It’s no secret that having an excellent credit score unlocks a lot of doors. Creditors are more likely to approve your applications, you can get the best credit card rewards and score the lowest interest rates on your loans. Sounds great, right? But how do you improve your credit from ground zero?
It’s not as difficult as you think. By educating yourself on the factors affecting your credit score and making a few changes to the way you spend your money, you can set yourself on the path toward a better credit score in no time.
Here’s an overview of the most important things you need to understand about credit scores, along with some advice on how to improve your credit score.
What are Credit Scores and Why Do They Matter?
Your credit scores are essentially a grade of your financial responsibility. They’re used by lenders to assess risk, and a poor credit score could make it difficult to get approved for a loan or to secure an affordable interest rate.
Your score is based on one of your credit reports. The three credit bureaus — Equifax, Experian and TransUnion — each maintain a record of the active credit accounts in your name. While most financial institutions report to all three bureaus, this isn’t always the case, so each report may contain slightly different information. This results in a slightly different credit score for each of your credit reports.
When you’re applying for a loan or credit card, the financial institution will usually only pull a single credit report and score. But the catch is, there’s no way for you to know which one they’re going to look at, so you have to monitor all three. And to do that properly, you have to understand the factors that affect your credit score.
The 5 Factors That Affect Your Credit Score
Here are the five key factors that determine your credit score, in order from most important to least important.
If you only listen to a single piece of advice in this article, let it be this: Always pay your bills on time. Payment history is the single-most important factor in determining your credit score, and even one late payment can drop an excellent credit score by over 100 points.
The effect that a late payment has depends on how recently occurred and how late the payment was. Late payments typically aren’t reported until they’re at least 30 days late. Payments that are 60- or 90-days late will hurt your score even more. The effects of late payments tend to decrease over time as your more recent payment history takes precedence, but late payments will stay on your credit report for seven years, so it will be a while before your record is clean again.
Any repossessions, bankruptcies, foreclosures or tax liens also fall under the payment history category and can severely damage your credit score. Bankruptcies, in particular, can make it difficult to get any lines of credit in the future, and these remain on your credit report for 10 years.
The second-most important factor affecting your credit score is your credit utilization ratio. This is a measure of how much of your available credit you’re using. For example, if you have a $10,000 credit limit and you spend $3,000 each month on average, then you have a 30% credit utilization ratio.
Ideally, you don’t want to exceed this. Maintaining a credit utilization ratio over 30% often results in a lower credit score because it indicates to lenders that you may be living beyond your means. This can make them reluctant to work with you, in case you fail to pay back what you owe them.
Your overall credit utilization ratio — that is, the amount of credit you’re using vs. the total amount available to you across all of your accounts — is more important than the ratio on your individual credit accounts, but these still matter too. You should try to keep all of these ratios as low as you can in order to get the best possible credit score.
Length of Credit History
The age of your credit accounts matters to your credit score because it gives lenders a longer view of your financial responsibility. It can be more difficult to predict how you will handle a loan or credit card if you haven’t had one before, and this makes lenders nervous. As a general rule, if you’re smart with your money, you’ll see your credit score improve over time without doing anything, simply because there’s more data to prove your responsibility.
This category takes into account the average age of your accounts, as well as the age of your oldest credit account and your newest credit account. It’s important to think carefully before closing an old account or opening a new one, as this could hurt your average account age and lower your credit score.
Credit mix is a minor factor influencing your credit score. There are two types of credit you can have: installment loans and revolving accounts. Installment loans include student loans, mortgages, auto loans and any other type of loan where you pay a set amount each month over the lifetime of the loan. Credit cards are an example of a revolving account. The amount you owe varies each month, and you don’t have to pay the balance in full.
Having both types of credit in your name can help boost your credit score because it demonstrates that you have experience handling loans of all types. However, this is a minor factor in the scheme of things, and it’s usually not worth it to take out a loan you don’t need just to increase your credit mix.
