Your credit score has a massive impact on your financial life. A good credit score can win you excellent rates and terms on loans, credit cards, and more. A bad credit score, on the other hand, can keep you out of your dream apartment, or leave you struggling with exorbitant interest rates — if you can get approved for a loan at all! It’s no secret that improving your credit can make for a happier, healthier financial life. But how exactly do you improve your credit score?
Let’s dig into some key strategies. Plus, learn what fifteen financial experts recommend you do when trying to raise your credit score!
Which factors influence your credit score?
If you want to improve your credit, you must first learn which factors affect your credit score.
The five factors which determine your credit score are:
- Payment history (35%).
- Credit utilization (30%).
- Length of credit history (15%).
- Credit mix (10%).
- Credit inquiries (10%).
So if you want to improve your credit, you simply need to work on improving these five factors!
Let’s dig a little deeper.
How can you improve your payment history?
Your payment history accounts for 35% of your credit score and reflects whether or not you’ve been making your credit payments in a timely fashion. As such, improving your payment history is fairly simple.
If you currently have outstanding loans or other debts, be sure to make your monthly payments on time every month. Or if you can no longer afford your monthly payments, consider consolidating your debts or refinancing your loans.
And what if you have no outstanding loans or debts? Well, then you won’t have a negative payment history, but you won’t have a positive one, either. It might be smart to take out a small secured loan which you can make regular payments on. Or take out a new credit card (making sure to pay it off every month)!
How can you improve your credit utilization?
Your credit utilization refers to how much of your available credit you are using. In other words, it’s the ratio of your current outstanding debt to your total available credit. The less of your available credit that you’re borrowing at a given time, the better your credit utilization ratio!
Improving your credit utilization ratio is also fairly simple. Just pay off your debts! The less outstanding debt you have, the better.
In addition to lowering your debts, raising your total available credit can also improve your credit utilization ratio. So you can also improve your credit score by taking out a new credit card and using it very sparingly!
How can you improve your length of credit history?
Your credit history is fairly straightforward: it’s the average age of your various credit accounts. This factor is the only reason why it might not be a good idea to pay off your debts early. If you have any long-lived loans, like a mortgage or a student loan, its lifespan increases the overall length of your credit history.
That said, the length of your credit history has a smaller impact on your credit score than your credit utilization. So it is still generally a good idea to pay off debts where you can. Just be mindful of the age of your various accounts! If possible, pay off some of your “younger” debts before tackling the older accounts.
Also, if you’re worried about the age of your credit history, you should avoid taking out any new loans. That’s because brand-new credit accounts reduce the average age of your credit accounts.
That said, your credit history has a much smaller effect on your credit score than your payment history. So if you want to establish a healthy payment record, it may still be a good idea to take out a secured loan for that purpose. Just keep in mind that you shouldn’t make a habit of it — you don’t want too many young accounts on your record at once.
How can you improve your credit mix?
This one is also easy — just make sure you have several different types of credit accounts! For example, if you have a credit card, a mortgage, and you’re paying off an auto loan, you should be all set. According to the Federal Trade Commission, just having utility bills in your name can help you build your credit.
But again, we’d advise against taking out several new credit accounts simply to diversify your credit mix. Any positive impact made by the influx of different types of credit would be negated by the damage to the length of your credit history. Plus, if you fail to pay on time any of these accounts, they will hurt your credit much more than they’ll help.
How can credit inquiries hurt your credit?
Credit inquiries occur when a lender or creditor requests to view your credit report after you apply for a new loan or credit account. They only cause a small dip in your credit score. If you then make timely payments on your new account, this good behavior should counteract any damage.
However, it’s important to be mindful of this factor. To avoid instigating multiple hard credit inquiries, you should always apply for pre-approval before submitting a formal application for a loan. Pre-approval gives you a sense of whether or not your application will be approved without hurting your credit score. Once you know that you’re ready to commit to a given loan or credit account, then you can send a formal application.
So where should you start?
As you can see, there are a lot of different ways to try and raise your credit! Even if you only decide to address the two most influential factors (payment history and credit utilization), there are a ton of different steps you could start with.
For example, you could take out a new credit card with the intentions of establishing reputable payment history. Or, if you’re worried about shortening your credit history, you could consolidate your existing debts.
You could work on lowering your credit utilization by paying off all of your credit card debts. Or you could start by paying off your loans!
With so many choices, what should you tackle first? What is the best single step that you can take to address a lackluster credit score?
1. Deal strategically with collection accounts
Deal strategically with collection accounts. So many people have misconceptions about how collection accounts and credit reports work. They believe that paying off these accounts will help them ‘clean up their credit.’ Not always true — at least for the majority of scoring models out there. VantageScore treats them differently.
