Having a “bad” credit score limits your financial options in nearly every aspect. It makes it hard to get a personal loan or credit card, gets you unfavorable rates on auto or home mortgage loans, impacts home insurance rates, and possibly hinders you from getting a job (especially if you work in accounting or finance).
In many ways a credit score is used as a prerequisite when you apply for a loan.
Example: You want to buy a new house with a 5% down payment (vs. 20%). A lender will probably require you to have provable income and a credit score above 700.
What’s In A Credit Score
A person’s score is calculated using the info on your credit report. The credit reports are compiled by the three major credit bureaus:
** Request a free copy of our credit report by clicking the links above.
FICO credit score ranges from 300 to 850 (with 850 being the highest).
In a perfect world you want to be north of 760, but you may get approved for larger loans if you’re above 700 — consumers below 640 should actively work to improve it. Depending on the situation it can take years to get up to 700 again.
According to Experian, in 2019 the average score was 703.
Here’s what’s in a credit score:
- 35% — Your payment history
- 30% — Amount owed and utilization ratio
- 15% — Credit history length
- 10% — New lines of credit requested
- 10% — Credit and loan types
If you’re in a hurry to improve your credit before you apply for a home mortgage or business loan, it’s possible to see an improvement within 3–6 months. Each situation is different — it can take a few months or several years to get your credit score above 700.
Below are 4 ways you can start improving your credit score today.
1. Lower Your Credit-to-Debt Ratio
One of the biggest factors that affects your credit score is your credit-to-debt ratio. Simply divide the amount you currently owe by the total amount you can borrow. Ideally, you should be using less than 30% of your total available credit to give your score a boost.
If you’re over that mark, there are two things you can do that can positively impact your score relatively quickly.
Example: You owe $5,000 and have a total credit limit of $20,000. Your credit-to-debt ratio is 25% (5,000 divided by 20,000)
There’s two ways to lower your credit-to-debt ratio.
- Pay off more of your debt.
- Requesting a credit limit increase.
In some cases you might not be approved for a credit line increase, especially if you’ve applied for new lines of credit within the last 30-days.
If your credit-to-debt ratio is higher than 50%, you might want to look into credit card consolidation options. It won’t improve your credit score, but should make your monthly payments more manageable.
2. Fix Credit Report Mistakes
If you notify a credit bureau of a mistake on your report, it can take up to 30 days for a full investigation. This includes getting in touch with the lender to verify that the info is accurate. If the lender can’t confirm (or doesn’t respond) the inquire against you is removed.
It’s usually impossible to remove accurate information from your credit report. But, if you have hits on your credit score due to late payments, you can possibly get them removed by talking with your lender.
3. Stop Applying for New Credit Cards
Any time you apply for new credit — whether it’s a personal loan, store credit card, or refinancing a mortgage — it shows up on your credit report. Every new inquiry knocks a few points off your score.
If you’re in “credit improvement mode”, try to hold off on applying for any new lines of credit — this includes loans, credit cards, and rewards cards.
4. Don’t Close Out Your Cards
Loyalty is rewarded, so you may want to hang on to old cards, even if you aren’t using them. That’s because 15-percent of your score is based on the length of your credit history, and includes the age of your oldest account, plus the average length of all your credit accounts.
Also by closing out old cards you increase your credit-to-debt ratio.
If a better credit score is your goal, you need to know what to fix. Request a free credit report from all three bureaus.
You can also use free credit monitoring websites like Credit Sesame to track your progress month-to-month.