5 Ways To Improve Your Personal Credit Score
Poor credit can be detrimental for a number of reasons — you might have trouble getting loans, credit cards, or even apartments or cell phones. Even if you can get the products and services you need, the rates might not be very good or you might not have access to as much money as you need.
Whether you’ve had poor spending habits in the past, or you simply don’t have a large enough credit history to return a good score, you will undeniably benefit from taking steps to improve your score. Below, we list everything you can do to ensure that you’re taking the right steps to a positive score.
Do you have poor credit? Or do you have fair credit, but think that it could be better? Read on to learn what you can do to improve your personal credit.
Table of Contents
1. Know How Your Score Is Determined
Your credit score is derived from one of your credit reports — information about you and your debts gathered by a credit reporting agency. A scoring model is applied to your report to calculate your score. Your credit score is a result of five main factors:
- Payment history: Whether you have paid your past debt in a timely manner or not.
- Credit utilization: The amount of credit available to you versus the amount of credit you are currently utilizing. The less money you are currently using, the better.
- Length of credit history: How long you’ve had various credit accounts open, as well as when you last utilized your credit accounts.
- Credit mix: The types of credit you have open, such as credit cards, loans, and mortgages.
- New sources of credit: The number of new sources of credit you have recently opened.
All credit scoring models place varying amounts of importance on all these scores; typically, the first two are the most important, whereas the last three are only a small part of your score. As a result, your score will be heavily impacted if you pay bills late or utilize a large percentage of your available credit, but will not be significantly impacted if you do not have a very good credit mix. That said, if you have insufficient payment or credit utilization history, the other factors will be more important.
2. Check Your Credit Reports & Dispute Errors
Because your credit reports contain the information from which your score is derived, they’re a good place to start. Knowing the specifics of your report will help you pinpoint ways you can improve your credit.
Additionally, you might discover that your credit report contains errors. The FTC found in 2015 that one in five Americans found an error that was corrected by a credit reporting agency, and about 20% of the people who fixed an error saw an increase in their credit score. In other words, finding and fixing credit report errors might be an easy, and relatively quick, way to improve your credit score.
The biggest three credit reporting agencies — Experian, Equifax, and TransUnion — are required by law to provide your report on an annual basis. You can request a copy of your reports via AnnualCreditReport.com. If you find any errors, head over to the FTC website to learn how to dispute them.
Your free annual reports do not come with any credit scores, however. If you’d like to take a look at your scores or reports more often than once a year, you will have to use a free or paid credit score service. These services provide a credit score from at least one agency, and often also include full or partial credit reports. FICO offers a number of credit scores, as well as your full credit reports, via myFICO. Or, to check out your scores for free, take a look at some of our favorite free credit report sites.
3. Pay Your Bills On Time
This one is a bit of a no-brainer. Because payment history is such a big part of your credit score, paying (or not paying) your bills in a timely manner will have a big impact on your credit score. To ensure the impact is positive, pay all your debts on time.
Creditors do extend some grace — your score will not be impacted if you repay a few days late on occasion. However, if you pay significantly late, the rule of thumb is usually 30 days, your credit score will take a hit.
If you cannot afford to pay off all your debt, be aware that debt does not impact your score equally. Size and recency are contributing factors to your score, so if you can’t afford to pay off all your debt, the hit to your credit score will be lessened the smaller you can make the debt.
4. Keep Debt Low
The second most important factor is credit utilization. In other words, part of your score is a result of the amount of money you have outstanding versus the amount of money you have available to draw from. Your credit utilization is normally expressed as a credit utilization ratio — the percentage of your credit lines that you are currently using. For example, if you have a credit card with a limit of $500, and you have $75 outstanding, your credit utilization ratio is 15%.
In general, you want to have a credit utilization ratio of 30% or lower. Note that many people believe that, in order to achieve good credit, you must maintain a credit utilization ratio of about 30% by carrying a balance on your credit card — this is not true. While carrying a small balance will not hurt your credit, it also won’t increase your score. If you have the means to do so, paying off your credit card bills entirely will suit your needs just as well.
There are many ways to keep debt low. The most obvious is to pay off your debt. If you use a credit card, pay off as much of your monthly statement as possible. Borrowers with low credit limits might consider paying their credit card debt more than once a month to maintain low utilization ratios.
Another way to improve your utilization ratio is to increase your credit limits. After all, while $300 outstanding on a credit line of $500 would make for a credit utilization ratio of 60%, the ratio would only be 30% if your credit line was $1,000 total. There are a few different way to increase your credit limits:
- Apply for a credit card: If you don’t already have a credit card, this is a good first step because it will kickstart your credit history and give future creditors an idea of how you manage debt. If you already have a credit card, you might want to consider applying for an additional card, thereby increasing the amount of money you have access to and lowering your overall credit utilization ratio.
- Apply for a credit line increase with your current credit card: Many credit card issuers offer credit line increases for consumers who have shown a positive track record of payment or increased their credit score since the account was opened.
- Keep old accounts open: If you have credit cards you no longer use, you might want to consider keeping the account open. Older accounts, even if they aren’t in use, contribute to a longer credit history. Note that this might not be worth it if your credit cards carry annual fees or other periodic expenses.
5. Wait It Out
As with most things in life, time might be your best tool for improving your credit. Unfortunately, you cannot change your credit overnight — it takes a consistent pattern of behavior to change your score. Additionally, with time, negative marks on your report — such as bankruptcies, delinquencies, and late payments — will eventually be taken off your report.
What About Credit Repair Services?
People with poor credit might be tempted to pay for credit repair services. Is it worth it to pay to have somebody else fix your credit?
In general, financial advisers say “no.” Aside from the steps outlined above, there is very little you can do to improve your credit. While you might be able to save a little time by paying a service to perform some of the steps, it can be difficult to find a reputable service, and they tend to cost quite a bit of money. Instead of hiring a credit repair service, most financial experts advise consumers who need extra help to visit a credit counselor or financial adviser.
Improving your credit has many advantages. You might be able to access services you couldn’t before and you will receive more favorable terms and fees. While improving credit might be easier said than done, paying attention to your score and being mindful of your spending habits will put you on the right track.