How to Improve Your Credit Score in 9 Easy Steps
September 6, 2019
A credit score is one of the most important numbers in your life because it affects several major milestones. For instance, your credit score determines the types of auto loans you’re eligible for, the interest rate on your credit card, and whether or not you can rent an apartment. That’s why it’s crucial to both know your credit score and understand how to improve it. A higher credit score opens up your options and can save you money with lower rates.
You can fix and improve your credit score in a handful of ways. Some steps are as quick as picking up the phone while other strategies require you to invest a little more time. Check out our list below to see what things you need to do now to improve your credit score and how you can set your credit score up for success in the long term.
What Affects My Credit Score?
The five main areas that impact your credit score are your payment history, credit utilization, length of credit history, inquiries and new credit, and types of credit. It’s important to understand what these areas are and how each factor affects your credit score.
- 35 percent – Payment History. Consistent, on-time payments are the highest weighted part of your credit score. Late or missed payments can drastically drop your score.
- 30 percent – Credit Utilization. This is the next most important factor that impacts your score. Your score will benefit when you have a lower utilization ratio. Your utilization ratio is calculated by comparing the amount of credit you’re using to the total credit you have available.
- 15 percent – Length of Credit History. Your overall credit history takes a smaller but still influential role in determining your credit score. Your history gives your lender a better picture of your overall financial responsibility and potential risk. A lengthy credit history works in your favor and gives lenders more information to consider.
- 10 percent – Inquiries and New Credit. Requests to open a new line of credit - referred to as inquiries - also take a small toll on your score. Excessive hard inquiries negatively affect your score since they signal riskiness to lenders, especially if you have many of them on your report in a short period of time. However, inquiries made in a concentrated period of time for home and auto loans may not have as big of an impact since credit bureaus understand that you’re shopping around for the best interest rates.
- 10 percent – Types of Credit. Credit mix is the final area that influences your credit score. Successfully managing a diverse credit portfolio demonstrates your ability to handle different types of credit.
Money owed due to a court judgment, a tax lien, bankruptcy, a charge off or similar types of negative marks on your credit report can also decrease your credit score and make it more difficult to get approved for a loan.
There are also certain actions that impact multiple parts of your score. For example, closing old cards lowers your available credit (affecting credit utilization) and may lower your credit age (affecting the length of your credit history).
It’s important to note that you have multiple credit scores, so you’ll see subtle differences when you check your score. This is due to different credit bureaus using different algorithms to calculate your score.
9 Tips to Improve Your Credit Score
Before you begin the journey of improving your credit, you should first check your credit score and credit report to see where you stand and what areas impact you the most. This way, you’ll know what to prioritize and how you can effectively use your time. This is especially important since it takes some time for your creditors to report changes and for improvements to reflect on your score.
1. Keep Old Credit Cards Open
Frequency: Once a month
Estimated time spend: 0 to 30 minutes, depending on how you plan to keep your card(s) active.
Old, active credit cards keep your credit age high and contribute to your overall available credit, thus positively impacting your utilization ratio.
Some companies may close old cards if they don’t see any activity. One trick to avoid this is to automate payments with that card. For example, you can set up autopay for a bill to the card and then set up autopay from your bank account to the card.
There are times when keeping an old card open might not be the best option for you since you may need to pay annual fees and any other associated expenses. If you need to close a card, you should calculate your utilization ratio with the remaining credit you have available to see where your ratio will fall.
2. Pay Your Bills on Time
Frequency: Potentially one time, depending on if you need to make multiple adjustments to your budget to catch up and keep up with payments
Estimated time spend: 15 to 30 minutes, depending on how long it takes to communicate with lenders and review your budget.
Lenders look at your payment history to determine how likely you are to keep up with payments. Payment history also has the biggest impact on your score and a single late payment can drastically drop your score. Here are a few things to keep in mind if you’re currently catching up with your bills:
- Missed payments can remain on your credit report for seven years. That’s why it’s important to catch up with your bill as soon as possible since older negative items have less effect than recent ones.
