Your credit score is vitally important to your overall financial health. A good credit score can unlock hundreds of opportunities to improve your life. Bad credit can close the door to many opportunities you might need in the future.
The good news is that you can improve your credit score through several strategies. Through a bit of effort and patience, you can obtain a higher credit score to ensure better access to the financial opportunities afforded to those with good credit.
With proper credit education resources, you can gain a better understanding of why your credit report matters, how the credit scoring model works, and how to improve your credit score.
Why Does a Good Credit Score Matter?
Your credit report affects so many different facets of your life. A good credit score could save you thousands of dollars on interest charges and credit fees. Credit card issuers and lenders use your credit score and report as a measure of your creditworthiness and financial reliability.
Hence, when you apply for credit cards or personal loans with a positive credit history, you are more likely to get approved for the new accounts and receive a more considerable loan amount or higher credit limit. Borrowers with fair credit or limited credit history will be less likely to qualify for more favorable terms and lower interest rates. This limitation applies to mortgages, auto loans, and other loans.
In addition to credit opportunities, your credit score can impact your ability to rent an apartment, get insurance, or rent a car. Your credit reports can even be checked when you apply for employment. It’s worth it to improve your credit score as it impacts nearly every aspect of your life.
What’s On Your Credit Report?
Your credit reports are compiled by three major consumer credit bureaus – Experian, TransUnion, and Equifax. These three credit bureaus include all information deemed relevant to your creditworthiness. Credit card companies and lenders report your credit accounts and payment history to all major credit bureaus.
Here is an overview of the sections of information that credit bureaus include on your credit reports:
Personal Identifying Details
Each credit bureau will include various personal identifying details to connect you to your credit report. This section will likely include your name, address, date of birth, employment information, and Social Security number. Your personal details are not used to calculate your credit score or determine your creditworthiness.
Credit Account Information
All your credit accounts are reported to the credit bureaus by lenders or credit card companies. Details of each credit account will include the type of account (i.e., credit cards, personal loans, mortgages, online payday loans, auto loans, student loans, etc.), the date the account was opened, credit limit or loan amount, credit usage, and payment history.
Every time you apply for a new loan or credit card account, this application shows up as a hard inquiry on your credit report. Soft inquiries such as checking your own credit or getting pre-approved don’t impact your creditworthiness, while hard inquiries can bring your credit score down. Too many hard inquiries within a short period of time isn’t good for your credit report.
Each credit bureau also pulls public records relevant to your credit risk. Public records included from state and county courts are repossessions, foreclosures, and bankruptcies.
If you have debt that you’ve defaulted on, a collection account may be opened and reported to the credit bureaus. Collection accounts and public records listed above are derogatory marks on your credit reports which could severely damage your credit scores.
How Credit Scores Are Calculated
Not all credit scoring models use the same calculation. There is an abundance of different credit scores available, but the FICO score is the most consistently relied upon by lenders. To better understand how to improve your credit score, you should know how your FICO score breaks down, so you know where you need improvement.
The FICO score system uses five factors to calculate your credit score:
The payment history on your revolving credit accounts and loans makes up 35% of the FICO score. All on-time payments will help improve your score, while all late or missed payments will hurt your credit score.
The amounts you owe on all your accounts is 30% of your FICO score calculation. Your credit utilization ratio, the total of your credit card balances compared to your available credit, is vital to this section of your credit score. For a better credit score, you want a credit utilization ratio as low as possible, so you have more available credit and less credit card debt.
Length of Credit History
The length of your credit history accounts for 15% of your FICO score. Your credit history considers the average age of your credit accounts and the age of your oldest and newest accounts. More established credit history is better for your score overall.
Your credit mix, meaning the different types of accounts you have, makes up for 10% of your credit score. It’s better to have a variety of kinds of credit rather than a credit report with only credit card accounts or only loans.
New credit accounts for 10% of your score’s calculation and includes both recently opened accounts and hard inquiries from applications.
Best Strategies for Boosting Your Credit Score
Even though you can’t change your credit score overnight, there are plenty of ways to make a marked improvement on your credit reports, so your credit score rises steadily as time passes. We can walk you through seven strategies to improve your credit score, so you can enjoy all the benefits you’ve been missing out on:
- Check Your Credit Often
It is always wise to check your own credit report regularly and often. Doing so can keep your credit file in excellent shape by ensuring you catch any inaccuracies as soon as they appear. When you check your credit reports often, you will dispute issues before they have a chance to hurt your credit score. You will also protect yourself from identity theft.
- Aim for 30% or Less Credit Utilization
The recommended credit utilization rate is 30% or less. You want to keep your credit card balances relatively low for a solid credit score. If your credit utilization ratio is too high, your credit scores could improve quickly by paying off some of your credit card debt. The best way to ensure you always have a perfect credit utilization rate is to pay off your credit card balances in full every month. Doing this will also save you a significant amount of money on interest.
- Take a Break From Applying for New Credit
Too many hard inquiries from applications for new credit hurts your credit score. To improve your credit, take a break from applying for new loans or credit cards to improve your credit. Building a positive payment history without filling out any more applications for the next while should help your credit reports immensely.
- Make Payments On Time
Late payments will consistently reflect poorly on your creditworthiness. It’s important to always make on-time payments on all your revolving accounts and loans. We recommend turning on automatic payments to ensure you always pay bills on time. It can be easy to forget when you have a lot on your mind. Automatic payments can make late payments a thing of the past and improve your credit immensely.
- Get Credit for Bill Payments
Under most circumstances, bills like utility or rent payments do not appear on a consumer’s credit report. But with new programs like Experian Boost and Rental Kharma allow you to get credit for paying bills that would otherwise not affect your credit score.
Experian Boost, from the credit bureau Experian, makes on-time payments for telephone and utility bills appear in your payment history so you can improve your credit. Using a service like this to build credit through paying bills could cause a considerable improvement surprisingly fast.
- Pay Off Debts
Too much debt can affect many aspects of your credit, from poor credit utilization to unaffordable monthly payments. Consider paying down your high credit card balances to fix bad credit. Paying off a credit card or two will not only build credit but also lessen your debt-to-income ratio, giving you the increased financial freedom to pursue the things you want.
- Keep Older Accounts Open
When you do pay off a credit card, keep the account open and don’t close it. Not only will this improve your credit utilization ratio, but it will also keep the average age of your accounts older. Closing older accounts will cause your credit history to become younger, which is not great for your credit scores.
Another way you can elevate the average age of your credit is to become an authorized user on an older credit card account owned by a friend or family member. Being an authorized user will allow you to improve your credit score fast with the account age and payment history of their account without needing to apply for new credit.
Patience Is Rewarded
While credit scores take time and patience to increase, the effort is always well worth it in the end. Sometimes you need outside help through educational resources or a nonprofit credit counseling agency. But whatever actions you need to take to make it happen, the important part is that you took action. Making your financial health a priority is one of the best moves you can make for shaping your future.
Once you have boosted your credit scores, you will receive ample rewards for all your hard work and patience. You may be offered a credit limit increase on an existing credit card or begin receiving an abundance of pre-approval offers. Doors will start to open to you, making financial options like a mortgage for your dream home or a minimal interest rate on an auto loan.