Understand What Impacts Your Credit Score
Your credit score is calculated based on several factors related to your credit history and borrowing behaviors. The most important elements that influence your score include:
- Payment history – Whether you pay your bills on time. This makes up a significant portion of your score. Missing payments can seriously damage your credit score, while an excellent track record of on-time payments will boost your score.
- Credit utilization ratio – The amount you owe compared to your total available credit limits, expressed as a percentage. Using more than 30% of your available credit can reduce your score.
- Credit history length – How long you’ve had credit. A longer credit history is better for your score.
- Credit mix – Having a variety of credit types, such as credit cards, installment loans, mortgages, etc. A diverse mix of accounts demonstrates you can manage different types of credit successfully.
- New credit requests – Applying for and opening new credit accounts may indicate higher risk and can temporarily lower your score if done excessively in a short period of time. Space out applications and only open accounts you actually need.
By understanding these key factors, you can focus your efforts on improving areas that have the greatest impact on your credit score. Monitoring your credit reports regularly is also important, so you can catch any reporting errors that may incorrectly drag down your score.
Check Your Credit Report
Your credit report contains the information that’s used to calculate your credit score. It lists your credit accounts, payment history, inquiries, and public records such as bankruptcies and foreclosures.
By law, you’re entitled to one free copy of your credit report every 12 months from each of the three major credit bureaus – Equifax, Experian and TransUnion. It’s important to check all three because errors or omissions may appear on one report but not the others. Go to AnnualCreditReport.com to get your free reports.
Carefully review your credit reports and dispute any inaccurate or incomplete information by submitting a dispute online or via mail. Common errors include accounts that don’t belong to you, incorrect balances or status, misspelled names, wrong addresses, and more. If you have errors, contact both the credit bureau and creditor.
If a dispute is not resolved to your satisfaction, you can submit a statement that will be added to your credit file to explain your side. Alternatively, contact the Consumer Financial Protection Bureau to open an investigation. Having inaccurate negative items removed from your credit report can boost your credit score.
Pay Bills on Time
One of the most important things you can do to increase your credit score is to pay all your bills on time. Payment history makes up 35% of your FICO credit score calculation. That means consistently making on-time payments is crucial for a good credit score.
Here are some tips for never missing a payment:
- Set up automatic payments through your bank or directly with the creditor when possible. Having your payments automatically deducted means you never have to worry about forgetting a payment.
- Use payment reminders through your creditors. Most credit card companies and lenders allow you to opt into email or text alerts before a payment is due.
- Mark payment due dates on your calendar. Use phone alerts for bills that don’t offer payment reminders.
- Avoid paying bills at the last minute. Try to pay at least several days before the due date in case there are processing delays or errors.
- If you do make a late payment, call the creditor, apologize, and ask if they can waive the late fee. You may be able to get late payments reversed if it was a rare occurrence. But try not to make late payments a habit.
Paying all your bills in full and on time every month demonstrates responsibility with credit and will help boost your score over time. Automating payments and using reminders makes it easy to never miss a payment deadline.
Keep Credit Card Balances Low
One of the most important things you can do to increase your credit score is to keep your credit card balances low. Ideally, you want to keep your balances below 30% of your total credit limit across all cards.
For example, if you have a total credit limit of $10,000 across all your credit cards, you’ll want to make sure your total balance stays under $3,000. This shows credit bureaus that you’re able to manage your credit responsibly.
Maxing out your credit cards is one of the worst things you can do for your credit score. If you’re carrying balances close to your limit, it gives the impression that you may be overextended. It also increases your credit utilization rate, which accounts for 30% of your FICO score calculation.
Try to pay off credit cards in full each month if possible. But if you do carry a balance, pay off as much as you can above the 30% utilization threshold. You can also ask for credit limit increases on existing cards periodically, which will help lower your utilization.
Keeping credit card balances low demonstrates you can manage credit wisely and takes your credit score to new heights.
Avoid Closing Old Credit Accounts
One important factor in your credit score is the average age of your credit accounts. When you close old credit card accounts, you lower the average age of your credit history which can negatively impact your credit score.
It’s generally recommended to keep old credit card accounts open, even if you don’t use them often. As long as there is no annual fee, it won’t hurt to keep an old credit card account open to maintain your length of credit history. You can even make occasional small purchases every few months to keep the card active.