- Paying off a collections account won’t remove it from your credit report. Collections accounts can remain on your report for seven years.
- Contact your creditors ahead of time if you have or know you will have trouble paying. They may forgive a single late payment if you have a positive history with them. The worst they can say is no, so it doesn’t hurt to try. You can also see if you can make a payment agreement with them if you’ve had trouble with past payments.
Once you’ve caught up with and paid off things like credit cards or student loans, it’s important that you leave them on your credit report instead of trying to remove them. Removing an account’s history can decrease your credit age, removes positive payment history and a handful of other things that lenders won’t see if it’s off your report.
A few exceptions to consider are charged-off accounts since they negatively impact your report even after it’s paid.
3. Set Up Reminders, Autopay and Micropayments
Frequency: One time
Estimated time spend: 15 to 30 minutes for one-time setup
An easy way to stay on top of payments is to automate them or set reminders. The right strategy depends mainly on how often and regularly you’re paid. Take a look below to see what method is best for you so you can improve your credit score:
- Payment reminders: If you have irregular pay or other things sporadically impacting your finances, it’s important to set up payment reminders to stay on top of your bills. You can set up reminders via phone or email (or both).
- Autopay: Setting up autopay is best if your pay is regular and you also have regularly timed expenses. You can set up autopay soon after you get paid so your bills are immediately paid and you know exactly how much money you have available.
- Micropayments: Another method is to set up micropayments. This means that you pay multiple times a month. This works with irregular pay since you can immediately put payments towards your debt when you get paid. If you’re paid regularly, you can set this up through autopay or simply pay down purchases immediately after you make them.
4. Account for Non-Credit Related Info
Frequency: One time
Estimated time spent: 15 to 30 minutes, depending on how much information you provide
Normally, only things like credit cards and loans impact your credit score. Today, you have a few ways to factor things like cell phone payments into your score. Experian Boost is one service that allows you to factor in utility and cell phone payments into your score. This free, opt-in service connects Experian to your bank accounts to verify these payments so they can account for them in your overall score.
UltraFICO is another service that allows you to connect your checking, savings or money market accounts and have that additional information inform your credit score. UltraFICO is currently in its pilot phase and only offered to a small group of lenders. It will be more broadly available after the pilot phase is complete.
5. Only Apply for New Accounts When Needed
Frequency: As needed
Estimated time spent: Varies depending on what you’re applying for
Opening new accounts shouldn’t be the first thing you do if you’re trying to improve your credit score. This strategy can easily backfire and end up lowering your credit score instead of raising it.
Here are a few reasons why:
- Hard inquiries: Too many hard inquiries raise red flags with lenders. They signal that you might have money issues and make you appear riskier. Hard inquiries stay on your report for two years and affect your credit score for the first 12 months.
- Lower credit age: New cards lower your overall credit age. Length of credit history makes up 15 percent of your score.
- Add temptation: New accounts with a fresh balance may tempt you to spend more and accumulate more debt. This is the main reason why opening new accounts just to increase your available credit can easily work against you if you haven’t first fixed your spending habits.
However, opening a new account can potentially help in the long run if you manage it responsibly and don’t apply for a lot of accounts in a short amount of time. This is especially helpful if you’ve fixed your previous credit issues and are now focusing on re-establishing your credit history.
If you feel you really need a new card or loan, follow the tips below to minimize the impact on your credit.
- Shop around for loans at the same time: Lenders understand that multiple inquiries for car loans and home loans likely mean you’re shopping around for the best deal. Hard inquiries made within about 14 days of each other (more or less, depending on the scoring model) are sometimes counted as one when calculating your score. However, all of these inquiries appear individually on your report even if they are only counted as one for scoring purposes.
- Make sure you’re a good candidate prior to applying: A good way to limit hard inquiries is to make sure your credit is in good standing. This increases your likelihood of approval and for lower rates.
