Having the best credit score possible is important for many reasons. Having strong credit will allow you to be approved for new loans and credit accounts, while enabling you to receive better products with more favorable terms and lower interest rates. Having a higher credit score will also help you to qualify for better rates on insurance for your home and your car. And if you rent, you’ll have a much easier time qualifying for a lease when you have good or excellent credit.
Thankfully, your credit score is almost entirely within your control, and there are many steps that you can take to improve it.
Lower your credit utilization
Nearly a third of your credit score is based on the amounts that you owe. But it’s not the dollar value of the money you owe that affects this factor, it’s the amount you owe compared to your available credit that matters. This is known as your credit utilization ratio.
For example, someone might have a million dollars in debt, but if they are extraordinarily wealthy and they also have ten million dollars of available credit, then they will still have a very low credit utilization ratio of just 10%, which is good. On the other hand, if you own just $1,000 but only have $1,500 of total available credit, then you will have a very high utilization ratio of 66%, which will hurt your credit score.
While there’s no hard and fast rule, many credit experts believe that you should keep your credit utilization ratio below 30%. This means that the total amount of outstanding balances you have on revolving accounts should be less than 30% of the total amount of available credit on those accounts.
There are two ways to reduce your credit utilization ratio. First, you can lower your outstanding balances by paying them down or paying them off. And what many people don’t realize is that your credit card statement balances are reported to the major consumer credit bureaus as debt, even if you avoid interest charges by paying them in full. Therefore, you can actually lower your reported debt by paying down your balances before your statement period closes. Just be aware that these payments won’t apply to the required payment on your statement, so you may still have to make a payment if you haven’t paid off your entire balance, or if additional charges appear on your statement after your payment has been made.
The other way to reduce your debt to credit ratio is by increasing the amount of available credit you have. You can do this either by opening new accounts or by asking for credit line increases from your existing accounts. However, applying for new accounts will result in requests for new credit appearing on your credit history, which can slightly reduce your credit score. You can also avoid closing unused accounts, as doing so will also lower your debt to credit ratio.
Limit your requests for new credit
Requests for new credit make up 10% of your FICO score. But it’s very easy to improve this factor which FICO calls New Credit. When a consumer makes a request for new credit, it’s called a hard inquiry. Multiple new hard inquiries within a short period of time can be interpreted by credit scoring formulas as a sign of potential financial distress. After all, who would be interested in lending money to someone who has also been receiving loans from many others at the same time? On the other hand, checking your own credit or receiving pre-approved offers for new credit you didn’t apply for merely results in a so-called soft inquiry, which has no effect on your credit.
Having too many recent hard inquiries can be especially problematic if you don’t have a long credit history. To improve your credit score, refrain from applying for new loans or lines of credit for a few months. And if you need to apply for a new line of credit or a loan, do so sparingly.
Thankfully, credit scoring formulas now treat multiple inquiries for many types of loans as one, in order to minimize the impact on consumers who are rate shopping. For example, newer versions of FICO’s credit scoring formulas ignore multiple inquiries for mortgages, vehicle loans and student loans for 30 days, and then treat them as one inquiry as a single one when they’ve occurred over a period of 45 days.
But since the New Credit factor only impacts 10% of your score, you shouldn’t emphasize avoiding credit to improve your credit score. However, if you are considering applying for a major new loan, such as a home mortgage or refinance, it’s best to refrain from applications for new credit until you’ve completed the process, as every little bit of credit score improvement could make the difference when it comes to qualifying for the lowest possible rate.
Pay off existing balances
A great way to quickly improve your credit score is to reduce the number of accounts that you have outstanding balances on. The FICO scoring formula will penalize consumers who have current balances on nine or more loans or credit cards. But at the same time, you’ll also benefit if you have outstanding balances on four or fewer credit cards or loans .
Remember, your credit card’s statement balance is reported to the major consumer credit bureaus as debt, even if you pay it in full by the due date. To avoid showing a balance on your card, pay it in full before the statement closes, and don’t make any new charges until after the new statement period begins.
If you’re unable to completely pay off your accounts, then you could reduce the number of accounts you have with outstanding balances by consolidating your debts. Methods for doing this include credit card balance transfers and debt consolidation loans from banks or credit unions. And if you’re able to get a lower interest rate loan, or a credit card with a 0% APR promotional financing offer, then you can save significant amounts of money on your interest payments as well.
