by: Remie Longbrake | published: Sept. 21, 2020
Credit scores range from 300 (poor) to 850 (excellent). Generally scores above 700 in FICO scoring model will allow you to access better rates and more options.
Higher scores illustrate consistently good credit histories, including on-time payments, low credit use and long credit history. Lower scores indicate borrowers may be risky investments because of late payments or overextended use of credit.
There are no exact cutoffs for good scores or bad scores, but there are guidelines for each. Most lenders view scores above 720 as ideal and scores below 630 as problematic. The average credit score in 2019 according to CNBC hit a record 703.
There are many reasons why your credit score is important.
Many landlords will check your credit report before renting to you. They want to make sure you can and will pay your bills on time. So a poor credit score could influence your ability to find a place to live.
Your credit score also affects how much you pay in home and auto insurance.
Most importantly, your credit score determines the cost of your future purchases. A good credit score gets lower rates on loans and credit cards, resulting in lower overall costs.
To put this into perspective, someone who has a credit score of 650 and gets a 30-year $400,000 mortgage loan is likely to pay over $70,000 more in interest than someone who gets the same loan, but has a credit score of 750.
As you can see, you can save A LOT of money by maintaining a good credit score.
Keep in mind however, that there are many credit scoring models, therefore you have more then one "score." Those scores vary in the way your score is calculated as well. Regardless of the model used, higher scores indicate stronger credit (in other words, less risk to the lender) generally holds true across the board.
The FICO model is to be the most popular. Here is a breakdown of how FICO scores is calculated.
Your credit score is determined by what’s in your credit report. So when it comes to improving your score, you definitively want to know what is in your report. Keep in mind, when it comes to your credit report that negative information can have a lasting effect on your score.
Consider just how long negative credit information stays on your report.
So you can see that a credit score is super important to reaching your financial goals. Use the strategies outlined below to get a better idea on how to better your score.
1. Pull Your Credit
You're entitled to one free credit report per year from each of the three main credit bureaus at AnnualCreditReport.com. Check them each carefully, and file a dispute with the appropriate bureau if you find something on your report you believe shouldn't be there, such as a late payment. Correcting any issues could give your credit scores a lift.
2. Track Your Credit Score
When you monitor your credit score, you can intervene quickly if it drops. You can address factors that influence your score, such as high balances, late payments or too many recent hard inquiries. There are many ways to check and monitor your credit score for free, including through your current credit card issuer or bank, third=party reporting, or through the credit bureaus themselves.
3. Create a Budget
To help pay off debt and keep your spending in check long term, take time to make a budget. This process will offer clarity on the amount you're earning and how much you can safely spend on discretionary items. You'll then be more likely to make smarter choices when you're tempted to use a credit card, and you can prioritize limiting your credit utilization.
4. Set Up Alerts
Many credit card issuers let you set up email alerts related to your spending. If yours does, set it so you get an email when your balance reaches 20% of the card’s credit limit. Once you get that email, you can start using another card or pay down the balance before charging more.
5. Set Up Automatic Bill Payments
The most important factor on your payment history is paying on time. Help protect your score from the adverse effects of a missed payment by putting your bills on autopay. Make sure you have enough money in your checking account to cover each bill every month to avoid an overdraft. When you know you won't have to deal with a sudden score dip after a forgotten bill, you can focus on other ways to improve credit.
6. Pay Bills on Time
If you want to improve your score, you must pay on time.Try to cycle your due date with your income checks if possible. If you do find paying on time challenging then get with your creditors and let them know you are going through difficulties. Many credit card companies will offer an adjustment to your due date at least once. It’s not likely your going to be able to skip a payment, but by delaying it a couple weeks or moving the due date to right after your paycheck pay open up more options.
7. Pay Balances at the Right Time
Your credit utilization ratio is calculated using the balances you have at the time your credit card issuers report to credit bureaus. Call to see when that is, so you can adjust your payments accordingly.For examples sake, you called the issuer of one of the Visa cards and was told they report information on the 5th of each month. Since I typically pay off my balances toward the end of every month, I end up with a very low ratio, because by the 5th I haven’t had time to charge much on the card. If I paid around the 27th of each month, however, they would be reporting my balances at around the highest point in the month, making my ratio higher.Paying shortly before the information is reported is the best strategy. Doing this might involve timing payments differently for different cards but worth the effort.
8. Pay Down Balances
One of the most crucial components of your score is how much debt you're carrying compared with your credit limit. This is your credit utilization ratio. You should make it a goal to reduce any high interest credit card debt first, since that likely will cost more money in interest than an auto loan or federal student loans. Decreasing your credit card balances also shows potential lenders that you're responsible with credit. Experts suggest keeping your credit utilization ratio below 30% of your credit limit as much as possible.