6. Clear Up Any Collection Accounts
Frequency: As needed
Estimated time spent: Varies depending on how many accounts you have
Collections accounts can wreak havoc on both your credit score and your total debt. You should speak to the original creditor of the loan to see if you can come to a payment agreement through a pay for delete letter. This is a negotiation tool that asks to remove negative information from your credit report in exchange for paying off the full balance.
If the creditor agrees to these terms, you’ll need to get the agreement in writing to ensure they follow through. Keep in mind that not all creditors accept this type of arrangement, so it’s not a guaranteed fix.
7. Dispute Inaccuracies on Your Credit Report
Frequency: Every three months
Estimated Time Spent: 30+ days, depending on how quickly the bureaus and data furnishers get in contact with you
You should routinely check your credit reports for any inaccurate information. One in five people have an error on at least one of their credit reports according to the Federal Trade Commission, so you may have something on your report that needs attention. These inaccuracies can come up for a variety of reasons including purchases made by someone who stole your identity and misreported late payments from your lender.
Experian, TransUnion and Equifax offer one free credit report each year through Annual Credit Report. You can also receive a credit report if you’re denied by a lender or creditor. They’re required to give you a copy of the credit report and score they looked at to make their decision.
Disputing items on your credit report takes a few steps and involves contacting each bureau in addition to the entity that gave the information to the credit bureaus (referred to as “data furnisher”). After alerting the bureaus, you’ll then need to wait (normally 30 to 45 days) for them to complete their investigation and report back to you. Checking your credit report does not impact your score.
8. Lower Your Credit Utilization
Estimated time spent: Potentially months or years, depending on your current debt level and overall financial situation
Keeping balances low and paying down debt directly impacts your credit utilization. This is another key area you need to keep an eye on since credit utilization is the second most influential factor of your credit score.
Here are a few things you should know about credit utilization:
Finding Your Credit Utilization
You can find your credit utilization for a single card by dividing your balance by your total available credit. To find your total utilization, add up the total balance of all of your cards and divide by the total amount of credit available. You should pay attention to both your overall and individual credit utilization to see where you should prioritize your repayment efforts.
The time you pay your bill can also affect your credit utilization. Although you may have paid your balance in full before your due date, your creditor may have reported your balance to the credit bureaus before you made that payment. This means that the credit bureaus may believe your balance is higher than it really is for that month. You can fix this by asking your lender when they report to the credit bureaus and paying before that date.
Preferred Utilization Ratio and Quick Ways to Fix It
A utilization of 30 percent or below is preferred by most lenders. Low utilization rates tell lenders you can successfully manage your debt and that you haven’t maxed out any of your cards. If you’re having trouble keeping your balances low, here are a few things you can do that may help your overall utilization ratio:
- Move your due dates: If you have trouble paying your debts because of the due date, you can call and ask your creditor if they can change your due dates.
- Raise your credit limit: An increased limit raises your available credit, thus positively impacting your credit utilization. Beware that you’re less likely to receive this if you don’t have a positive history with your creditor or have a high balance on your credit card already. This also causes a hard inquiry to show up on your credit report.
How to Prioritize Debt
Paying down debt isn’t a single-step process, so where do you start? This depends again on your financial situation, your goals and what works best for you.
Here are a couple debt repayment strategies to consider:
- Avalanche Method: This method requires you to pay the minimum payment on every account owed except for the one with the highest interest rate. For that, you pay the most that you can to pay it off as fast as possible. Once that is paid, you’ll move on to the account with the next highest interest rate and continue until everything is paid.
- Pros: Saves the most money in the long run
- Cons: Requires a lot of discipline
- Snowball Method: This strategy is the exact opposite of the above and focuses on paying off accounts with the lowest balance first. After paying off an account, you’ll use the money originally allocated to that account for the next lowest account. This builds up “momentum” and is said to motivate you to keep going since you’ll pay off balances more frequently and quickly in comparison to the avalanche method.
