How-To Guide for Boosting Your Credit Score
A step-by-step path to excellent credit
Poor credit can affect your ability to buy a cell phone, raise the cost of your car insurance, limit your housing and employment opportunities (as many landlords and employers run credit checks on prospective candidates), and require you to put down deposits on your utilities each time you move. Plus, when you apply for a car loan, mortgage, or personal loan, a bad credit score can lead to rejections or, if approved, extremely high interest rates, costing you thousands of dollars over the life of the loan.
For most lenders, a FICO score of at least 670 is considered “good,” but it’s not until a consumer has a score of 740 that they’ll begin to receive lower interest rates on their loans and credit cards.
So if your score isn’t quite up to 740, or you want to chase that perfect score of 850, this article will provide you with step-by-step instructions for boosting your credit score and understanding how it’s calculated.
Step 1: Check Your Credit Report
This is a completely necessary step (so don’t skip it!). Many people neglect reviewing their credit reports, but finding and disputing errors on your report can be one of the fastest ways to improve your score.
Because there are dozens of websites that charge you to access your credit report, you might find the process confusing and costly, so to be clear, you should always use AnnualCreditReport.com to check your credit reports. This is the only website required by the federal government to provide them to you for free each year.
Don’t ever pay to access your credit report.
Many people also aren’t aware that they have multiple credit reports, one from each of the three major credit bureaus (TransUnion, Equifax, and Experian). While you can only access each report once a year, because there are three different reports, you can actually check your credit history once every four months. My wife and I check our credit reports according to this schedule:
- January— TransUnion
- May — Experian
- September — Equifax
We like checking our reports at the beginning of the year (in the spirit of the new year), then following up every four months afterward, but you’re free to set up your own schedule however you’d like!
If you find any inaccuracies on your credit report, use this link to review the contact information for whichever credit bureau generated the report you’re disputing and this link for helpful information about the dispute process.
It may seem daunting, but clearing up your credit reports is essential to having healthy credit and an excellent score.
Step 2: Make On-Time Payments (and Get Rid of Bad Marks)
Now that you’ve ensured the accuracy of your credit reports, the following steps explain how to move forward, as it relates to the way your score is calculated. According to the FICO model (the most commonly used by lenders), payment history comprises 35% of your credit score, the highest of any category.
Because it’s the most heavily weighted category, the single best thing you can do for your credit score is to always make on-time payments.
For some of my accounts, I enroll in automatic payments. For others, I set recurring reminders in my phone to go off a few days prior to the due date. Take whatever steps you need to ensure you never make a late payment because this is probably the simplest way to improve a bad credit score (and the most damaging should you forget).
If you don’t have a stellar track record in this category, don’t worry. There are extra steps you can take to get bad marks removed from your credit history.
First, I suggest asking the creditor of the account to make what’s called a “goodwill adjustment.” By appealing to a lender’s more compassionate side, they might be inclined to wipe the late payment from your record out of “goodwill.” You can use this sample letter to get started.
If that doesn’t work, you might try negotiating. Lenders frequently remove bad marks from borrowers’ records if they agree to sign up for automatic payments, thereby ensuring (unless you overdraw your account) that the lender always gets their money on time — and that you never miss a payment again.
Unfortunately, if neither of those options pan out, there’s not much else you can do but wait seven years for the missed payment to be expunged from your credit report.
Step 3: Lower Your Credit Utilization
Credit utilization makes up 30% of your FICO score, the second-highest category, and it measures the amount of credit you’ve used across all accounts. For instance, if you have three credit cards that each have a $1,000 credit line, you have $3,000 in credit. If you’ve charged a total of $1,500 to those cards, your credit utilization would be 50%.
There are three ways to lower your credit utilization:
- Pay off debt.
- Increase your credit limits.
- Apply for new credit.
