The goal is to increase credit score quickly to 800 and above if it’s not already there. Having a great credit score will give you options. Most importantly, you will be able to get the absolute lowest borrowing rate on loans.
This article will give you an overview on how to improve credit score quickly, including tips you can implement immediately. Let’s get to it.
How is your FICO Credit Score Calculated?
There are a variety of ways to calculate your FICO score and a variety of companies and agencies do it different. The data is grouped into five categories: payment history (35%), amount owed 30%, length of credit history (15%), new credit (10%) and credit mix (10%). A FICO score considers both positive and negative information in your credit report. Additionally, the importance of these categories may vary from person to person.
An individual’s credit report and FICO scores evolve frequently. As the information in your credit report changes, so too does the evaluation of these factors in determining your FICO scores.
Each methodology has a range that generally falls between 300 – 850. A credit score above 700 is generally considered good.
In general, you want to be in the top bracket. A score of 750+ will put you in this range. But a score of 800+ and above is even better. Once in this range, you will have access to the best credit cards and the best loan terms. Additionally, you won’t have any issues when employers or landlords check your credit. Higher scores will make creditors more confident that you will repay your future debts.
Take a look at this score-range graphic from Experian, one of the three credit rating agencies. Note that, in addition to the FICO Score, the other most commonly used scoring system is by Vantage Score. But we won’t discuss that here.
Your payment history is your single biggest factor. Makingon-time payments on your credit accounts can help your score. But missing payments, having an account sent to collections could hurt your scores. The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This helps a lender to determine the amount of risk associated with extending you a loan. Do you pay your debts on time every time? Despite the fact that most companies have a grace period where they will not report you to the credit ratings agencies, you really want to pay all of your bills every month like clockwork.
This is the most important factor in a FICO score.
The best way to ensure that your payments are made on time is to have that automated. Many companies will even give discounts to individuals that choose auto-pay options. I personally split my payments between manual and auto-pay. My larger payments I like to sit down and complete during the first week of each month. That way I get a chance to check remaining balances, if there are any outstanding, interest paid, and fees paid. An example of such payment would be my mortgage or auto loan payment.
The total amount owed is your second most important factor. How much debt do you have outstanding at any given time? Creditors are going to want to see that you are not using anywhere near the maximum amount of credit available to you. Creditors will view individuals that have extremely high utilization rates as risky. Do you borrow as much money as you possibly can? Do you allow your expenses to equal your income? This is a bad habit and one you should stop today, if at all possible.
The best strategy is to have high credit card limits and use very little of the credit that is available to you. A great rule would be to not exceed 10% of any individual credit account or to use less than 10% of your total credit limit. Obviously, you want to spend less. But, you may also be able to open new credit accounts or ask for an increase on your existing credit limits. Sometimes, you can also spread your purchases across several cards so that you never use a large portion of any card all at once. Any benefit achieved by owning multiple credit cards ultimately depends on the cardholder and how financially responsible he or she is. Ultimately the number of cards someone should have depends entirely on their personal situation and financial history. Some remain fine with one and others can thrive with a handful. I personally use four cards. There are many great articles out there on what types of credit cards to use. I won’t expand upon that here.
Remember if you are using a lot of your available credit, this looks like you have overextended yourself. And creditors will interpret this to mean that you are at a higher risk of defaulting.
How long is your credit history? In general, having a longer credit history is seen as a credit positive for your FICO score. But this is not necessary. And by longer credit history, I am referring to the length of time that a revolving account has been open. Creditors will look at how long your credit accounts have been established. Focusing on the age of your primary account. In general, it is better to have fewer older accounts, rather than having an array of many newer accounts. They will also look at all accounts in aggregate to determine average account age, as well as how long it has been since you have utilized certain accounts. If possible, try never to close one of your older accounts. These are essentially the bedrock or foundation of your credit score because they serve to dramatically increase your accounts overall average age.
The last two things that the credit bureaus will look at when assigning you a credit score it the credit mix and your recent new credit history. There are essentially two types of credit: 1) revolving credit and 2) installment credit. You should ideally have at least one of each because it shows your creditors that you have the ability to handle multiple types of loans. Your credit cards are the main type of revolving loans. They are considered “revolving” lines of credit because there is no stated end date or maturity date. You can tap into this line of credit as much as you want so long you are paying it off on time, and in full, each and every month.
Installment credit is different; examples include student, auto and home loans. Each of these will have an end date and require, generally speaking, consistent monthly payments of the same amount. These payments, as you are aware, are composed of both principal and interest.
