How to Improve Your Credit Score

Your credit score is one of the most critical elements of personal finances. In this article, you’ll learn how credit scores work, why they are vital, what to do to maintain your score, as well as methods to improve your credit score in just 30 days.

Why Is a Credit Score Important?

Very few of us can get through life without ever needing to take out a loan. And when we do, our credit score is going to be one of the most important factors in the lender deciding whether or not to give us the money. 

Keep in mind, when it comes to getting the loan, the lender will look at other factors beyond your credit score alone. That is not to say that your credit score is irrelevant, but lenders will also look at your income, your current job (whether you are an employee or self-employed) and how long you have been employed, as well as the kind of credit you are requesting.

“Fine,” you say. “That doesn’t apply to me. I always pay cash.” Not so fast. Your credit score can still affect you even if you plan on never taking out a loan. Your credit score is often considered when renting a house or apartment. Further, your credit score can also play a factor in a business application or how much you pay for insurance and other necessities of modern life. 

How Having a Good Credit Score Helps–and a Bad Score Hurts

A poor credit score can prevent you from getting a loan, affordable insurance, a place to live, or even a job. A lender may still give you a loan, but will charge you higher interest or require a co-signer. It’ll also be more difficult to get a credit card with favorable terms.  

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Conversely, consumers with excellent credit scores may pay lower interest on loans and credit cards, as well as be offered credit cards with the most lucrative rewards. They may pay lower rates for insurance and enjoy other monetary benefits–all because they’ve proven they can manage their money responsibly. 

What If You Have No Credit? How to Start Building the Right Way

Establishing first-time credit can be a bit of a challenge at first. You have no credit history; this is known as “credit invisibility.” It’s almost as if it takes credit to get credit–a bit of a catch-22 that can be frustrating. Don’t worry, though, there are steps you can take to build credit slowly and prudently. 

Start With a Secured Credit Card

One method to establish and build credit is to apply for a secured credit card. If accepted, the credit card holder pays a security deposit that is equal to the credit limit on the card. 

For example, you might put down $200 for a $200 credit limit. Sometimes this deposit can be lower. For example, a secured credit card from Capitol One may only require a $49 or $99 security deposit for an initial $200 credit line.

Keep in mind, the point of a secured credit card is not the credit limit itself but a mechanism for establishing a credit history. This means you want to do everything that rewards your credit score, such as making multiple payments in the same month and never maxing out your credit line.

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Become an Authorized User

Another means of establishing credit is for someone who already has a credit card to assign you as an authorized user on their card. A card will be issued in your name that helps you build credit in your name. Just remember that your card is still attached to their account, and they are ultimately responsible for the payments. If you don’t make the payments or are late with the payments, not only will you damage your credit, but you’ll hurt theirs as well.

Get a Loan With a Co-Signer

Similar to becoming an authorized user, a loan with a co-signer who has good credit allows you to produce credit under your name. You are both responsible for making the payments. Late payments or non-payments will damage both of your credit scores. This is a big risk for the co-signer, so make sure that it’s something you are both comfortable with pursuing. 

How Credit Scores Work

Before we can talk about how to improve your credit score, it’s helpful to understand what a credit score is and how the scoring system works.

A credit score is a three-digit number that allows lenders to assess the risk of lending someone money. In the United States, the most commonly used scoring system is called a FICO score, which stands for Fair Isaac Corporation.

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FICO Credit Score Category Ratings

  • Excellent Credit: Anything above 800.
  • Very Good Credit: Between 740 and 799.
  • Good Credit: Between 670 and 739.
  • Fair Credit: Between 580 and 669.
  • Poor Credit: A FICO score lower than 580.

How Your FICO Summary Is Calculated

While not all aspects of credit score calculation are revealed to the public, your credit score is determined, in part, by the following five factors and percentages:

  • Payment history: 35%
  • Debt burden: 30%
  • Credit history length: 15%
  • Credit inquiries: 10%
  • Types of credit: 10%

Main Three Reporting Agencies

In the United States, there are three primary credit reporting agencies that collect and maintain consumer credit information: Equifax, Experian, and TransUnion.The scores may be slightly different for each one, and it’s a good idea to check the reports from each bureau once a year to make sure that they are accurate.