Obviously, paying off debt is easier said than done, but it should be your primary focus, especially since the average interest rate on a credit card is a whopping 17.5%. The faster you pay down your balances, the more money you’ll save in interest and the quicker your score will rise as your utilization ratio rapidly decreases (which will help with my next two suggestions).
If paying off debt isn’t an immediate possibility, I recommend contacting your creditors to ask for a credit line increase. In my research for this article, I came across a widely-reported myth that you should not accept a credit line increase if you don’t have to, but this is nonsense. Increasing your available credit is only beneficial to your score. The action that proves detrimental is using that increased credit line to its full potential (or “maxing out” your cards). As long as you have the self-control to keep your credit utilization as low as possible, taking on more credit can only improve your score.
For those of you with outstanding credit card debt, here’s how this would help. Referring back to the example I mentioned at the start of this step, let’s say each of your creditors gives you a $500 credit line increase. Previously, you had $1,500 in debt and $3,000 in credit, resulting in a utilization ratio of 50%, but if your available credit goes up to $4,500, your utilization ratio automatically drops to 33%, resulting in a higher credit score.
And finally, if your current creditors won’t give you a limit increase, you might consider applying for new credit. Now, as you’ll see in Step 4, applying for new credit will trigger an inquiry and, if approved, will open a new account — two things that lower your score. However, the drop should only be slight and likely temporary, as opening a new card and gaining access to increased credit (which only works if you don’t charge much to the new card) will lower your utilization ratio and thereby increase your score.
The problem with applying for new credit, of course, is that you may not get approved if you have a low score, and then you’d have an extra inquiry hurting your score without the reward of increased credit.
Step 4: Wait (and Strategize)
The other three categories used to calculate your credit score are length of credit history (15%), new accounts (10%), and credit diversity (10%).
The latter category refers to the different types of accounts you’ve opened (such as credit cards, mortgages, car loans, and student loans). Having at least one of each demonstrates that you’re able to manage various kinds of credit responsibly.
However, this category isn’t really one you can do anything about. I don’t think any financial expert would recommend buying a house, a car, or taking out a student loan just for the sake of improving your credit score. And before doing any of those things, it’s best to make sure your credit score is as high as it can be anyway. So while I believe in being aware of exactly how your score is calculated, this category won’t factor into my step-by-step instructions.
At this point, because the remaining categories are length of credit history and new accounts, the last step is to simply wait.
As I mentioned above, 15% of your credit score is based on the average length of all your credit accounts, so if you’re young and playing the long game, I recommend opening a credit card as soon as you can (and keeping it open). That way, you’ll always have at least open account boosting your average age as you apply for new credit down the road. For everyone else, I suggest keeping your oldest accounts open (unless you have some credit cards with high annual fees that are no longer worth the rewards) and continuing to practice good credit habits as you wait for your credit to age.
Similarly, your most recent inquiries and account openings won’t factor into your score after two years, which means you just have to wait for them to “expire.”
Other than waiting for those two years to pass by, I recommend being intentional about precisely when you apply for new credit.
When you check your credit reports, make a note of all the inquiries and new accounts that have been opened in the last two years. Keep a list of the exact date of each, then plan to apply for new credit along a timeline that ensures you have as few inquiries/new accounts affecting your score as possible.
For example, if I have inquiries from March 2017 and October 2018, and I want to apply for new credit soon, I should wait until April of this year, so that the inquiry from March 2017 will have expired. That way, I maintain only two inquiries in the last two years. If I applied for new credit now (January 2019), I’d have three inquiries on my report for the next couple of months, dragging down my score in the meantime.
For a little extra help raising your credit score, two new programs debut this year designed to factor positive banking history into your score.
UltraFICO and Experian Boost will both allow consumers to link their checking account, granting each company access to your banking history, which they’ll use to look for evidence of on-time utility payments, no overdrafts, and consistent savings habits.
As I haven’t used these products myself, I can’t speak to their effectiveness, but FICO boasts that 70% of users who “show average savings of $400 without negative balances in past three months” see an increase in their credit score.