Improve Your Credit All Year

Your credit score is one of the most important aspects of your financial life, because it impacts nearly every financial move you make. Need a credit card? A car? A mortgage?

Your credit score affects all of these, your ability to get them and at what rate. With a good credit score, more loan options are available to you, as lenders can trust that you are a reliable borrower. A high credit score will also allow you to get the lowest interest rate and make it easier to be approved for loans.

But many Americans don’t have good credit and are looking to change that. If you’re asking “how can I improve my credit?” you’ve come to the right place. Credit is a long game; you can’t raise your credit score overnight. But over time, if you are consistent, you can raise your credit score with simple steps throughout the year.

What does my credit score mean?

Your credit score is a number between 300-850 based on your credit history that indicates your creditworthiness and is used by lenders to determine if you are likely to pay them back. FICO and VantageScore are the most common credit scoring models, which have slight differences but are mostly the same. Your credit score is calculated based on information collected from the three national credit reporting agencies--Equifax, Experian and TransUnion. The financial factors that make up your credit score are payment history, debts, length of credit history, credit mix and new credit.

Payment history. Making up 35% of your credit score, your payment history is the single biggest factor in your credit score. Payment history includes collections accounts, paying bills/loans on time, late payments, etc...

Debts/Amounts owed. At 30%, what you owe has a big impact on your credit score. This is determined by your credit utilization rate, which calculates how much credit you are using out of your total available credit. A high rate negatively impacts your credit score and means you are using more of your available credit, while a low rate helps your credit score and means you are using less. A lower credit utilization rate (under 30%) is ideal, because it means that you successfully manage your credit and don’t spend too much.

Length/Age of Credit History. At 15%, the length of your credit history also impacts your score. A longer credit history (especially one without blemishes) will raise your credit score, because it shows long-term reliability. A short history is harder to judge. So if you have an old credit card and pay it off reliably each month, your credit score will improve.

Credit Mix. Making up 10%, this reflects your different types of credit accounts, such as credit cards, student loans, mortgages, etc… A mix of installment credit and revolving credit will raise your score the most, because it shows you can manage a variety of credit accounts.

New Lines of Credit. This makes up 10% of your score and applies to opening new lines of credit, such as getting a new credit card or applying for a mortgage. When you apply for a credit card (or any other kind of credit-related account or loan), it automatically dings your credit score via a hard inquiry. The negative impact of a hard inquiry may be small and temporary, but many hard inquiries will add up.

Tips to Increase My Credit Score

Either actively or passively, you can improve your credit score, but it will take time. Below are some ways you can improve your credit. If you stick to it throughout the year, your credit score will increase.

Stay well below your spending limit and reduce your credit card debt. As mentioned above, your credit utilization rate has a huge impact on your credit score and accounts for nearly 1/3 of it. Going over the ideal rate of 30% will hurt your credit, so staying well below that number and consistently paying off your debts in full each month will raise your score over time.

Become an authorized user of a parent/loved one’s credit card. This is one way you can passively build credit without actually having to do anything. As an authorized user of a loved one’s card, your credit will rise as they make regular payments.

Don’t miss payments. Your payment history makes up 35% of your credit score and has the single biggest impact on your score. Just one collection on your credit report can bring down your score by 100 points. So the best way to improve your credit score is not to miss payments. If you pay all your bills on time, your score will gradually rise, and there will be nothing negative to report to the credit reporting bureaus to bring your score down.

Get a free credit report and check it for errors. You are entitled to a free credit report from the three reporting agencies every year. You can submit a formal dispute for any mistakes you find, so they can be removed from your credit report.
Don’t apply for unnecessary credit. Applying for a credit card or a loan dings your credit score via a “hard inquiry.” The negative impact is small and temporary, but many hard inquiries do add up. So while credit accounts are important for building your credit, you should be careful to not overdo it while you rebuild.

Keep old accounts open. If you have several credit cards, you may think that closing older accounts will help your credit, but that’s not the case. The length of your credit history factors heavily into your credit report, so you should keep older cards active to raise your score. The longer the better!

Have different types of credit. As described above, having too many lines of credit can negatively impact your credit. But having a mix of revolving credit and installment credit will raise your credit score.

The Bottom Line

Increasing your credit score is a good idea, especially if you know you will be applying for a line of credit in the future. If you know you will be applying for a mortgage or any other kind of loan, be sure to give yourself ample time. Raising your credit can take months or even years, so be patient and stick with it.