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How to Improve Your Credit Score

Learn how credit scores work so you can improve yours and gain access to financial products and perks.

Your credit score is the major factor that banks, credit card issuers, lenders, creditors, employers, insurance companies, and landlords use to gauge your credit worthiness. But that's not all—as the Capital One Credit Confidence Survey found, 48 percent of people say your credit score is also a reflection of your personal character. The logic goes that a bad score implies you have bad judgment and may even be untrustworthy.

In the same survey, nearly two-thirds of respondents acknowledged that those with good credit get special treatment. To a certain extent, that's true. There's no getting around it: If you want to be able to get credit cards with an ample credit limit, you need a good credit score.

"Here are three numbers that often decide your quality of your life: your weight, your blood pressure, and your credit score," says Howard Dvorkin, CPA and chairman of Debt. "If you want a credit card, a car loan, or a mortgage, the words 'credit score' will become well known to you. Simply put, you truly are a number to lenders."

As you go through life's major transitions and milestones (applying for credit cards and bank loans, buying a home, and even getting married), a strong credit score has advantages.

Learning how to improve your score by understanding the factors that comprise it is the key to financial freedom.

Yet many people, to their peril, don't take the time to fully understand how a credit score is calculated, or realize they have the power to improve it. As such, you could be missing out on access to the best credit cards, a decent credit limit, and low interest rates, and in some cases, getting hired for jobs, being able to buy a home or car, or getting selected to rent an apartment.

This guide will break down what a credit score is, how it's used, the components that affect its rise and fall, and what you can start doing today to improve your credit score and secure your financial future.

Chapter 1: Credit Score 101 (so you can boost yours)

In order to improve your credit score, you have to understand what it actually is, what it isn't, and that there's more than one. Essentially, you're being graded, and a strong credit performance will unlock access to a variety of credit and financial products, stretch your credit limit, and qualify you for favorable rates and terms. Here's what you need to know…

As defined by Investopedia, a credit score is a statistical analysis performed so that financial institutions can determine a person's creditworthiness. Put another way, your credit score is a lot of information and data summarized into a three-digit score, says Dvorkin. "It includes your history of paying debt, how much debt you have, how long you've been getting credit, how many lines of credit you apply for, and what kind of credit you have," he says.

A credit score is not the same as a credit report, although some people use those terms interchangeably. As CreditKarma explains, credit reports contain detailed information about your credit history (on-time or missed payments, your total credit limits and balances, past bankruptcies, and other relevant details).

There are three credit reporting agencies or bureaus that generate consumer credit reports: Experian, Equifax, and TransUnion. Credit scores are then calculated and converted into a numerical representation of all that collected data. Think of credit scores as your credit behavior GPA. You want a high credit GPA so you can qualify for the best credit card choices available.

Here's something that surprises many people: There are actually hundreds of credit scoring models. The most notable one is FICO, and the next most popular is VantageScore, according to SimpleDollar.

The reason there are so many scores is that FICO, VantageScore, and other companies create industry-specific versions. So there may be a version of your FICO score that an auto lender would look at that's slightly different than the one a credit card issuer or insurance company would review.

Generally speaking, however, there is very little variation between the consumer scores you can review on your own and the ones banks and lenders see. That is to say, when you pull your own credit scores, consider them a reliable representation of where you stand credit-wise.

Toward that end, there are three main FICO scores available to consumers—one for each of the three credit bureaus. It's normal for the scores to be slightly different since some creditors may only report activity to one bureau and not the others. Therefore, your Experian credit score might be 20 points higher than your TransUnion one, which might be slightly higher than your Equifax score.

You have the option to purchase your credit scores when you get your free credit reports; however, there are also a few ways to get your credit score for free. You can join sites like Credit Karma or Quizzle, or see if one of your banks or credit card companies provide access to your score as a value-added service.

While all this can seem overwhelming, don't let the magnitude of the credit score industry stress you out, because here's the good news: The scoring methodology is virtually the same across the board.

