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If you’re interested in buying a house, purchasing a car (with financing), or opening up a new line of credit, your credit score will dictate what options are available to you. With a poor credit score, your options will be limited, and you’ll end up paying a lot more in interest costs for a loan. If you want to learn how to improve your credit score, I’ve got seven simple steps to get you started!
Composition of a Credit Score
Before I jump into the steps to improve your credit score, let’s quickly cover the composition of a credit score.
The most common credit score, the FICO score, has five categories that impact your credit score. These include:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Credit (10%)
The first element, payment history, is the most important. Simply put, do you pay your bills? If you don’t, you’re never going to have good credit.
Even a single missed payment can set you on the wrong path.
Second, how much do you owe? It’s okay to have loans outstanding (on a house or car), but you shouldn’t borrow everything you can. Using a small fraction of your available credit lines indicates to a lender that you borrow responsibly.
Length of credit history is the 3rd most crucial factor. The longer you’ve been making on-time payments, the more likely it is that you’ll continue making on-time payments.
Finally, credit mix and new credit make up a small percentage of your score. Do you use multiple types of credit (mortgage, credit cards, etc.), and how much new credit have you taken out?
To improve your credit score, focus on the two most significant value drivers first: payment history and amounts owed. Let’s get started with the seven steps to improve your credit score.
1. Check Your Credit Report
The first step in learning how to improve your credit score is to understand where you sit today.
There are a whole bunch of tools to do this, but I have two recommendations.
Annual Credit Report
First, if you haven’t pulled your credit report in a while, head over to annualcreditreport.com and do so, it’s worth noting, this is the only site where you can get a free credit report from the credit bureaus.
You are entitled to one free credit report from each of the credit bureaus (Equifax, Experian, and TransUnion) per year. And I am willing to bet it’s been more than 12 months since you’ve done this.
Once you pull your credit report, check it meticulously for errors. If there is an error on your credit report, get it corrected. Checking your credit report is also an excellent way to look out for identity theft and fraud – make sure everything in your name is yours.
Second, I like Credit Karma for credit monitoring. Again, it helps you look out for unexpected changes in your credit report. Credit Karma also gives specific guidance on how to improve your score.
I use Credit Karma because I want to be able to keep tabs on my credit report throughout the year, and I want to know when there are significant changes.
Credit Karma is more of a “real-time” tool vs. once per year “official pulls” from Annual Credit Report. I recommend using both.
2. Pay Your Bills on Time
Okay, so you’ve checked your credit report, and everything looks normal. Let’s get to improving your score!
Like I said, start by focusing on the most significant value drivers. First and foremost, pay your bills on time, every time. And I don’t just mean rent or credit cards. I mean EVERY BILL.
If you don’t pay your bills on time, any other attempts to bump up your credit score will be wasted effort. Now for clarity, if your financial situation means carrying a balance (e.g., if you have credit card debt), that won’t necessarily hurt you (more on that below). What will hurt you is not making at least the minimum payment.
As an example, let’s say you have two credit cards. The balance on Card A is $150, and the balance on Card B is $50. If you can only put $150 towards your credit card bills, don’t be tempted to pay $150 on Card A and $0 on Card B. Make sure you make at least the minimum payment on all your bills (though make the full payment if you can).
If you are struggling with your debt, check out our guide on How to Get Out of Debt.
3. Pay Down Debt
The second factor in your credit score is something called a credit utilization ratio. Let’s assume you have a credit card with an available credit line of $1,000. But you put $800 on your card. Your credit utilization ratio is 80%. Yikes!
The credit bureaus penalize your score if you use a large portion of your available credit. Aim to keep your credit utilization ratio below 20% on each of your accounts. While up to 30% is typically considered the “good” range, below 20% is a superstar number.
Because amounts owed makeup such a big chunk of your credit score, lowering your credit utilization (paying down balances) should give you a big bump. Of course, if you have debt, this may be no easy feat, but if you have existing debt, don’t focus on improving your credit score to take on more debt!
4. Find Out When Your Balance Gets Reported
Now, knowing that your credit utilization is a significant driver of your score, I have a little hack for you to try out. Typically, card balances are reported by your credit card company to the credit bureaus once a month. Balance reporting usually happens shortly after your statement closing date.
For example, if your credit card statement closes on the 12th of the month, your credit card company may report your balance on the 16th of the month. The key here is that you want to get your balance as low as possible before your credit card company reports the balance to the credit bureaus.
So, if you can make a payment towards your credit cards just a few days before the reporting date, it will lower your utilization ratio and help boost your credit score.
And all you have to do to take advantage of this hack is call your credit card company and ask what date they report to the credit bureaus!
5. Increase Your Credit Limits
I have one other tip that can help lower your credit utilization ratio. Credit utilization ratio is just (current balance) / (available credit). The last two tips have been about shrinking the numerator (your balance). But what if you can make the denominator bigger? Increasing your available credit lowers your credit utilization ratio.
If you manage your credit responsibly, and this is a big if, you can try to increase your credit limits. You can do this by calling your credit card company and asking for an increased limit on one of your cards.
If, however, you already use a substantial portion of your available credit, stay away from this tip, as it has the potential to put you further in the hole.
6. Keep Credit Cards Open
Our next tip is to improve (slowly) your length of credit history. The longer your history of showing steady payments, the better your credit score.
The credit bureaus keep track of the date you opened each of your lines of credit. So, you may have an account that you opened 15 years ago. Having an account open for that long can help boost your credit score.
While some “experts” suggest closing out accounts, I don’t recommend doing this. The reason is, if you close a credit account, you shorten your credit history and hurt your credit score.
7. Stop Opening New Accounts
Our last tip is regarding opening new accounts. If you go on a spree and open 2 or 3 new credit cards, a red flag is going to go up and say, “Woah, this person is trying to take on a bunch of debt.” Even if this isn’t your intention, it will look that way in the eyes of the credit bureaus.
If you plan to open new accounts, space them out. And it goes without saying, but please, pretty please, do not open a new credit card while trying to close on a mortgage. It will create extra hoops for you to jump through, and it could jeopardize the deal.
How to Improve Your Credit Score: A Summary
Learning how to improve your credit score doesn’t have to be a tricky process. There are a few simple steps you can take to improve each component of your score, starting with the most significant movers first. To recap, here are the seven simple steps you can take to improve your credit score.
- Check Your Credit Report
- Pay Your Bills on Time
- Pay Down Debt
- Find Out When Your Balance Gets Reported
- Increase Your Credit Limits
- Keep Credit Cards Open
- Stop Opening New Accounts
On a long-term basis, one of the best things you can do is monitor your credit report and be proactive in improving it. Check out Credit Karma to help you along this process. I use it, and so should you!