Recent Credit History
This category looks at the number of credit inquiries on your credit report. Every time you apply for a loan or credit card, your lender will do a hard pull on your credit report. This will cause your credit score to take a slight hit — usually only a few points. If you’re applying for new credit often, the effects of these hard inquiries will add up and could lower your credit score by a few dozen points.
But it’s not always that simple. Credit scoring models make exceptions to account for normal behavior while shopping for new credit. For example, it’s common to explore several different options when looking for a mortgage. Rather than placing several hard inquiries on your report, credit scoring models count all inquiries that take place within a 30- to 45-day period as a single inquiry.
It’s also worth noting that checking your own credit reports and scores won’t hurt your credit score at all. This is called a soft inquiry, and it doesn’t matter how many of them you have because they play no part in credit scoring models.
Factors That Don’t Affect Your Credit Score
There are a lot of misconceptions out there about what does and doesn’t count toward your credit score. Here are a few factors you don’t need to be worried about:
- Employment or marital status
- Bank balances
- Debit or prepaid card usage
The 2 Most Popular Credit Scoring Models
As if having a different credit score for each of your credit reports wasn’t complicated enough, there are also different credit scoring models. Here are the two most popular models used by lenders and credit card issuers:
It’s estimated that about 90% of lenders use FICO scores when determining creditworthiness. FICO scores range from 300 to 850. While opinions differ on where the cutoffs are between excellent, good, fair and poor credit scores, most will agree that a score over 800 is exceptional. If you fall into this range, you shouldn’t have any trouble getting approved for a loan or credit card, and you’ll likely secure the best interest rates.
Scores 700 and above are still considered to be very good, and scores in the mid- to upper-600s are considered fair. It’s difficult to pin down where fair credit ends and poor credit begins, but most say that anything under 630 can make it difficult to get a line of credit when you need one.
Here’s how the FICO scoring model breaks down the factors that impact your credit score:
- Payment History: 35%
- Credit Utilization: 30%
- Length of Credit History: 15%
- Credit Mix: 10%
- Recent Credit History: 10%
VantageScore isn’t as widely used, but it is still a well-established credit scoring model. Like the FICO model, VantageScores range from 300 to 850. The credit tiers are also similar to FICO’s, with anything over 800 considered to be excellent and anything under about 630 being considered poor. But creditors will have their own opinions on what constitutes a good or bad score.
The VantageScore model weighs the credit score factors a little differently:
- Payment History: 40%
- Length of Credit History: 21%
- Credit Utilization: 20%
- Account Balances: 11%
- Recent Credit History: 5%
- Available Credit: 3%
This model considers a few extra factors that FICO does not. Your available credit and your account balances are considered separately as well as in combination via the credit utilization ratio.
Other Credit Scoring Models
It’s not uncommon for companies offering credit reports and monitoring services to throw in a free credit score with your purchase. However, these scores are rarely FICO or VantageScores. They’re what the companies call “educational” scores, and they may have little resemblance to the scores that creditors see.
If you’re going to pay for credit scores, make sure you’re purchasing legitimate FICO or VantageScores so that you can get an accurate idea of where you stand.
How Long Does It Take to Improve Your Credit Score?
You’re probably not going to like this answer, but the truth is, it’s impossible to say exactly how long it will take to improve your credit score. It all depends on where your credit score is now, where you’re trying to get it to and what actions you’re taking to get there.
Here are some suggestions of short-, medium- and long-term steps you can take to improve your credit score.
How to Boost Your Credit Score Overnight
It’s pretty easy to lower your credit score in one day — close old accounts, open new ones, applying for new credit — but raising your credit score in one day is very unlikely. This is because lenders usually only report your payment history to the credit bureaus once a month. So it might be a couple of weeks before your credit score reflects the changes you’ve made. But if you happen to make these changes on the day before your payment activity is reported, you could very well see a slight improvement overnight.
