A good credit score can have many benefits, such as higher likelihood of loan approval and lower interest rates, while a bad credit score can drag you down in both your financial and personal life. Credit scores are not the end all be all, but if you focus on what you can do to improve your credit score, you’ll find that you have access to more financial opportunities and will save money in the short and long term.
Before focusing on what you can do to improve your credit score, it’s important to know how it’s calculated. That way you’ll be able to dedicate your time and energy to the areas that have the biggest impact.
What Is a Credit Score?
Your credit scores are three-digit numbers that represent your creditworthiness. They are valuable to lenders, credit card companies, and other businesses to see how reliable you would be at repaying money that you borrowed from them.
In general, the higher the score, the better you would be as a borrower; the lower the score, the more of a risk you would be.
Credit scores are based on the information, both positive and negative, that appears on your credit report. This information is reported by creditors to the top three credit reporting agencies: Equifax, Experian, and TransUnion. Credit scoring agencies then input the information into advanced algorithms to generate your score.
The top credit scoring models in the U.S. include FICO, which is used by 90% of lenders, and VantageScore. Your FICO Score ranges from 300-850, with anything above 670 being considered a “good” credit score.
What Makes Up a Credit Score?
Much of the information that factors into your credit scores is the same regardless of what score you are looking at. But how strongly each category influences your score varies based on the scoring model. For instance, a FICO credit score will more heavily weigh your payment history than VantageScore will.
The information on your credit report that most strongly impacts your score includes:
Your payment history, one of the most influential components of your credit score, shows how reliable you’ve been with payments over the course of your credit history. If you make all of your payments on time, your payment history will positively affect your credit score. Conversely, if you have a number of late payments or missed payments, your score will go down.
Sometimes called credit utilization ratio, it is the amount of credit in use in your revolving credit accounts compared to the total credit in your revolving accounts. In other words, credit utilization is how much of your total credit limit is in use at any given time.
Revolving credit is a type of credit that you can use, repay, and reuse on a recurring basis, unlike installment loans, which require you to pay off a set amount of money over a predetermined period of time.
Credit experts recommend that you keep your credit utilization ratio at 30% or less. This recommendation applies to individual credit accounts, as well as all of your open accounts combined. The closer that you are able to maintain an ideal credit utilization ratio, the more positively that your score will be affected.
Length of credit history
How long you’ve had open credit accounts also contributes to your score. The longer that you’ve had credit, the more it will positively impact your score as long as you’ve managed that credit responsibly.
The length of your credit history consists of:
- Average age of your accounts
- Age of your oldest account
- How long it’s been since you opened an account
Average age of accounts (AAOA) is calculated by adding the monthly ages of all of your accounts and dividing by the total number of accounts on your credit report.
You must also be actively using these accounts. If you have a line of credit that’s been open for decades but haven’t actually been using it, it won’t necessarily boost your score. If you have open credit, lenders want to see that you’re using it. More importantly, they want to see that you’re using it responsibly.
Credit mix represents the variety of credit accounts in your portfolio. A diverse credit portfolio might include a credit card, mortgage, auto loan, student loans, or personal loans. The more diverse that your credit portfolio is, the more positively it will impact your score.
This includes any credit-related accounts that you’ve opened or tried to open recently. New credit can inevitably cause your credit scores to dip; when you open new credit, lenders see this as a risk, as there is a higher likelihood that you will not be able to pay back your debts. Information on your credit report that qualifies as new credit could be:
- Taking out a loan
- Opening a new credit card
- Hard inquiries by lenders or financial institutions
How Does FICO Calculate Your Credit Score?
FICO assigns a percentage of importance to each factor of your credit score, and prioritizes them as:
- Payment history: 35%
- Credit utilization: 30%
- Credit history length: 15%
- Credit mix: 10%
- New credit: 10%
How Does VantageScore Calculate Your Credit Score?
VantageScore calculates your credit score based on how influential each factor is.
- Total credit usage, balance, and available credit: Extremely influential
- Credit mix and experience: Highly influential
- Payment history: Moderately influential
- Age of credit history: Less influential
- New accounts opened: Less influential
Who Looks at Your Credit Score?
Many different parties reference your credit scores before making lending decisions. A loan servicer or credit card issuer is the most obvious party that would run a hard inquiry on your credit report to see how you’ve managed debt in the past.
Potential employers, utilities providers, and cell phone providers may also reference this information. While employers and different service providers are not in the business of offering you a loan, your credit scores can still give them a glimpse into how you manage your finances and abide by deadlines.
When lenders, credit card companies, potential employers, utilities providers, cell phone providers, and other companies check your credit score, they are interested in whether you are a reliable borrower who can manage their debt, make on-time payments, and spend responsibly in comparison to how long your accounts have been open.
7 Things You Can Do to Improve Your Credit Score
In understanding what a credit score is and how it’s calculated, you’ll be able to better target certain areas that will boost your credit score fast.
1. Manage your bill payments
As one of the most influential aspects of your FICO Score and VantageScore, it’s crucial that you make on-time payments to your lenders, credit card issuers, and billers if they report them to the credit bureaus. For FICO Scores, bill payments count for 35% of your score. VantageScore calls payment history moderately influential.
One of the easiest ways that you can improve your credit scores is by making all of your payments on time — no matter what. Even if you can’t settle your credit card balances, and can only make the minimum payment, pay what you can.
Sometimes this is easier said than done, but there are some simple things that you can incorporate into your bill pay routine to ensure that your payment is heading out the door when it needs to be.