What about opening new lines of credit? If you open many new cards or loans at once, this will be detrimental to your score. Research has shown that opening several credit cards in a short amount of time, for example, represents a greater risk, especially for individuals that may not have an established credit history. Creditors look at you with increasing caution. The appearance is that you are opening lines of credit to “remain liquid”. The assumption is that you may not have the cash flow to support new purchases and existing payments. Remember to be conservative with the number of lines of credit you choose to open.
How to Improve Your Credit Score
Always make at least the minimum payments and make all payments on time. As aforementioned, even a single late payment can hurt your credit scores. This missed payment could stay on your report for as long as seven years. If you miss a payment, reach out to your creditors as quickly as possible to see if they can work with you, and waive a late-fee if it hasn’t happened before. There may also be hardship options available for you to use given your unique circumstances.
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Make sure to keep your credit card balances low and pay them in full each month if possible. Your credit utilization rate is extremely important an compares the current balances and limit of each revolving account your own. Having a low utilization rate will help your credit scores. Oftentimes, individuals with excellent credit scores have utilization rates of 10% or less.
Having zero credit (no credit history) is not good credit. You need to open accounts that will be reported to the credit bureaus. This includes installment accounts, such as student loans, auto loans and home loans, as well as revolving accounts, such as credit cards.
Try to minimize hard inquiries. This entails applying for credit only when you truly need it. When you open a new account, a creditor will make a hard inquiry into your credit history, which may adversely impact your score a little. Although the score impact is minimal, many inquiries in a short period of time can have a definite negative impact.
Can you be more specific – What steps should I take to improve my score, especially when you are new to credit?
1. Become an authorized user on someone’s card. You are essentially piggybacking on someone else’s good credit. In college, I became an authorized user on my parents’ card. You do not need to spend anything on that individual’s card; the simple act of adding your name to the account provides immediate benefit.
2. Acquire your own low-limit card as early as possible and make sure to do the following: never miss a payment and pay in full every month (if possible). If you cannot pay the full amount, you need to at least pay the minimum required payment. Ideally, you pay more than the minimum.
3. Do not carry any credit card debt between payments. This will help to minimize your credit utilization ratio.
4. Don’t be afraid of taking a loan. For example, I took out student loans for both my undergraduate and graduate education. I made sure to refinance these loans with a private lender when I had the opportunity to do so, thus lowering my annualized interest rate and annual payment. I consistently paid the loans back on time and I paid more then the required monthly payment.
5. Open a premium credit card account with great rewards. There are many cards that offer users excellent options and benefits that suit their specific needs. Cards often provide cash back, travel miles, fuel discounts or some other type of consumer rewards program. Look around a find the right card for you and your unique needs and interests. You can search for cards on sites like:
6. Remember not to close any of your credit card accounts, especially your longest standing ones.
7. Do not open more accounts than necessary. I personally own four credit cards. I have a mortgage payment, a monthly car payment and a low interest loan that I used to finance a pool for my family. My credit score is 800+ because I never miss a payment, I always pay-in-full (on credit cards), and keep my utilization rate low. Again, it’s okay to have debt – so long as your balance, relative to your income is low. I’ll say it again, “A low debt to equity (asset) ratio is okay”. My family, for example, chose to invest in a pool. We made a sizeable down payment and continue to pay on time and in full each month. Would it have been more financially responsible or prudent to pay in cash? Yes, of course. But we didn’t want to wait five to ten years. We use the pool nearly every weekend during the year. I am happy to pay for that family time, as long as I do it in a responsible manner. I also got a great rate on the loan.
8. Increase your credit card limits where appropriate. Oftentimes, a creditor will offer to increase your card limit if they see you making consistent on-time payments. It is okay to increase the credit card limit so long as your purchasing behaviors don’t change. This is a natural way to decrease your utilization rate. I keep my utilization rate between 5% and 10% each month. Under 5% would be ideal.
9. Monitor your score over time to identify areas of improvement.
10. Request and review your annual credit report to make sure that there are no errors. Make sure to check your credit score. You are entitled to one free credit report each year. And oftentimes your revolving accounts will offer some type of free score reporting feature to you.
Remember that improving and building your score takes time. Having a strong payment history and increasing the length of time on your various accounts takes several years. That being said, there are some other basic tenants to consider.
1. Spend less than you make. This goes without saying. Make sure to pay yourself first; this means investing in your retirement.
2. Pay down any high-interest bearing account first. 3. Build you cash reserves whenever you can. You want to have an emergency fund to cover 6 months’ worth of expenses. At a minimum, you will want to keep 2 months.
For more financial life-hacks, visit our Personal Finance page! There, you will find great ideas that are not widely known.