Request a credit limit increase: If your credit is good and you’ve been a loyal and responsible customer, your credit card issuer may be willing to grant you a credit card increase. This raises the amount of credit available to you, thus lowering your credit utilization ratio. You can request a credit limit increase by contacting your card issuer by phone or online. The company may request updated income records from you in order to make its decision. It will do a hard inquiry, which will lower your credit score slightly, but these inquiries have a smaller impact on your score than your credit utilization ratio.
Pay down your debt: This is another way to lower your credit utilization ratio if you’ve been carrying a balance. You don’t have to wait until your payment due date to do this either. Only your balance at the end of the month gets reported to the credit bureaus. If you make a mid-month payment as well, then you free yourself up to spend more without hurting your credit utilization ratio.
How to Improve Your Credit Score Within 30 Days
In most cases, even a month isn’t going to be enough time to significantly improve your credit score. But here are a few steps that could have a big impact.
Check your credit report for errors: Mistakes on your credit report can cost you hundreds of points on your credit score. But the good news is, the credit bureaus and financial institutions are legally required to correct any errors found in your reports. You’re entitled to one free credit report per bureau per year through AnnualCreditReport.com. Look your reports over for outdated information (missed name changes, credit limit increases, etc.) or fraudulent accounts that may have been made by an identity thief. Dispute any incorrect information immediately by notifying the credit bureau and financial institution of the issue and provide them with the most current information for their records.
Negotiate derogatory items: If derogatory items like late payments or repossessions are accurate, creditors don’t have to remove them from your credit report. However, they may if you offer something in return. Offer to pay any outstanding balance in full in exchange for the creditor removing the derogatory item from your credit report. Remember, your lender doesn’t have to do this, so it’s important to always be polite while you’re negotiating. If they do agree, make sure you get a copy of the agreement in writing before you hand over any money.
Consider mixing up your credit: It’s not recommended to take out an unnecessary loan just for the sake of diversifying your credit, but if you were already planning on taking out a loan and your credit is good enough, it could help you by boosting your credit mix. However, it’ll also place a hard inquiry on your credit report, which could negate some of the benefits you’d get from mixing up your credit.
How to Improve Your Credit Score Within 6 Months
Six months is a realistic timeframe for seeing real, positive changes to your credit score. Here are some long-term strategies for boosting your credit score:
Always pay on time: This was mentioned above, but it bears repeating. Your payment history is the most important factor in determining your credit score, and making regular, on-time payments every month can go a long way toward pulling even the worst credit scores out of the gutter.
Apply for new credit sparingly: Think carefully before applying for a new loan or credit card because every one comes with a hard inquiry attached. Consider how necessary it is and also how likely you are to get approved. There’s no point in applying for a top rewards credit card if your credit score is only 500 because you won’t be approved and you’ll still have the hard inquiry on your report. If you are applying for new credit, try to have all of your applications as close together as possible.
Become an authorized user on someone else’s credit card: Authorized user status enables you to use someone else’s credit card as if it were your own. However, the responsibility for paying the bill still rests with the primary cardholder. In most cases, the account will show up on both of your credit reports, though, so you can reap the benefits of your friend or family member’s good payment history.
Apply for a secured credit card: A secured credit card is designed to help those with bad credit improve their scores. You must put down a security deposit (usually at least $200) that is equal to your credit limit. This amount will be refunded to you when you close the account, provided you’re up to date on all your payments. The card issuer reports your payment history to the three credit bureaus each month, and good payment history can go a long way toward improving your credit score.
Common Credit-Building Scenarios
Your credit score affects every area of your financial life. Here’s some advice on specific goals or scenarios that may apply to you.
How to Improve Your Credit Score to Buy a House
Many people don’t become interested in their credit score until they’re ready to buy a house. Then, they become agitated when they realize their score isn’t high enough to secure them a loan or a good interest rate. There isn’t always a quick way to fix this. Unfortunately, there is no substitute for a long, responsible payment history. But here are a few things that might help you if you’re trying to boost your credit score to buy a home.