The longer you have credit accounts open, the more it demonstrates you have a reliable credit history. Having long-standing credit accounts on your report shows lenders that you have experience managing credit responsibly over time.
So avoid the temptation to close old credit card accounts you don’t use anymore. Keeping them open and active will help maintain a higher average age of accounts, which can benefit your credit score.
Apply for New Credit Selectively
When applying for new credit, it’s important to be selective in both timing and credit types to minimize the impact on your credit score.
Spacing out new credit applications by at least 6 months allows your score to rebound from any associated inquiries before the next application. Opening too many new accounts in a short period can signal greater risk to lenders.
Aim to mix up the types of credit you apply for as well. Getting new credit cards, an auto loan, and a mortgage within a few months shows you are managing diverse credit types responsibly. However, getting 3 new credit cards in the same quarter can be seen as riskier behavior.
Stick to only applying for credit you actually need, not just for the sake of increasing your available credit. Each application results in a hard inquiry on your report, so apply thoughtfully.
Correct Any Errors on Your Credit Report
One of the best ways to improve your credit score is to make sure your credit reports are accurate and free from errors. Even small mistakes on your credit reports can drag down your credit score.
You should review your credit reports from all three major credit bureaus (Experian, TransUnion, and Equifax) at least once per year. This allows you to spot any inaccuracies and dispute them.
If you find an error on your credit report, such as an account that isn’t yours or a late payment that you paid on time, you can submit a dispute. Write a dispute letter identifying the error and include any supporting documentation, like bank statements or receipt of payment. Send the dispute letter to the credit bureau and the financial institution that furnished the information.
The credit bureau typically has 30 days to investigate the dispute. If they confirm it’s an error, they must remove the inaccurate information from your credit report. This can boost your credit score since the mistake is fixed.
If a credit bureau refuses to remove incorrect information after investigating your dispute, you can file a complaint with the Consumer Financial Protection Bureau (CFPB). The CFPB will work on your behalf to resolve the issue with the credit bureau. Having a regulator like the CFPB involved can be effective in getting errors taken off your report.
Regularly checking your credit reports and promptly disputing any errors is key to maintaining a healthy credit score. Don’t let inaccurate information drag down your creditworthiness.
Become an Authorized User
One easy way to benefit from someone else’s good credit is to become an authorized user on their credit card. Ask a family member or significant other with a long credit history to add you as an authorized user on their credit card. As an authorized user, you get the entire payment history of the account reported to your credit report, even though you aren’t responsible for making any of the payments.
This strategy works best when you’re added to old accounts that are in good standing. The longer the credit history, the bigger boost it will provide to your score. Try to get added to an account that’s at least 10 years old if possible. Make sure the primary cardholder has low balances relative to their credit limits and always pays on time.
Monitor Your Credit
One of the best ways to increase your credit score over time is to regularly monitor your credit reports from all three major credit bureaus – Equifax, Experian, and TransUnion. This allows you to stay on top of your complete credit history and ensure everything is accurate.
Get in the habit of checking your credit reports at least once every 4 months. You can request free credit reports annually from each of the three bureaus at annualcreditreport.com. It’s important to check reports from all three bureaus since they don’t all contain the exact same information.
Monitoring your reports helps you catch errors or fraudulent activity as soon as possible so you can dispute them. It also helps you see how your score changes over time. Sign up for alerts or notifications so you don’t miss any important activity. Consider using a credit monitoring service for convenience.
Staying on top of your credit reports ensures you have the full picture when it comes to your score and financial reputation. This oversight is key to maintaining and boosting your credit over time.
Be Patient
Building credit takes time. Even if you do everything right, don’t expect your score to rise overnight.
The age of your credit accounts has a significant impact on your credit score. The longer you maintain your accounts in good standing, the more your score will benefit. Older accounts demonstrate that you have a longer track record of responsible credit use.
Persist with good credit habits. Pay all your bills on time, keep balances low, and only apply for new credit when needed. With consistent good behavior, your score will gradually improve. Monitor your credit report regularly to ensure there are no errors holding back your score.
Don’t obsess over daily or weekly score fluctuations. Look at the bigger picture and focus on long-term score trends. Scores can dip temporarily for reasons like a lender’s report not yet being updated. But over time, your score will reflect your positive habits.
Be patient and stick with responsible credit management. Building an excellent credit score doesn’t happen instantly, but it’s worth the effort. A little diligence goes a long way when establishing strong credit.