- Pros: Motivates you to keep going since you’ll pay off balances quickly and frequently
- Cons: Costs more in the long run with interest
Regardless, you should tackle debt as quickly as possible to lower or eliminate fees and interest and raise your credit score.
9. Consider Debt Consolidation and Credit Repair Services
Frequency: Once to set up, then ongoing
Estimated time spent: Varies greatly depending on your financial situation
Depending on your specific financial situation, it may be in your best interest to consider turning to debt consolidation or credit repair services. There are key differences between the two and it’s important to understand them when weighing your options.
Using debt consolidation consists of bundling credit card payments into a single monthly payment. You can do this through personal loans, zero percent balance transfer credit cards and other methods. Keep in mind that many of the differences below vary based on your specific financial situation.
- Easier to manage since it’s a single payment
- Can help you make payments on time
- Can be easier to put aside savings
- Can increase payment period
- Potentially get a lower overall interest rate
- Potentially lower monthly payments
- Can end up costing more
- Can potentially shorten payment period
- Creates a credit inquiry
- Lose account history when closing accounts
- Hard to discharge consolidation loans when declaring bankruptcy
Credit Repair Services
On the other hand, credit repair is a process that involves fixing unverifiable, biased, incomplete and otherwise inaccurate information on your credit report to improve your credit score. This includes things like disputing inaccuracies and clearing up errors on your credit reports.
- Credit reports are examined by experienced professionals who know what to look for and understand the system
- Receive help disputing inaccurate information with creditors and the credit bureaus
- Receive ongoing support for long cases
- Saves time
- Can make costly mistakes if attempting to do it yourself
- Difficult to understand if doing by yourself
- Extensive time spent doing each step if doing alone, including compiling information and managing correspondence with creditors and the credit bureaus
How Long Does It Take to Rebuild Your Credit Score?
The time it takes to rebuild your score depends on the types of negative items on your report and the extent of your credit history. Below are some major negative items and the length of time they remain on your report:
- Inquiries: Two years
- Delinquencies: Seven years
- Most public record items: Seven years, but some bankruptcies can remain for 10
The most important thing to remember is that there are no shortcuts or quick fixes. You’ll need to steadily work on fixing the different factors that affect your score to eventually improve it. Consistently practicing good habits is the key to raising your score.
Establishing Credit Without Prior History
You’ll likely have a thin file if you have little to no credit accounts on your credit report. If you have little or no history, lenders don’t have enough information to calculate a credit score. It may take about three to six months for activity to get reported on your account if you have no prior credit history.
To begin establishing credit, you can try one of the following methods:
- Secured Credit Card: The balance on this type of card is equivalent to the deposit you put down. This reduces risk for the card issuer since any late or missed payment is covered by your deposit. After about six to 12 months of good payment history, your issuer may convert you to an unsecured credit card and refund your deposit.
- Credit Builder Loan: Similar to a secured credit card, this is a loan that’s easier to get than a regular loan since it has significantly less risk. If approved, the money for the loan is deposited into a savings account that is normally inaccessible to you until the loan is paid off. Some credit builder loans even allow you to make a little bit of money by paying interest.
- Authorized User: With this method, someone grants you permission to use their card and all activity on that card will also reflect on your credit report. However, this can hurt your score if that person is not responsible with their payments. Becoming an authorized user is a great way to build your credit when you have limited options to apply for a card. If you choose to go this route, remember to ask someone you trust, like a good friend or a family member.
A good credit score comes down to following best practices and responsibly managing your money. Learning how to improve your credit score requires familiarity with how your credit works and how different things affect your credit.
If along the way you find a number of discrepancies on your credit report or have other things that need swift, legal action, you can contact the team at Lexington Law to help you repair your credit and get you back on track. Our team understands the law and is prepared to help you receive fair and accurate reporting from the credit bureaus.