Carrying a balance on your credit cards will hurt you. Not only will this raise your credit utilization ratio, but it will also raise your debt-to-income ratio, which is something mortgage lenders look at when deciding whether or not to lend to you. If either ratio is too high, it could damage your chances of getting approved. So you should make it a priority to pay off as much debt as you can.
Most people have at least one credit card, but not everyone has some type of installment loan to their name. Taking out one of these could help to boost your credit score by improving your credit mix. Mortgage lenders may also look more favorably upon you if you’ve demonstrated experience with other installment loans in the past. But keep in mind that this will also require a hard inquiry and will raise your debt-to-income ratio slightly, so it’s not always a smart move.
If you are applying for mortgages, make sure to submit all of your applications close together so that all of the hard inquiries get counted as one instead of several. This will minimize the effect on your credit score.
How to Improve Your Credit Score After Bankruptcy
Bankruptcy is one of the worst things you could have on your credit report, and it’s going to haunt you for the next decade. You will probably have trouble finding any creditor that’s willing to give you a loan or even a credit card.
In that case, your best option is to apply for a secured credit card or find someone willing to make you an authorized user on their card. Make a few small purchases each month and pay the balance in full and on time. As your credit improves, you can begin applying for unsecured cards and other loans.
How to Improve Your Credit Score Without a Credit Card
Credit cards are one of the easiest ways to improve your credit score because they’re quicker and easier to get than other types of credit and you can use them for everyday purchases. But some people prefer to avoid credit cards because they don’t want to risk getting charged interest for carrying a balance.
It is still possible to improve your credit score without applying for a credit card, but your options are more limited. You’ll most likely be working with installment loans, like auto, student or mortgage loans, where you’ll pay a flat amount each month. You can also try applying for a credit builder loan. Unlike traditional loans, you don’t get the amount you paid for right away. Instead, you pay the lender a regular amount each month until you pay off the full balance and then the money is released to you.
If you’re renting, you can ask your landlord to report your monthly rent payments to the credit bureaus as well. They may be doing this already, but it is unlikely. If your landlord is unwilling to do so, you can self-report your payments using online rent payment services.
How to Improve Your Credit Score With Student Loans
Student loans aren’t inherently bad for your credit score. In fact, if you’re making at least the minimum payment each month, they can actually help to improve your credit score. It’s another opportunity to show that you’re a responsible payer and to diversify your credit mix.
But like any loan, student loans have the potential to hurt your credit just as much as it can help it. If you fall behind on your payments or the account goes to collections, you can expect your credit score to take a big hit.
It’s a good idea to estimate what your monthly payments will be before you take out a student loan to make sure that you’ll be able to afford to pay the minimum amount. If you’re someone who has trouble remembering to pay their bills on time, consider enrolling in autopay so the amount is automatically deducted from your account each month.
How to Increase Your Credit Score to 800
Getting into the 800 Club seems like a pipe dream for many, but it is possible. These are the people who have never missed a payment, who use only a small fraction of their credit and who have a good mix of revolving credit and installment loans to their name. But the real key to getting an 800 credit score is time.
The length of your credit history accounts for 15% to 21% of your credit score, depending on which model you’re looking at. Being able to demonstrate a responsible financial history over many years makes creditors feel more at ease about working with you and will result in a higher score.
It can take years to reach an 800 credit score, depending on where you started from. But the good news is, you don’t have to. Credit scores of 700 and above are still considered to be very good. If you fall in this range, you shouldn’t have any trouble getting approved for most loans or credit cards that you apply for.
The Bottom Line: Improving Your Credit Score is a Process
A lot of people are looking for a quick fix for their credit score, but the credit scoring models are specifically designed to prevent that. Your credit score is meant to be a long-term measure of your financial responsibility, and raising your score can take anywhere from a few months to a few years.
There may not be much you can do to radically change your credit score overnight, but by taking some of the steps I’ve outlined above, you can put yourself on the path to better interest rates, more credit approvals and maybe even that elusive 800 credit score.