Need to improve your credit score? Whether you’re looking to make a big purchase, like a car or house, or simply want to improve your overall financial health, there are specific steps you can take to increase your FICO score. First, a quick refresher on how credit scores work.
FICO stands for the Fair Isaac Corporation. They were the first company to come up with a model to assess the risk associated with lending a consumer money. Based on several factors, the FICO score can help lenders make predictions about how likely the consumer is to repay their debt on time.
There are three major credit reporting agencies that are primarily responsible for furnishing these scores to lenders – Experian, Equifax, and Transunion. The scores these reporting agencies come up with are generally between 350 and 850. These scores act as “grades” that let the lender know if you’re a good credit risk or not. The lower your score, the harder it is to obtain credit, so you’ll want to aim for the highest score possible.
Scores are generally calculated using five major elements of your financial information, starting with your payment history. Around 35% of your score is based on your bill-paying history, so it’s the largest factor in determining your “grade”. The amount you owe to creditors – or how much available credit you are utilizing – is the next factor and consist of approximately 30% of your score. The length of your credit history, meaning the age of your credit accounts, makes up about 15% of your score. The final 20% is normally consists equally between how many new credit inquiries you have (the lower, the better), and the type of credit accounts you have (a mix of secured and unsecured debt is best).
According to Experian, a rating of “good” for your credit score ranges between 670-739 (https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/). A good credit score puts you in a very advantageous financial position. It helps to give you the green light on everything from fast approval for large purchases like a home or car to the ability to rent an apartment to perks like low interest rates. Your credit rating can even affect your ability to obtain employment.
Striving for the highest score is one of the most important things you can do for your financial health. There are a number of things you can begin doing now to improve that number. Here’s our top six tips:
1) Obtain your credit report. It’s easy, and free! The Fair Credit Reporting Act (FCRA) requires each of the three major credit reporting agencies to provide consumers with a free copy of their credit report once per year. This act, enforced to the credit reporting companies by the Federal Trade Commission (the FTC), promotes the accuracy of the reports as well as the privacy of the information contained in them. All you have to do is request it. The only authorized place to obtain your free report online is annualcreditreport.com. You can also call 877-322-8228. In order to verify your identity, you’ll need to provide your name, address, social security number, and date of birth. https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/fair-credit-reporting-act
2) Take ample time to review your entire report. According to the FTC, one in five consumers have errors on at least one of their credit reports. Often, these errors have a negative impact on a person’s credit. It’s not uncommon for lenders to make mistakes, and most consumers never know they’ve been made. It is also very important to make sure that each of the credit items is verifiable. If the credit items cannot be verified, creditors effort are much less enforceable, and this can be very helpful in negotiating against a creditor. So, check your report with a fine-tooth comb. If you spot any errors, there are a few different courses of action you can take to ensure the mistakes are corrected as quickly as possible. You can contact both the credit bureau reporting the mistake and the creditor that reported it and file a dispute. Both parties are responsible for correcting inaccurate or incomplete information under the Fair Credit Reporting Act. There are many online resources to guide you in the exact ways to file disputes. There are also legal services available to consumers where you can obtain legal representation directly with the credit bureaus. Whatever you decide to do, taking immediate action if you have errors on your reports is an essential step in improving your score.
3) Stop opening new credit accounts. As we explained earlier, around 10% of your score is determined by how many new credit inquiries you have. Almost all new credit applications run a hard inquiry on your credit report, resulting in a “hit” to this part of your score. Taking on more debt, or even attempting to take on more debt, can lower your FICO score. Resist the temptation to open store credit lines or take credit card companies up on those no-interest offers if you don’t absolutely need the credit.
4) Conversely, don’t close old credit accounts. Because the length of your credit history makes up around 15% of your score, those old accounts in good standing can help boost your total score. The longer you’ve had the account, the more it can help. This is assuming the account is in good standing and you’re not using too much of the credit line, which brings us to the next tip…
5) Work on lowering your credit card utilization. Your utilization is the amount of available credit you are using on a given billing cycle. If you have a $5,000 credit line and carry a balance of $500, your utilization rate on that account is 10%. How much you owe your creditors is a major factor in your overall score (as we explained in the beginning of this post, it makes up around 30% of the scoring). While you want to carry some balance with your creditors to keep a healthy financial profile, the sweet spot is generally around 20%-30% utilization. As much as you can, begin paying balances down and work to stay within that ballpark utilization overall moving forward.
6) Pay your existing bills on time. It sounds like a given, but this basic tenant is one of the most important things you can do for your credit. If you find it impossible at this point to pay all your bills on time, aim to keep your late payments to less than 30 days. Most late payments aren’t reported as such until they are 30+ days late. Remember, the biggest factor reporting agencies use to calculate your credit score is your payment history. It comprises approximately 35% of your score, so late payments can take a major toll on your overall score. Make it a priority to pay bills no more than 30 days late if they cannot be on time.
If you are not able to pay your bills on time due to personal circumstances, it is important to be open and make yourself aware of any alternate assistance that may be available to you. Under the right circumstance, debt settlement, debt consolidation, and even bankruptcy can pose alternatives that can help to provide a bridge across short term financial hardships and lead to a more positive long-term outcome. It is important to take time to assess all options that are available to you in order to ensure the best possible financial result for your situation.
Everyone’s credit score is determined by their own set of unique factors, so there are no hard and fast rules when it comes to how long it will take to increase your score. When embarking on the process of improving your credit, you’ll likely want to know how long it will take to see a difference. Again, this depends on several factors. It will mostly have to do with the issues that caused your score to fall in the first place.
Look at the factors that make up your credit score and understand that things like adding a new credit card (new inquiries) make up the smallest percentage of your overall scoring. Issues like poor payment history will have a fairly significant impact on your score and will take longer to resolve. Paying debt down in general is a great way to see results in the form of a better credit score, and this sometimes happens in a matter of months. Larger issues such as foreclosure or bankruptcy will sustain major impacts that are longer lasting.
Taking a longer term, holistic view of your overall credit health is a great way to keep your eye on the ball when it comes to your score. Ensuring that there are no errors on a regular basis (at least annually), making payments on time, not using more than 30% of your credit limits, and not opening new accounts unless it’s absolutely necessary are great rules of thumb when going about obtaining and sustaining good credit.
