How do you improve your credit score? It never stands still and bounces around as your credit behavior changes. This would seem to complicate matters, but it’s actually good news!
Why? Because this perpetual change means that you have the means to improve your credit score, regardless of past missteps.
It also helps that, as time goes by, and information on your credit reports ages, older information will carry less and less of an impact on your score.
What factors influence my credit score?
In order to improve your credit score, it’s helpful to understand how credit scoring works and the factors that affect it. If you missed it or need a refresher, our beginner’s guide to understanding credit scores will bring you up to speed.
Credit scoring companies like FICO and VantageScore pay close attention to a number of factors about your credit behavior when developing their scoring methodologies. The credit categories they use carry different weights depending on the importance that each company assigns to them.
The categories that affect your credit score, in order of importance, are your:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix in use (10%) and
- New credit or opening of several credit accounts quickly (10%)
The percentages in parenthesis refer to the weight that FICO assigns to each factor for the general population. While VantageScore uses similar categories, they don’t publish specific weights.
Also, the relevant importance of these categories may change, depending on your own situation. For example, if you have a short credit history, the weight of the categories applicable to you may be different.
In general, your payment history and amounts owed are considered higher impact factors in driving your credit score, while the length of your credit history is considered a moderate impact factor. Your credit mix and new credit activity are considered lower impact factors in the calculation of your credit score.
Here’s what each of the factors that influence your credit score is about:
- Payment history (higher impact): This factor looks at your various accounts such as store cards, credit cards, loans, mortgages, etc. and whether you’ve missed payments or listed collections. It also looks at public record matters such as bankruptcies and foreclosures.
- Amounts owed (higher impact): This considers not only the total amount of debt that you owe, but also the total number of accounts you have which carry a balance, together with your credit utilization ratio. This ratio refers to how much of your available credit you’re currently using.
- Length of credit history (moderate impact): Refers to the age of your accounts, including how old is your oldest account.
- Credit mix in use (lower impact): This refers to the types of accounts you have, whether store cards, credit cards, loans, mortgages, etc.
- New credit activity (lower impact): This factor looks at the frequency with which you have opened accounts in the past and the number of new credit applications you have made in the past 12 months.
Note how “Credit mix in use” and “New credit activity” gain importance when taken together (20% weight), so don’t underestimate these, even if they’re labeled “lower impact.”
What are the best ways to improve my credit score?
Now that you know the type of information that credit scoring companies use to calculate your score, you can focus on getting results. First, focus on those action steps that are:
- Simple for you to follow, and
- Carry the most benefit to your score
Start with the higher impact categories below and then move on to the moderate and lower impact ones:
Higher impact category: Payment history
Your payment history is an important piece of information used in calculating your credit score. It considers your revolving and installment loan history, including any delinquencies you may have had.
1. Avoid late and missed payments
Keep track of due dates on your credit cards, store cards, loans and other accounts where you owe money since late payments will stay on your credit file for 7 years. Although late payments will drag down your credit score, you can turn around their impact. Continue making your payments on time, and the negative impact of previous late payments will diminish over time.
» Helpful tips:
- Set up alarms and reminders. We can be forgetful about distant, future due dates. Use your mobile phone to set up recurring alarms and calendar reminders.
- Create a bills folder in your phone’s home screen. If you make payments through apps, or through internet portals, gather them in one folder in your phone’s home screen. Most mobile browsers will let you create shortcuts that you can easily place in a folder. This will help you stay current with your payments.
- Use your bank’s electronic bill pay. Take advantage of your bank’s electronic bill payment service. It’s particularly useful for fixed, recurring amounts such as loan repayments. Set up is relatively simple and it can save you headaches.
- Find your “bills spot” where you’ll always see your paper bills. Sounds simplistic, but how often do we misplace paper bills because they get shuffled around or buried under piles of other mail? Find a unique spot in your kitchen, your foyer or a place in your home that you always see and place you bills there.
- Pay ahead. Bills due don’t go on vacation. If a due date falls during a planned holiday, make sure you pay ahead. Don’t trust yourself to remember to pay while you’re having fun.