- Keep a tidy bill pay space, either at a desk or on your computer
- Make a bill pay date, and align your bills with your paychecks if necessary
- Create notifications just before your due date to remind you when your bill is due
- Decide whether automatic payments are the best choice for your financial situation
- Contact your lender or biller if you’re experiencing financial hardship and are unable to make at least the minimum payment
2. Stick to 30% or less credit utilization
After paying your bills on time, managing how much credit you are using at a given time is the second most important factor of your FICO Score, accounting for 30%. VantageScore groups your utilization, balances, and available credit together and calls them all extremely influential.
The best way to keep your utilization low is to always pay off as much of your credit card balance as possible — in full is best. While you should always shoot to pay off the minimum amount, more is better.
To reduce your credit utilization rate, you can also make more than one payment per month. You should avoid using more than 30% of your credit limit at all times. However, if you use more than 30% of your credit limit throughout the month and make small, more frequent payments, you can keep your utilization at an ideal rate when your credit card company reports the information to the credit bureaus.
Another way to lower your utilization is to ask for a credit limit increase. You can usually ask for a higher credit limit online or over the phone with your issuer. In order to get a credit limit increase, you typically have to have a positive credit history. With a credit limit increase, your balance should not increase as well. If it does, you won’t be helping your credit utilization.
3. Keep credit accounts open and in good health
While not the most important component of your credit score, the length of your credit history counts for something. For FICO Scores, credit history length accounts for 15% of your score, while VantageScore calls it less influential.
However, the age of your credit history is an easy one to use to your advantage. Essentially, if you have an open credit account that you’re considering closing, you should reconsider. If you close it and it’s one of your oldest accounts, it could bring your score down several points. Further, closing an account will lower your overall credit limit and increase your credit utilization.
If the account is in good standing but one that you don’t really use anymore, keep it open and only use it for sporadic, small purchases to keep it in good standing. For instance, charge gas or groceries to your card every once in a while, but don’t forget to pay off your balance at the end of the month.
If the account is not in good standing, such as if it is delinquent or has been given to a collection agency, try to get the issues with the account resolved as soon as possible. Settle any delinquent payments, and make a plan to manage the card better in the future.
For collections accounts, decide whether it makes more sense for you to settle the account in full or offer the agency a settlement. As of late, settling collections accounts in full may result in a slight credit score boost.
4. Limit hard inquiries and new credit requests
Try not to open too many accounts at once. Credit applications lead to hard inquiries by creditors, which knock your credit score down a few points.
Sometimes hard inquiries are inevitable, like when you’ve decided that it’s time to expand your credit mix or take advantage of a good deal on a credit card. Luckily, new credit will only moderately affect your credit score. Nonetheless, it’s best to limit new credit requests when you can.
This is especially important when you’re looking to apply for a new, large line of credit in the near future. For instance, if a new home is on your horizon and you need to take out a mortgage, you’ll want to keep your credit score as high as possible so that you have a higher likelihood of getting approved for the loan and securing a good interest rate. That means you should avoid requesting new lines of credit in the months before applying for the mortgage.
5. Make your thin credit file a little thicker
People with thin credit files have few (if any) accounts listed on their credit reports. According to Experian, around 62 million Americans have thin credit files. In many cases, you have to have credit in order to get credit, making it difficult for people with little credit to improve their credit score situation. However, there are things that you can do to kickstart your journey.
- Apply for a secured credit card, make on-time payments, and manage your credit utilization
- Become an authorized user on someone else’s credit card
- Use services, such as utility or cell phone providers, that report your bill payments to the credit bureaus. You’re paying bills anyway — might as well make it count. Make sure you’re paying these bills on time, though.
6. Consider debt consolidation
Debt consolidation is the process of taking out one loan to pay off several loans. For instance, if you have multiple student loans, you could take out a single loan and consolidate all of the student loans under a single umbrella. If you’re able to get a good interest rate on the consolidated loan, you’ll be able to pay down your debt faster, which will improve your credit utilization ratio and boost your credit score.
In a similar vein, if you have multiple credit card balances, you can do a balance transfer to consolidate all of your credit card debt under one card. Many balance transfer credit cards offer an introductory 0% APR, which allows you to pay down your debt faster.
It’s important to be careful with these cards, though. Many balance transfer credit cards have higher-than-average interest rates after the introductory period, so it’s important that you have a plan to pay off your balance quickly.
Also, balance transfers typically come with a fee that costs a certain percentage of the total transfer, usually 3–5%. You may be able to get balance transfer fees waived before you sign your contract, but don’t expect it.
7. Review your credit reports
One of the most important things that you can do while trying to improve your credit score is review your credit reports. You have access to one free credit report per year from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Request your copy at AnnualCreditReport.com.
By reviewing your credit reports, you can get a sense of what you’re doing right when it comes to credit and — just as importantly — what you can be doing better. If you want the highest possible credit score, your credit report should look like: on-time payments, low credit card balances, older credit accounts that are still in use, a diverse array of credit types, and minimal hard inquiries or applications for new credit. If any of these areas are amiss, it’s time to give them your attention.
It’s helpful to pull all three credit reports at the same time so you can compare the information in them. You should be on the lookout for inaccurate or outdated information that could be dragging your score down.
For instance, if a payment that you made to a biller has been marked late but you believe you made the payment on time, you can dispute it with each credit reporting agency. But if you call to dispute a mark with the credit bureaus, make sure that you have grounds for your claims, such as a screenshot of your on-time payment.
If you find any discrepancies or inaccurate information when checking your own credit report, you can dispute them directly with the credit bureau and should see some movement in your credit scores within the next few months.