How to Check Your Credit Score for Free

In the US, under the Fair and Accurate Credit Transactions Act (FACTA), Equifax, Experian, and TransUnion jointly operate a website where consumers can check their credit score for free: AnnualCreditReport.com.

Consumers are allowed to check their report for free once every 12 months from each credit reporting company. 

*Important: There are many scam sites on the Internet that use ads to entice you to obtain a free credit report but later attempt to trick you into charges. Some may use similar website names to create confusion. AnnualCreditReport.com is the only official, federally mandated site to supply consumers with totally free credit reports.

Monitor Your Credit to Prevent Errors or Identity Theft

A good strategy is to monitor your credit against any errors or identity theft by checking a different bureau’s report for free every four months. For example, check your credit with Equifax in January, then with Experian in May, and with TransUnion in September. This way, you’ll be able to spot any errors that could be damaging your credit score, as well as any credit accounts opened in your name that you did not authorize–which could be a sign of identity theft.

Suppose you do believe that you’ve become a victim of identity theft. In that case, all three of the major credit reporting agencies provide methods for you to place a lock on your credit that prevents any new accounts from being opened. Typically, you can turn this lock on and off with your PIN.

How to Improve Your Credit Score

There are several ways of improving your credit score over time. Some steps can boost your score in as little as 30 days. In fact, the lower your credit score, the better chance of 100 points being added quickly, according to Nerd Wallet.

Those with already high credit scores may take a little longer to move from good or very good to excellent. Regardless of where your score is right now, the best time to start working on your credit score is right now!

Credit report with a score of "Fair"
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Immediate Steps You Can Take to Improve Your Credit Score

  1. Never make late payments – always pay on time.

Late payments are the #1 factor in bringing down your credit score. Even worse, late payments can affect your score by remaining on your credit report for seven years.

2. Make multiple payments in the same month.

Instead of paying your credit balance at the end of the month, pay twice a month or more, continuing to pay your balance down. In this way, you keep your available credit higher. That helps your credit score.

3. Request a higher credit limit.

Credit scores look at your credit utilization–that is, how much credit you are using. For example, if you had a $1,000 line of credit and had $500 in debt, you would have a 50% credit utilization. However, if your limit was increased to $2,000, that same $500 in debt would only register a 25% utilization. Therefore, the higher your limit, the lower your debt ratio will be.

4. Pay down your debt strategically.

Now that you understand how debt ratio affects your credit score, you should apply this idea to all of your credit accounts. If you are trying to pay down debt, rather than paying off one card first (if a high interest rate isn’t a factor), spread it strategically across all of your credit accounts to lower the debt ratio on certain accounts. 

For example, if interest rates are equal and card A has a limit of $1000 and the balance of $500 for a 50% debt ratio, while card B has a limit of $1000 and the balance of $250 for a 25% debt ratio, it would help your credit score to pay down card A faster to lower its debt ratio.

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4. Dispute any credit errors immediately.

Any error that affects your credit should be disputed immediately. This is one more reason it is beneficial to check your credit regularly so that you can spot errors you otherwise may not be aware of. 

5. Have credit from different sources and at least 3 lines of credit.

It is beneficial to have a mix of credit types. In other words, you don’t want to have only credit cards or only loans. It is better to have a mix such as installment accounts and revolving credit. Plus, if you have more lines of credit, such as between 3-10 lines of credit, it will be even better for building a strong credit score. 

Multiple lines of credit are helpful in getting certain types of loans. For example, if you are looking to buy a home, a bank will look for at least three lines of credit, NPR reports. That might be a car payment, credit card, and a student loan. Just don’t take out more credit than you can responsibly manage!

6. Keep credit cards open.

Even if there are credit cards you don’t use often, you should not close the accounts. Having more open accounts benefits your overall credit limit and utilization, which helps your credit score. If you close accounts, you lose their contribution to your overall credit limit. However, you do need to use your cards occasionally. Otherwise, the issuer will close your account for inactivity.

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