Just note that you can’t perform balance transfers between two credit card accounts from the same card issuer.
Make your payments on time
The most important factor in your credit score is your payment history. In the FICO scoring formulas, it makes up 35% of your score, more than any other factor.
There are several ways to ensure that you make your payments on-time. The easiest way is to enroll in auto-pay, which is a feature offered by nearly every credit card issuer. With auto-pay, the money comes directly out of your checking or savings account, ensuring it’s always received on-time. Once auto-pay is configured, all you have to do is ensure that you have the funds available in your account at the right time.
With most credit card issuer’s auto-pay feature, you can choose to make the minimum payment, pay your entire statement balance or another amount. In addition to auto-pay, most credit card issuers will offer the ability to create payment reminders by text or email, giving you even more advanced notice of when you have a new statement or when your payment is due. You can also use your computer or mobile device’s calendar to create your own reminders.
If you have multiple credit card accounts, you could also choose to request the same due date for each account. By law, credit card issuers are required to make each month’s due date the same day of the month, and nearly all credit card issuers will allow you to change your account’s due date at your request.
Examine your credit reports
Another way to improve your credit is to find out what negative things may be on your credit report, and attempt to fix it. Fortunately, consumers are entitled to receive their credit report for free, once a year, from all three major consumer credit bureaus, Equifax, Experian and TransUnion. You can also request a free copy if you’ve been denied credit.
To order your free copy go to AnnualCreditReport.com, which is the only website that is officially authorized to request the free copy of your credit report that you’re entitled to by law. Be careful not to use one of the sites with similar names that isn’t officially authorized.
Once you have a copy of your credit reports, look through them for information that could hurt your credit score. This includes missed payments, high balances on credit cards, multiple new inquiries or just a lack of an established credit history. Knowing what’s hurting your credit score can help guide your efforts to improve it.
It’s also important to look for any incorrect information such as accounts that have been opened without your authorization, or payments that have been incorrectly reported as being late. You should also look for errors in your address and if you are divorced, ensure that your former spouse’s debts aren’t listed on your report.
If you find errors in your credit report, you can contact both the credit bureau and the reporter to have the information corrected. You can also file a dispute online, specifying which information you believe to be inaccurate.
Increasing your positive credit history
One of the things that prevents many Americans from having a high credit score is having a very limited credit history, which is sometimes referred to as a thin file. This can happen when you are new to credit, either because you are a young adult or because you have always avoided applying for new loans and new lines of credit. Recent immigrants can also have lower credit due to limited credit history.
To expand your credit history, you’ll want to open up new accounts that you can manage responsibly. For example, you might apply for a simple credit card account. If you only use it occasionally, pay your bills on-time and avoid debt, then it will add positive information to your credit history every month. And if the card has no annual fee, and you avoid interest by paying your account in full every month, then you’ll be improving your credit score at no cost to yourself.
Credit building apps like Brigit have credit-building features built in so you can raise your score quickly without high fees and interest rates associated with credit cards. Especially for people without established credit, this is a cost-effective way to build your reputation with the credit bureaus.
You may choose to open multiple new credit accounts, but you should never have more credit cards than you can manage responsibly. And if having a new account encourages you to incur debt or make late payments, then you shouldn’t use this strategy.
Don’t close old accounts
There’s a popular misconception that your credit score will improve if you close some of your existing accounts. However, doing so will only increase your debt to credit ratio, for a given amount of debt, which can hurt your credit score. And by having accounts in good standing on your credit reports, you’ll continue to increase your positive credit history.
If you have a credit card account that has an annual fee that you want to avoid paying, then there are alternatives to closing it. You can often contact the credit card issuer and request a product change to a no fee card. When you perform a product change, your account remains open and in good standing, but the terms change to the new credit card type. However, the account’s balance and available credit will remain the same, and will appear unchanged on your credit reports.
Use a credit improvement service
Most of the time, your credit score only takes into account your loans and lines of credit, which ignores other factors such as your banking history and your record of paying other bills. However, there are two programs that you can use to take these factors into account and increase your credit score.
The first is called Experian Boost, which uses your banking history and utility payments to help calculate your FICO score when using your credit report from Experian. This service is free and works best with those who pay their bills on-time and have a limited credit history.
The other service is called UltraFICO, which uses your banking history to bolster your FICO score. This program is ideal for those who have enough savings to show that they won’t have any problem making their credit card and loan payments. Both services are free to use.