As you'll see in subsequent chapters, no matter which company is crunching the numbers, credit scores are always based on the same basic set of financial criteria. Master that criteria and you'll be in a far better place for the best credit card options and financial products than most Americans.

Now that you understand the basic credit score terminology, it's time to learn how credit scores are used, and how to maximize them.

Chapter 2: Know the score, and maximize yours

In your quest for a strong credit score, you need to know which activities cause a score to rise or fall. "Credit scores summarize the information on your credit reports and predict the likelihood that you'll go seriously delinquent on your credit obligations," explains credit expert John Ulzheimer.

There are a lot of myths and misinformation about what does and does not go into a credit score calculation. To ensure you're making moves that can benefit you (assuming you want more than a $300 credit limit someday), here are the components of credit scores to focus on:

  • Payment History (35 percent of your score): This refers to whether or not you pay all of your credit card, loan, mortgage, and other bills on time. But don't worry if you're a couple of days late. As credit expert Barry Paperno explains, "As long as you can keep from missing more than one payment in a row, not only will your account consistently be reported to the credit bureaus as having been paid on time, but your score will continue to look favorably on your recent payment history."
  • Credit Utilization (30 percent): This refers to how high your balance is compared to your available credit. So if you have a $1,000 credit limit and owe $500, you are utilizing 50 percent of your credit. Lenders get nervous if you're using a lot of your available borrowing power since it could become a challenge to meet your obligations if you have a loss of income. The general consensus, and one advocated by financial empowerment site, The Balance, is that you should keep the balance on your credit card to about or less than 30 percent of the card's credit limit.
  • Length of Credit History (15 percent): This factor is about the age of your oldest account, and the average age of all your accounts. The older your credit history, the better it is for your score. Having a credit history is one of the reasons why it's smart - even if you don't plan to use it very often - to apply for a credit card. Having no credit history hurts your score.
  • Mix of Accounts (10 percent): Part of your credit score also reflects your ability to balance different types of accounts, including installment loans (like a car, student loan, and/or mortgage) and revolving debt (like credit cards).
  • New Credit Inquiries (10 percent): Anytime you apply for or open new lines of credit - when you ask a financial institution to lend you money - that's considered a hard inquiry, and your credit score will drop slightly.

It's important to also understand what's not factored into your credit score, especially since a TransUnion survey found that more than half of consumers have many misconceptions about that. Despite what many erroneously believe, these items below do not help or hurt your score:

  • Salary
  • Employment history
  • Age
  • Race
  • Religion
  • National original
  • Gender
  • Marital status
  • Where you live

By looking carefully at each credit score component, you can figure out which areas need improvement.

Chapter 3: How to get great credit cards with high credit limits, low-interest rates, and more

Now that you have a better sense of what a credit score measures, you can probably understand why lenders and creditors use it to evaluate potential customers. "Your credit score is a snapshot of your creditworthiness," says Beverly Harzog, consumer credit expert and author of “The Debt Escape Plan."

Take a look at some of the companies and people who use credit score to size you up:

  • Home loan providers. For many people, getting ready to buy a home is when they become most concerned about credit score, and for good reason. Not only is credit score one of the major factors for determining whether you'll qualify for a mortgage, but it can also affect the interest rate you'll get, according to Experian. Your credit score could literally save you (or cost you) thousands of dollars. It's not an exaggeration to say that a poor credit score can put limitations on where you can live.
  • Insurance carriers. Credit score can affect your premiums for health and car insurance. This is because research backs up a correlation between a low credit score and the likelihood that you'll file a claim. Therefore, a lower score would make you a more risky customer in the eyes of the insurer.
  • Employers. If you plan to work in fields like finance or data security, a credit check could be a routine part of the job application process. Usually, that involves taking a look at your credit report, not necessarily your score, but remember–it's all related. "It's important to take care of your credit because it reflects how responsible you are to a prospective employer," says Harzog.
  • Credit card companies. Beyond simply getting approved for plastic, with an excellent credit score you'll have access to the lowest available interest rates, your credit limits will keep increasing, and may also qualify for elite rewards program cards. Such perks (like personalized concierge service and luxury gifts) are reserved for only the top tier of borrowers.
  • Future romantic partners. More and more experts, like Erin Lowry, are recommending that couples have a credit score conversation before tying the knot. In fact, a Bankrate survey found that nearly 4 in 10 adults say knowing someone's credit score would affect their willingness to even date that person.