9. Balance Your Card Use
If you charge $1,000 on a card with a $2,000 limit and charge nothing on three similar cards, your overall credit utilization ratio might be 12.5%, but it will be 50% for that one card, and that will hurt your score. To avoid this, note the credit limit for each card and, when you reach 20% of the limit, put the card away and use another.
10. Pay Off Credit Card Balances Every Month
In addition to lowering existing debt balances, minimize ongoing debt by making it a goal to pay off your credit cards each month. Zeroing out your balance each statement period keeps your credit utilization low, which is one of the best ways to strengthen credit. You'll also avoid incurring interest charges.
11. Keep Old Accounts Open
Even if you no longer use an old credit card, it's typically best to keep the account open. That's because your credit scores benefit from a long credit history and a high total credit limit. Closing established accounts will shorten the average age of your accounts and lower your total credit limit. It will take years before an account closed in good standing drops off your credit report, but the effects on your credit utilization rate are immediate. If a credit card comes with a high annual fee you can't afford, closing the account could be a good option—or ask your issuer to downgrade the card to a no-fee version if possible.
12. Limit New Lines of Credit
When you apply for a new credit card or loan, a hard inquiry will appear on your credit report. That may lead to a brief dip in your score. Plan to apply only for the credit you truly need, after you've done enough research to understand which accounts you'll likely qualify for. That means avoiding multiple hard inquiries cluttering your credit file.
13. Limit Loan Applications to a Short Time Period
Lots of hard inquiries in a short time could be an indication to lenders that you're searching for lines of credit you won't be able to pay. Smart borrowers, though, will apply for a few loans of the same type to compare rates. For that reason, credit scorers tend to treat multiple hard inquiries of the same loan type made around the same time as one, so submit applications within a short time frame. That will prevent your credit score from suffering.
14. Add to Your Credit Portfolio
Lenders look for a mix of accounts in your credit file to show that you can manage multiple types of credit. These include installment loans, for which you pay a fixed amount per month, and revolving credit, which comes with a limit you can choose to charge up to (as is the case with credit cards and home equity lines of credit). If you only have one type of credit in your file, adding something different could improve your credit mix. Credit mix accounts for just 10% of your FICO® Score, however, so don't apply for credit simply to improve your score. That could put you at risk of taking on debt you can't repay.
15. Get a Credit Builder Loan
If you're focused on building credit from scratch or recovering after a hit to your score, a credit-builder loan from a credit union could help. You'll make fixed payments for six to 24 months, and your money will sit in a savings account you'll be able to access at the end of the loan term. In the meantime, the lender will report your on-time payments to the credit bureaus, strengthening your score.
16. Seek Out a Secured Credit Card
Another option for building credit is to get a secured credit card. It requires a cash deposit, typically between $200 and $3,000, which becomes your credit limit. You can then use the credit card as you would any other, and the deposit protects the issuer from the possibility that you won't pay off your balance. If you use a secured card responsibly, you could upgrade to a traditional unsecured card down the line.
17. Join an Account as an Authorized User
You can also improve credit by joining a family member, friend or another trusted person's credit card account as an authorized user. You'll be able to use the card to make purchases, and the card's payment history will show up on your credit report. That makes it crucial to pick someone whose credit you will benefit from. Work with the primary cardholder to pay them for your purchases, as they'll be ultimately responsible for any balance on the card.
18. Get a Loan With a Cosigner
Making on-time payments toward an installment loan, similar to making timely payments on a credit card, helps build credit history. Besides using a credit-builder loan, getting a traditional one such as a car loan can add positive information to your credit report and improve your credit mix. If you can't qualify for a loan on your own, a cosigner can help—but make sure the cosigner knows what they are getting into. If you can't afford to repay the loan, it becomes their responsibility. Also, as always, only seek out a loan if you really need it, not simply to improve credit. Potentially boosting your score should be an added bonus or motivation, not the central reason.
19. Ask for Higher Limits
The lower your debt-to-credit ratio the better as it accounts for 30% of your credit score. As discussed above, you can lower this ratio by paying off debt. But you can also lower it by increasing your available credit.Call your credit card issuer to request an increase to your credit limit. Make sure to ask if the card issuer will do a hard pull on your credit report, as this could temporarily ding your credit score a few points.
20. Spend Less on Credit Cards
This is perhaps the most obvious way to lower your credit card balances. Make it a habit to spend less overall, or just move to using cash when you get past a certain threshold utilization ratio, like 20%. Once you’ve taken some of the steps above, you can move on to the following tactics, which are potentially even more powerful. They’re all about increasing your available credit.
