How To Improve Your Credit Score in 5 Steps
What can I do to get my credit score up?
Credit scores can feel like a mystery, making improving your credit score impossible. There are several credit scoring companies, but the FICO® Score is the credit scoring system 90% of lenders use.
The FICO® Score uses your credit reports to calculate your overall credit score.
The calculation use to come up with your score is listed below:
Improving your credit score comes down to:
Understand what goes into each category scoring
Assessing which one of these categories is impacting your score the most
Strategically focusing on improving your score in your category of struggle for maximum impact
For instance, if your score is low because of payment history, trying to improve your score by improving in another category may not be as effective.
Below are 5 Strategies to boost your credit score
Strategy 1: Make consistent on-time payments. Payment history is 35% of your overall credit score.
If you’ve ever heard the term “your past behavior predicts your future behavior,” then you know why payment history makes up such a large part of your credit score.
Your score represents how much a creditor can trust you will repay them if they loan you money.
The better your payment history, the more confident creditors are that you will pay them back, and the more likely they will give you credit.
The credit report data FICO uses to calculate your score in this category.
How long have the payments been past due
How much you owe on delinquent accounts
The number of past due payments
Bankruptcies, liens, judgments
Number of accounts you paid on time
How To Improve Your Credit Score if it’s low in this category:
Set up automatic minimum payments so you don’t miss a payment.
Track your bills on your online calendar to help you keep track of payment dates
Work with your creditor and see if you can develop a payment plan to get past due accounts current.
Continue to make on-time payments. Over time, your credit score will go up.
Strategy 2: Lower your credit balance. Amount owed makes up 30% of your overall credit score
Debt is a risk. The more debt you have, the more likely an unexpected expense will create a financial crisis. In a financial crisis, you may be unable to pay off your debts. For this reason, creditors consider the amount of debt they carry to be a key indicator of how likely they are to pay them back.
The credit report data FICO uses to calculate your score in this category.
The amount you owe on all your accounts
How much you owe on certain accounts
The number of accounts you have and owe money to
Credit utilization- how much of your credit limit are you using? A rule of thumb is to keep your credit balance under 30% of your total credit limit.
How To Improve Your Credit Score if it’s low in this category:
Calculate your credit utilization by dividing your total current card balance by your credit limit. Next, multiply that number by 100. You can also use a credit utilization calculator to find your number.
If you’re over 30% and need to improve your score for credit needs, consider paying down your balance lower your overall credit limit using to under 30%
Commit to not using your credit while trying to down the balances.
Strategy 3-Don’t close old credit cards. Length of credit history is 15% of your overall credit score
Long credit history of on-time payments shows creditors a history of you paying back your creditor.
The credit report data FICO uses to calculate your score in this category.
Age of your oldest account, age of your newest account, and the average age of your total accounts
The length of time certain types of credit have been opened
How long since you’ve used the credit
How To Improve Your Credit Score if it’s low in this category:
Once you’ve paid off debt, consider keeping some of your older credit cards active because this can positively impact your credit score since it gives you a long payment history.
Think twice before closing credit cards if you're looking to use credit for purchases like a home.
Establish credit, even if you can’t get credit, using one of the methods outlined in a blog I wrote for Saverlife.
Strategy 4: Establish new credit. New credit accounts for 10% of overall FICO Score
Getting a lot of new credit may show financial irresponsibility or financial hardship. Both may make creditors hesitant to extend your credit.
Applications for new credit are often reported to your creditors and may hurt your credit score. Limit applying for credit when using credit for major purchases like cars or homes.
There are two types of credit inquiries:
Hard Credit Inquiry: You may also hear this type of credit inquiry called a “hard pull” or “hard credit check.” Lenders request Hard Credit Inquiries when they looking to approve or disapprove a credit application.
Hard Credit Inquiries show up on your credit report. Certain types of hard credit inquiries, like interest rate shopping for a car or home, may not be as impactful on your credit report.
Soft Credit Inquiry: Sometimes described as “soft pull” or soft credit check.”
Soft credit inquiries may or may not show up on your credit report but don’t impact your credit score. Creditors often use this type of inquiry to verify eligibility for special offers. Employers will request a soft credit inquiry to review your credit report before they make a hiring decision.
The credit report data FICO uses to calculate your score in this category.
Number of new accounts you have
Amount of recent credit inquiries (how often you applied for new credit)
When was your last credit account opened?
How To Improve Your Credit Score if it’s low in this category:
Limit how often you apply for new credit
If possible, ask for a “soft credit inquiry” vs. “hard credit inquiry.
Think carefully before establishing new credit. Getting new credit may make sense if you are getting new credit to:
Establishing Credit
Get credit to improve your credit history.
The new credit CAN increase your debt-to-income ratio.
All of these strategies can work if you have a plan such as:
Establish credit with one instead of 10 credit cards
Commit to only using 30% of your new credit card limit and paying your bill on time
You’re only using the credit card to increase your credit utilization ratio.
Without a solid plan for managing the debt, you may find yourself quickly in a deeper credit card debt.
Strategy 5: Get another line of credit. Credit Mix Accounts for 10% of your overall credit score.
If you’re responsible for paying different credit types on time, creditors feel you will be responsible for paying future credit.
The credit report data FICO uses to calculate your score in the credit mix...
Revolving- a line of credit, like a credit card, store credit cards, gas station credit cards
Installment payments- a fixed monthly payment like student loans or mortgages
How To Improve Your Credit Score if it’s low in the credit mix:
Carefully consider applying for credit. Remember, this is only 10% of your overall credit score, so don’t go crazy applying for credit.
If you are looking to get a loan for a purchase like a home, talk to your mortgage lender to see if getting additional credit will help or hurt your credit score.
Recap
Use the following steps to improve your credit score
First, review the categories FICO uses to calculate your credit score.
Payment History
Amount Owed
Length of Credit History
Credit Mix
New Credit
Second, get a clear understanding of the data FICO uses to calculate your score in each section.
Third, after you understand the data FICO uses to calculate your score, strategically look to improve your credit in the categories directly impacting your credit score.
Next Steps
Get your FICO score. You can typically get a free score from credit monitoring agencies, your bank, creditor or credit bureas like Experian. Many offer data to explain your scoring.
Use one of the strategies listed to improve your score based on your credit score category of struggle. For most people it’s on time payments of amount owed
Additional Resources:
Undebit.it- use to credit a debt payoff plan
MyFico.com is a wealth of information about the FICO® Score
Credit Karma Article on Six Places to get your free credit score
