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How to Improve Your Credit Score

By: Kiana Wright, Vice President, Consumer Lending

Posted on 8/30/2019 9:30:00 AM

A good credit score is essential. It doesn’t just affect your ability to get a loan for big purchases like a car or home, it can have an impact on your employment and ability to rent property. Your credit score is a key factor in completing your financial goals. In this article, we’re going to look at ways to improve your score. First, let’s take a look at what exactly your credit score is:

Understanding Credit Scores

You credit score is a number on a scale of 300-850, with 300 representing poor credit and 850 representing perfect credit. This number is reported by the three main credit reporting agencies: Equifax, Experian, and TransUnion. These agencies use what’s called a FICO Score (Fair Isaac Corporation Score).

Your credit score is different from your credit report. A credit report includes details about your credit history and does not always include a credit score. But a credit score is just that – a score only, without details of your credit history. 

Lenders, banks, credit unions, and even landlords and potential employers can use this score to determine how responsible you are, and in the case of lenders, estimate how likely you are to pay back loans on time. In general, a score above 740 is considered excellent, and a score below 640 will often mean paying higher interest rates. 

Several factors determine your credit score

According to FICO, here are the data points that determine your score and approximately how much weight they carry:

Payment history – 35%

This includes how frequently you’ve made payments on time. The more on time payments-in-full, the better. 

Amounts owed – 30%

This includes your total amount of debt and how much of your current credit you are utilizing. In other words, if you have a credit card with a $1,000 limit, how much do you currently owe? Most lenders recommend keeping credit utilization below 30%.

Length of credit history – 15%

This includes how long your credit accounts have been open. Lengthier credit histories will mean higher scores, but you can still have a good credit score when you’re just starting out building your credit because the age of your credit is considered. 

Credit mix – 10%

This includes a variety of credit types like installment loans, credit cards, and a mortgage. A wider variety of credit helps increase your score. 

New credit – 10%

This includes how many new accounts you have. Try not to open too many new accounts at once because it can have a negative impact on your score. 

How to Improve Your Credit Score in 7 Steps

If you’re just starting out, building your credit, or you are recovering from debt, there are actions you can take right now to improve your credit score. Some of these actions are quick fixes, while others require that you build good financial habits. When combined, they are great long and short term strategies for meeting your financial goals:

1. Check Your Score

First things first, you need to know where you stand with all three agencies. The best way to do this is to use annualcreditreport.com, which is a government site that allows you to see your credit reports from all three agencies, for free, once a year. 

After you view the credit reports, you’ll have an option to purchase your report from each agency. You can also use FICO’s site to see your score as reported by all three agencies. 

To see your credit score for all three agencies, you’ll generally have to pay some kind of fee. However, some free alternatives allow you to see your score as reported by one or two agencies, such as NerdWallet and CreditKarma. Just keep in mind that these free services have some limitations when it comes to reporting your FICO score accurately. 

2. Dispute Inaccuracies

When you view your credit report, you might see inaccuracies with how much you owe, whether your accounts are closed or open, and even mistakes regarding your identity. Be sure to report all these discrepancies to the individual agencies. Here’s how to report those discrepancies, according to the Consumer Financial Protection Bureau. 

3. Optimize Credit Utilization

As we mentioned earlier, your credit utilization plays a big role in your score. Try to stay 70% below your credit limit. For example, if you have a credit card with a $1,000 limit, try to not use it for purchases above $300. 

4. Keep Credit Cards Open

The age of your accounts has an impact on your score, which means the longer an account is open, the better. This doesn’t mean the account needs to be active, but it’s not a bad idea to make small purchases on each of your credit cards every month and always pay them back, in full and on time. Some ideas for small purchases could be buying gas, clothes, or paying for meals at restaurants. 

5. Make Payments on Time

This is the most important factor in your score. Making your payments on time every single month is so important for your credit score. Whether it’s a mortgage payment, credit card payment, car loan payment, or even a student loan payment, paying the amount due, in full and on time will go a long way to improving your score. 

6. Pay Off Debt

Along with credit utilization, how much money you owe on your credit accounts is the second biggest contributor to your credit score. So, the faster you can start paying off those debts, the more you’ll see your score rise. 

Outside of a debt consolidation loan, best-selling author and radio show host Dave Ramsey recommends two strategies for how to pay off your debt: Snowball and Avalanche. Each method has its pros and cons, so pick the one that works best for you.

  • The Snowball Method – In this method, you start with your smallest debt first and pay it off in full. Like a snowball, the amount you’ve paid will build over time.
  • The Avalanche Method – In this method, you start with the account that has the highest interest rate and work towards paying it off. Like an avalanche, the amount you owe will come crashing down (become smaller). 

7. Get Credit Smart

As they say, knowledge is power. You’ve already taken the first step in improving your score by reading this article. Now you can dive deeper and get even smarter!

Complete Community First’s 'Credit Scores and Reports' moveUP Module