In short, a healthy credit score is imperative for achieving financial milestones, says Heather Battison, vice president of TransUnion. However, if your score isn't quite where you want it to be just yet, don't despair. Most lenders consider additional criteria along with your score, including your income, assets, and other debt obligations. Still, credit score is an area you have some control over, so doing your best to maximize it will serve you well.

Chapter 4: Credit score ranges: The good, the bad, and the ugly

So what is considered a "good" vs. "bad" credit score? Knowing the answer will help you understand why some people can't get one credit card, while others have a wallet full of them.

FICO and VantageScore scores are between 300 and 850. Here's a breakdown of the generally agreed-upon credit score ranges, as per Credit:

  • Excellent Credit: 750+
  • Good Credit: 700-749
  • Fair Credit: 650-699
  • Poor Credit: 600-649
  • Bad Credit: below 600

    As reported by NerdWallet, the average FICO score among U.S. consumers was 695 as of April 2015–that's an all-time high! About 22 percent of scores are below 600; 23.3 percent are between 600 and 699; and 54.7 percent are 700 or above. Only an elite few (19.9 percent) have scores above 800.

    Credit score ranges can mean different things in different situations. "It all depends on the lender and on the specifics of the person's credit history," says Harzog. For instance, an auto financing company may not require a car shopper to be in as high a tier as an elite credit card program.

    Also, a less-than-stellar score doesn't mean your life is doomed–but it may limit your options or delay plans.

    For instance, if you wish to buy a home but fall into the poor or bad credit range, your only choice (unless you want to delay your plans while you improve your score) might be an FHA mortgage, which requires a minimum score of 580.

    It can also make credit card companies leery about increasing your credit limit until you can prove that you can manage it. It can also make credit card companies leery about increasing your credit limit until you can prove that you can manage it.

    The fact is financial companies are classifying you as "bad," "excellent," or somewhere in between based on which credit range you fall into. The good news is that improving your score as few as 20 to 30 points—such as going from a 680 to a 710—can move you into a higher bracket, and therefore qualify you for better terms. The next chapter will discuss how to do just that.

    Chapter 5: How to raise your credit score (and reap the financial rewards)

    Improving your score doesn't mean you should obsess about these three digits, says Dvorkin. "Instead, address the underlying factors, and nature will take its course." The factors he's referring to are the credit score components discussed in Chapter 2, so let's revisit them as you apply these strategies:

