up 35% of your credit score, so it’s a huge factor to stay on top of.
If you have had late payments or missed payments in the past, all you can do is keep paying on-time and watch your credit score recover. If you have never had a missed payment, just keep doing what you’re doing!
Note: It’s worthwhile to set up autopay on all your credit accounts, so that you don’t accidentally miss a payment!
Bottom line: Paying your bills on time will dramatically improve your credit score over time. Set up auto-pay to automate everything!
3. Keep Old Accounts Open
If you have older credit accounts, it may be wise to keep them open. This is particularly true for credit cards with no annual fee, as there is no cost or hassle involved with keeping them open.
Older credit accounts help to boost your average age of accounts, which is a significant credit factor.
Not sure what to do with an old credit card? Check out our article on what to do with unused credit cards.
Bottom line: Keep your old credit cards open to improve your age of credit accounts. Even if you don’t use them often, it’s beneficial to have them kept open.
4. Pay Off Debt
If you have existing debt, paying off some or all of it will likely improve your credit score. Now, this doesn’t mean that you have to entirely pay off your mortgage, your car loan and your credit cards all at once. However, the more you can pay off the better your financial health will be – and your score will likely improve, as well.
Your level of debt compared to your total credit limit available to you is referred to as your credit utilization. Keeping credit utilization low helps to improve your credit score.
Bottom line: Pay off as much debt as you can, to help improve your financial health and your credit score. Aim to keep credit utilization under 30% (so less than 30% of your available credit across all accounts).
5. Dispute Inaccuracies on Your Credit Reports
Credit reports should be accurate, but in many cases errors do happen. Sometimes credit issuers report that you missed a payment when in fact it was made on time. Or, an account may have been reported as closed when it’s still open.
You can use a tool like Credit Karma to monitor your credit (see #1), and can also download a complete credit report once per year. When you do, make sure to look closely at each mark against you to make sure there’s nothing inaccurate.
Check out this guide on how to dispute credit report errors for more information.
Bottom line: Errors do happen, even on credit reports. Check your report frequently and dispute any errors to protect your credit health.
6. Submit Phone & Utility Bills to Build Credit
Credit reports monitor your bills with credit card companies, medical billing companies, mortgage providers, etc. However, they generally do NOT take into account payment history from things like phone bills, home utility bills, etc.
Fortunately, a new program called Experian Boost aims to help fix this problem. The free service allows you to manually submit your utility bills to be added to your credit profile. This can help improve the payment history aspect of your credit score.
We put together an Experian Boost review if you’re interested in learning more.
Bottom line: This free service can help flush out your credit profile by including utility bills in your payment history.
7. Only Open New Accounts as Needed
Opening new credit accounts won’t necessarily hurt your score, but you shouldn’t overdo it. By sticking to only opening new lines of credit when they’re actually needed, you can help preserve your average age of accounts and reduce the risk of overspending.
With that said, if you have a need for a new credit product, there’s generally no harm in opening one up. It can actually help your score in some cases. The trick is to not open too many accounts, too fast – and to avoid unnecessary lines of credit.
Bottom line: If you have a genuine need for a new credit product, go ahead and get it. However, you should avoid opening too many accounts or any unnecessary accounts to help build your credit score.
8. Avoid Excessive Credit Inquiries
Every time you apply for a new line of credit, the issuing financial institution will pull your credit (known as a “hard pull“). You may also have your credit pulled when applying for a lease or even a job, potentially. Every one of these credit pulls results in a credit inquiry on your credit report.
Credit inquiries on your profile are not inherently negative. However, too many inquiries can reduce your credit score temporarily. If you have 3 or 4+ recent inquiries on your profile and apply for a new line of credit, the issuer may be hesitant to approve you. So, it’s best to avoid excessive inquiries by not applying for multiple things at once, and only applying for credit when it’s actually needed.
With all that said, remember that credit inquiries only affect your credit score temporarily. Every credit inquiry will stay on your account for 2 years, but it will only affect your score for 12 months.
Bottom line: Avoid excessive credit inquiries by only applying for credit when you actually need it.
9. Consider Becoming an Authorized User
If you have a relatively short credit history, there’s another method you can use to potentially boost your credit score. It’s called becoming an authorized user on someone else’s credit card. This will require the help of someone close to you that trusts you explicitly. Spouses, partners and parents are good options.
If you have someone in your life that trusts you, they can add you to their credit card account as an authorized user. This gives you your own credit card and access to their entire credit limit. Whether you actually use the card or not, this can help improve your score if they themselves have good credit and the account is well-aged. Nerdwallet notes that this strategy is really only effective for people with limited credit history.
Bottom line: If you have a short/limited credit history, becoming an authorized user on someone else’s account may help boost your FICO score.
10. Raise Your Credit Limits
If you carry some debt, raising your credit limits on one or more credit cards may help. This is because it can lower your credit utilization ratio. For example, if you have a total credit limit of $10,000 and you currently have $4,000 in credit card debt, your current credit utilization is 40%. But if you managed to raise your credit limit to $12,000, your utilization would go down to 30%. This may help improve your credit score.
If you have demonstrated responsibility with on-time payments, your credit card issuer may be willing to raise your credit limit. You’ll just need to call in and ask!
However, we do NOT recommend this method if you have trouble with overspending. The point of this strategy is to raise your limits without gaining additional debt. You want to get a higher credit limit, but you don’t want to actually use it!
Bottom line: Raising credit limits can lower credit utilization, helping to boost FICO scores.
Now that you’ve read all about how to improve credit scores, it’s time to take some steps towards a better financial future! And remember, changing your credit score can take a long time, so don’t expect immediate results.
If you follow the steps listed in this detailed guide, we are confident that your credit score will improve over time. And in addition to these tips, make sure you’re using credit responsibly in general.