2. Don’t let your past due amounts go into collections
Having your past due amounts go into collections has a larger negative impact on your credit score than being late. Not only that, the drag on your credit score will be felt for a longer period of time. Accounts in collections will remain in your credit reports for seven years.
3. Catch up and stay current if you’re behind on payments
If you can’t, then be proactive and call your lender to inform them that you’ll be late. The strategy here is to let your lender know that you’re taking action and to prevent your account from going into collections. Be prepared to provide a payment plan and don’t expect much more than an extra month from them to pay.
Higher impact category: Amounts owed
This category digs deeper into the details behind your total debt. It looks into the amounts you owe in all your credit accounts, not just your credit cards. Your credit utilization ratio and the remaining balances of installment loans compared to the original amounts are included here.
4. Actively manage your credit utilization
Your credit utilization ratio on revolving accounts is the percentage you get when you divide your total outstanding debt balances by your total amount of available credit. Always use the smallest percentage possible of your revolving credit limit, keeping your outstanding balance at no more than 30% of your limit, if you can.
This sends the signal that you have access to credit and funds availability. If, on the other hand, you max out, or are close to your credit limit, the higher utilization will raise a red flag with the credit scoring models.
5. Rotate your cards
When you carry balances on more than one credit card, rotate your cards to keep your credit utilization in each as low as possible.
Credit card issuers can check your credit report as often as they want if you have an account with them. An increase in your credit utilization with one card might lead them to take an adverse action on your other card accounts. An example of one such action could be a reduction in your credit limit.
6. Request a credit limit increase
If your income has increased, or you’ve been with your credit card company longer than 6 months and have been paying on time, call them and request a credit limit increase. A limit increase will reduce your credit utilization ratio and will be favorable to your credit score.
7. Reduce the number of credit card accounts with a balance, but don’t close them
Keep your credit card accounts open to have their credit limit count towards your credit utilization ratio. The available credit you gain never hurts and adds to your financial flexibility should you face an unexpected financial emergency.
8. Avoid paying only the minimum amount due
Making minimum payments not only costs you interest charges, but also keeps your debt outstanding for longer. You won’t be freeing up available credit as fast as you could, slowing down your credit-improving efforts.
9. Pay down debt
Use some of your reserves or take advantage of any extra cash that comes your way to pay down debt. This recommendation is always easier said than done. But you should do it.
It’s a proven way to improve your credit score relatively quickly. Focus first on revolving accounts such as store cards and credit cards.
10. Take advantage of balance transfer offers
If you have good credit and want to pay down debt faster, consider a balance transfer with a 0% APR, preferably with a low or zero balance transfer fee. Balance transfers with a zero promotional rate can be a great tool to save money. By avoiding interest during the promotional period, you can free up cash to pay down debt faster.
11. Take advantage of personal loan offers
If you don’t qualify for a balance transfer offer, you might qualify for a personal loan to pay down high interest credit card debt. You can compare personal loan offers with our free comparison tool and our loan calculators can help you decide if a loan makes sense for you or not.
Moderate Impact Category: Length of Credit History
This category gives lenders an idea of how much experience you have managing credit. It considers not just how long ago you opened your accounts, but also the last time you used them.
12. Don’t close your credit card accounts when you pay off balances
A longer credit history, especially if you’ve paid regularly and on time, shows that you have experience managing credit. In addition, by keeping the account open, its credit limit counts towards your credit utilization ratio, which is favorable to your credit score. Closing a credit card account won’t improve your credit score.
13. If you must close a card account, don’t close one with a high credit limit
If you do, and you have other cards with outstanding balances, your credit utilization ratio will increase, affecting your credit score.
14. Also, if you must close a card, don’t close an older account
Closing an older account, even if your payment history with it was less than perfect, can lower your score as it’ll impact the overall age of your accounts.
15. Start your credit history early
If you can handle credit and you need it, don’t avoid it. Building a positive credit history can open up better access to financing later on when you need more of it either for planned or unforeseen events.