    • Never miss a payment. "Be sure you pay all of your bills on time. This is the foundation of a great score," says Harzog. As you may recall, it accounts for 35% of it. The best way to ensure you're never past due on an account is to take advantage of technology. MyFICO recommends setting up bill and credit card payment reminders and/or automating your payments. Almost all credit card accounts allow you to set up alerts to receive an email or text message that reminds you when a payment due date is approaching. You could also set up an automatic minimum payment to act as your back up plan in case you have a tendency to forget to pay credit card and other bills. Since paying just the minimum on your credit card keeps you in debt for a longer period of time, as the ReadyForZero blog points out, be sure to log on and make additional payments as needed.
    • Avoid delinquencies. On-time payments of medical bills, rent, utilities, parking tickets, and cell phone bills are not generally reported to the credit bureaus. But if you fall behind on such bills and are sent to collections, that could be reported as a negative item, which is particularly damaging to your score.
    • Pay down close-to-max balances on your credit cards. As the second most important factor, lowering your credit utilization can help bump up your score. If you're carrying balances on a number of credit card accounts, make strategic payments. Take a look at your balances as they relate to your credit limits, and focus on paying down the credit card with the highest utilization, says financial expert Clark Howard.
    • But don't aim for a magic number. Although conventional wisdom says to stay below a 30 percent credit utilization ratio, in actuality, the closer you are to debt-free, the better it will reflect in your score. As NerdWallet explains, "Consumers with the best credit scores utilize only 8 percent of their available credit, proving that the lower your ratio, the better."
    • Build a robust emergency fund to keep balances in check. Says WalletHub: "With a nice chunk of change acting as a safety net, you'll be less likely to miss credit card payments and default on debt if you lose your job or encounter some hefty unexpected expenses."
    • Make sure you're not getting penalized for mistakes. In other words, check your credit reports for errors and correct them, says Dvorkin. An FTC study found that about 20% of consumers who identified and corrected errors on one of their three major credit reports experienced an increase in their credit score. Here's what you should do: Pull your three free credit reports via AnnualCreditReport, and look them over carefully. If you spot anything, head to a bureau website (Experian, Equifax, or TransUnion) for instructions on how to file a dispute.

    Doing all of the above will almost certainly result in an improved score, but it's important to know that major increases can take anywhere from a couple of months to more than a year. That being said, time does heal past money missteps. "The impact of past credit problems on your FICO Scores fades as time passes and as recent good credit card payment patterns show up on your credit report," according to FICO's blog.

    Chapter 6: Make your credit score soar with these advanced tips and tricks

    After working on your payment habits and debt utilization, you can look for additional ways to help your score improve even further. These involve, for the most part, manipulating the other aspects of your credit score (length of history, credit mix, and recent inquiries). Take a look:

    1. Avoid closing unused credit cards. Doing so reduces your total available credit, thus increasing your credit utilization. Plus, keeping old accounts open and active helps maintain your credit age, which has a moderate impact on your credit score.
    2. Open up a new credit card. "This increases your available credit and lowers your utilization ratio," says Harzog. However, she cautions, this tactic is only recommended for those who have a solid score to begin with because you'll lose a few points initially for opening the new credit card account.
    3. Ask for a credit limit increase. This is another quick trick to improve utilization. The idea is that if you owe $7,500 on a card with a $10,000 limit, and your credit line is increased to $15,000, your utilization will go from 75 to 50 percent. But do this sparingly, says Ulzheimer, and only if you have the self-control to not charge more on the credit card account.
    4. Do comparison shopping in a timely manner. Any time a potential creditor checks your credit history as part of your application, your score takes a dip. However, don't let that deter you from searching for the best rate on a loan product. Just try to do so in a relatively short period of time, like 30 days (though you could have as few as 14 days or as many as 45, depending on whether your lender is using an older or newer FICO scoring formula), recommends TheSimpleDollar. That way, FICO algorithms will recognize that you're shopping around and count all the credit pulls as a single inquiry. You should know: Checking your own credit score is considered a "soft inquiry," meaning you will not be penalized for doing so. Check away!
    5. Get credit for good behavior. If you're a younger consumer with a short credit history, that's something you can't control. However, you could ask your landlord if he or she can report your on-time rent payments to the credit bureaus, says Battison. "Building credit is all about establishing a history of on-time payments to demonstrate a pattern of responsible borrowing," she says. "Rent is often the largest monthly expenditure, and reporting it to the bureaus ensures you can get credit for on-time payments."

    These advanced strategies won't work for everyone, but when used appropriately and in tandem with good credit behaviors, you should see a positive credit score response.

    Your final credit scorecard

    By now you should feel like a credit score expert and have a good idea which money moves you can make to start seeing progress. Although there is misinformation out there claiming you can manipulate the system, improving your score really comes down to your own hard work and patience. By sticking to the basics–paying bills on time, keeping balances low, and managing a healthy mix of credit–you can grow and maintain a healthy score, and reap the financial rewards that come with it.

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