Paid or unpaid, collection accounts are typically negative and can remain on your reports for seven years plus 180 days from the date you first fell behind with the original lender.
That doesn’t mean it isn’t a good idea to resolve them. By taking care of them, you can stop them from being sold to other agencies and appearing more recently on your credit reports. And you may head off a lawsuit that way as well. (Check your state statute of limitations if this is a concern.)
But it does mean that one viable strategy is to settle the account for less than the full balance. Be sure to get it in writing before you pay!
Thankfully, as these accounts age (get older) they have less impact on your credit scores. So if you pay your other accounts on time going forward, you can still build better credit even though these negative items are reported.
2. Open a low-fee secured card with a reputable company
We all know that secured cards can be a great way to get a new, positive tradeline on your credit report, but there’s a secret, added benefit…. By establishing a healthy relationship with a specific credit card company, you have a better chance of getting a real card with that company. And it can happen pretty quickly! Call the company after six months and ask them if they will give you a regular card.
3. Get help from a trusted family member to pay off credit card debt
For those of you with some credit card debt holding back your credit score, keep in mind that the amount you owe accounts for 30% of your credit score. Still, you might need a higher credit score to qualify for a loan.
If you’re lucky enough to have a trusted family member that could lend you the cash you need to cover your debt, discuss the situation with them. They might be able to lend you money long enough to improve your credit score. The tricky part comes in paying them back right away without putting that debt on your credit card as a cash advance with a hefty interest rate. So beforehand, work out a plan to pay them back quickly, or talk to your bank about getting a line of credit.
4. Focus on creating wealth
Don’t focus on the credit score. Instead, focus on building wealth. When you focus on this, you do the right things financially, like paying off debt and paying on time. Do the right things, and your score will follow.
5. Pay your balances on-time
The best tip is to pay your balances on-time – even if it is the minimum due.
6. Keep an eye on your credit utilization ratio
The single most important tip for improving your credit score is to watch your credit utilization. Ensure your outstanding debt to available credit ratio is not above 15%.
7. Make sure you pay everything on time
If you are looking to improve your credit score, you need to make sure that you pay everything on time. It is as simple as that. Even if you have bad credit, the best way to improve your score is to show creditors that you have changed your behavior and that you have a new track record of paying on time.
8. Invest time in learning how credit works
The best way to improve your credit score is to stop spending time looking at it. You won’t be able to sustain a high credit score by worrying and reading some articles about how to game the credit score system.
Use the time to become a better borrower.
9. Sign up for multiple credit cards
One of the measurements that has the most significant impact on your credit score is your number of on-time payments. Sure, you screwed up in the past, but if you want to improve that metric quickly paying one card on time each month won’t get you there.
Sign up for multiple credit cards and put a tiny amount on each every month so you can rack up many on-time payments quickly. Three on-time payments a month will get you to your goal faster than just one!
10. Try to pay more than the minimum
Always pay your bills on time and try to pay more than the minimum. Your payment history constitutes around 35% of your credit score. And if you pay bills late, companies can see this. It may affect you being able to get a loan, and it will affect your credit score.
11. Always pay your bills (all bills) on time
Not taking on any credit is not a great way to improve your credit scores. In order to improve yours, you need to show that you are a responsible credit taker. One of the ways to do so is by putting your purchases on credit, and always — let me repeat that again, ALWAYS — paying them on time.
12. Don’t ever allow your accounts to go into past-due status
Make sure you don’t miss any payments or let any accounts go into past due status. Your payment history is one of the largest items determining your score. So the better your future credit and payment history, the better you can expect your score to be.
13. Pay the whole bill amount every month
Don’t miss any payments or let any accounts go into past due status. Payment history is one of the largest items determining your score, so the better your future credit and payment history, the better you can expect your score to be.
14. Get a secured credit card and pay the balance in full every month
If you have no credit history, it’s very hard to get a credit card to help you build history. One option is to get a secured credit card with a $200 limit. Then at the end of the month, pay off the entire balance. After a few months, ask for an unsecured credit card. You may be surprised how quickly you get approved.
Taking the first step
Are you ready to take your credit score into your own hands? Then check out SuperMoney’s list of top credit counseling agencies. Or browse top credit repair companies side-by-side. Don’t forget to shop around, and read reviews from past users to make sure you find a firm you can trust! With their guidance, you can take the first steps toward securing a great credit score.
In the pursuit of getting better with money management, personal finance and everything in between. These are my learnings along the way.