Lower Impact Categories: Credit Mix and New Credit
16. Don’t overly rely on one type of funding
When you need money, consider different sources of funds. Being responsible with various types of financial products shows you can handle repayment and is positive for your score.
17. It’s OK to have credit cards – just stay responsible
If you need credit and don’t have a credit card, obtaining one and using it responsibly can add to your credit score over time. You don’t need to carry a balance though; best practice is to pay your balance in full each month.
If you’re rebuilding your credit, consider a secured credit card. Your payment behavior will be reported to the main credit bureaus, helping you build responsible payment history and eventually improving you access to regular, unsecured credit cards.
18. Plan your rate shopping to avoid being penalized by inquiries
When reviewing your application, lenders will need to check your credit information and do a “pull” or inquiry on your file. Find out ahead of time whether your lender will do an initial soft or a hard credit pull to provide you with a rate.
Soft credit inquiries won’t affect your credit score, but hard inquiries can have a small negative impact. That’s because they signal uncertainty. Statistically, you’re more likely to run into financial trouble when you increase your borrowing. When rate-shopping, be mindful of credit inquiries.
Credit cards:
When you apply for a credit card, your lender will do a hard credit pull to decide your terms. Applying for multiple credit cards in a short period of time is not a good idea. Doing so sends a red flag to the credit scoring algorithms and it’ll affect your credit score.
Mortgage, auto and student loans:
You can compare quotes from multiple lenders during a short window since they’ll be treated as one inquiry. The definition of “short window” can vary depending on the scoring model used by each lender. It can be 14, 30 or up to 45 days. So, it’s best to keep your rate-shopping within a two-week period.
Personal loans:
Lenders typically need to do an initial soft pull on your credit file to provide you with a quote. As long as the lender you’re considering doesn’t do an initial hard pull, you can compare multiple options and take as long as you need.
Once you obtain your new loan or credit card, your score will likely dip a little bit. Don’t worry. Continue paying on time and your score will come back up as the uncertainty about your ability to take on the new credit disappears.
Other actions you should consider:
19. Correct credit reporting errors
Obtain your free credit reports and correct any errors you find by filing a dispute with the credit reporting agency that is showing any mistakes. Errors could be dragging down your credit score, so clear them up if you find any. Our guide to credit scores shows you how to obtain your free credit reports.
You can dispute credit reporting errors online with each of the credit reporting agencies through the following links:
How quickly can I raise my credit score?
Improving your credit score takes consistency and a little bit of patience. By their very nature, some credit improving actions—like making payments on time, take time to be generated and reported to the credit bureaus; while others, such as reducing debt, can be done and reported faster.
The speed of credit improvement and recovery also depends on which negative information caused your score to drop in the first place. Some types of negative information “age fast” while others don’t.
Note:
You can recover from some negative actions in a few months, while others can weight on your credit score for years. In general, the more a given negative action lowers your score, the longer it will take to recover from it.
Some examples of negative actions that drop your score a little, but age fast, include:
- Opening new credit accounts. If you pay on time, you should expect your score to recover within 2-3 months.
- Closing an account. This action may drag your score for 2-3 months.
An action that can drop your score a bit more, but also ages relatively fast includes:
- Maxing out a credit card. This can lower your score for +3 months. To recover, you’ll need to take action and reduce your utilization.
As the severity of the negative action increases, you can expect the recovery process to be a slow grind:
- Missed payment. It likely will take you more than a year to recover from this negative action.
- Bankruptcy. It’ll affect your score for 7 to 10 years.
The recovery times mentioned above won’t be the same from person to person, given the differences in individual credit histories. They’re rough guidelines and not definitive rules. Note that your debt level and future on-time payment behavior will affect your recovery time.
If speed is what you’re after, then paying down debt is the way to go. But don’t pay down just any type of debt. Revolving debt (credit cards) is viewed as riskier than installment debt (loans). So, focus on paying down credit card debt and you’ll see your credit score improve relatively quickly.