21. Balance Transfers
One way to save on interests, is to move your credit card balance to a lower rate, ideally one with 0% interest. Many cards have a window, usually up to 12 months, where you can transfer a balance to their card at that lower rate. Depending on how much is on that card, this could save you a lot, just in interest. You’ll want to consider if there are any fees for doing a transfer along with APR and any terms in doing a transfer. Consider your options, but this might be a great option to consider.
22. Keep Your Cards Active
I once had a card canceled because I hadn’t used it in two years. It was a card with a $10,000 limit and it was my oldest card. My credit score fell due to both the resulting higher credit utilization ratio and a shortening of my average credit history.To keep this from happening, put each unused credit card in an envelope with the last date you used it written on the outside. When it gets close to a year, take the card out and use it for one of your regular purchases, then put it away again (and pay the balance in full, of course). I haven’t had another card accidentally canceled since I started using this system.Remember, keeping those credit lines open keeps your total credit availability higher, and your credit utilization ratio lower, which is exactly what you need for a higher credit score.
23. Add Rent Payments to Your Credit Report
If you regularly pay rent on time you can add rent payments to your credit report in order to add positive information reported to the credit bureaus. You can do so by signing up with a service like RentTrack or PayYourRent. In many cases, getting your landlord or property management company on board will limit the fees you'll be charged.
24. Dispute Credit Errors
This is another one of the fastest ways to improve your credit. You're normally entitled to a free credit report from each of the three major credit bureaus every year. But right now you can check your credit report every week as the bureaus have made free weekly credit reports available until April 2021.Comb through these credit reports to make sure everything is accurate. If you find an error, you can file a dispute with the credit bureau. If the negative mark is removed, your credit will bounce back.Good credit isn't something you can achieve overnight. Luckily, though, there are plenty of actions you can take to give your score a quick boost.
25. Defer Payments
Now deferring payments will not be possible for most, however for those with educational loans, you just might be able to take advantage of this option. In deferment the interest will still accumulate, however that might allow some breathing room, at least temporarily. Deferring is usually limited to 6 months max, and this may be for the lifetime of the load, however it could certainly help in the right circumstances. Just call your loan provider and ask. There will be some forms to complete verifying income(or lack thereof), once approved, you are temporarily relieved from payments. Deferment might come up on your report, but it shouldn’t hurt it. Due make sure however that if interest payments are due during this time, that you continue to keep payment that portion.
26. Utilize Debt Consolidation
If you have a lot of debts with higher interests rates (over 12%), it may be wise to consolidate those debts into one loan. This is save significantly on interests and also lower your payment. You should be able to do this at your local bank on your own, however it may be smarter to call a company that specializes in restructuring debt on your behalf. Regardless, always pay what you can afford. And if you do consolidate make sure the previous accounts you had note that you paid on your credit report.
27. Refinance Your Loans
You may be able to save money in interests on your loans by refinancing them. A refinance is a way to trade in an existing loan and convert it, hopefully on better terms. You can compare current rates to what you are paying now, if it’s a point or two higher, it might make since to refinance a get a lower interest rate. Before doing so you’ll want to make sure the it makes since. You’re home is a good place to start, however also consider any car loans or school loans you have. Now financing will usually include fees or points, so first you’ll need to consider that with those fees and the new payment structure, that it will be beneficial to do a refinance. You don’t have to stick with the original bank either, you’re free to refinance where ever you may get a better rate and payment plan.
With a loan forbearance you may be able to temporarily put loan payments on hold. Sometimes lenders may not stop payments entirely, but would be open to reducing the monthly payment amount due instead. Regardless, the loan amount due will not decrease, also interest will likely continue to accrue. When forbearance is complete, you’ll likely have to find a way to catch up on those missed payments. Make sure you get all details in writing, but don’t be afraid to consider forbearance as an option.
29. Talk with Lenders
Before applying for new accounts, talk with lenders first. See what options are available. Last thing you want to do is hurt your credit by applying when the lender can usually state what they are looking for to get approved. If your credit is sub 700, realize many lenders will not want to approve you for either a loan or credit card. When applying, you’re not bound to your current bank, but you should start there, since you have history. Also, consider local credit unions, sometimes they may be more responsive to helping with less then idea credit.
30. Get a Money Mentor
No matter where you are at, you can probably save some money and improve your finances by getting a professional involved. As much as our finances are privy to our ability, truth is most of us are not good at managing money and utilizing credit efficiently. Just as an accountant find benefits to reduce taxes, and credit and financial specialist can help you understand your money better and work with you to reach your financial goals.
Improving credit isn't an immediate process. An excellent credit score is most often the result of years of conscientious financial behavior. While some strategies will let you see small improvements quickly, joining the ranks of those with the highest credit scores will take time.